Reducing Foreclosures: No Easy Answers

NBER Macroeconomics Annual, Vol. 24, 2009

Federal Reserve Bank of Atlanta Working Paper 2009-15

53 Pages Posted: 23 Aug 2009

See all articles by Christopher L. Foote

Christopher L. Foote

Federal Reserve Bank of Boston

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Lorenz Goette

University of Lausanne; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Paul Willen

Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2009

Abstract

This paper takes a skeptical look at a leading argument about what is causing the foreclosure crisis and what should be done to stop it. We use an economic model to focus on two key decisions: the borrower's choice to default on a mortgage and the lender's subsequent choice whether to renegotiate or modify the loan. The theoretical model and econometric analysis illustrate that unaffordable loans, defined as those with high mortgage payments relative to income at origination, are unlikely to be the main reason that borrowers decide to default. In addition, this paper provides theoretical results and empirical evidence supporting the hypothesis that the efficiency of foreclosure for investors is a more plausible explanation for the low number of modifications to date than contract frictions related to securitization agreements between servicers and investors. While investors might be foreclosing when it would be socially efficient to modify, there is little evidence to suggest they are acting against their own interests when they do so. An important implication of our analysis is that policies designed to reduce foreclosures should focus on ameliorating the immediate effects of job loss and other adverse life events rather than modifying loans to make them more affordable on a long-term basis.

Keywords: mortgage, foreclosure, modification, securitization

JEL Classification: D11, D12, G21

Suggested Citation

Foote, Christopher L. and Gerardi, Kristopher S. and Goette, Lorenz F. and Willen, Paul S., Reducing Foreclosures: No Easy Answers (May 1, 2009). NBER Macroeconomics Annual, Vol. 24, 2009. Available at SSRN: https://ssrn.com/abstract=1458995 or http://dx.doi.org/10.2139/ssrn.1458995

Christopher L. Foote (Contact Author)

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States
617-973-3077 (Phone)
617-973-3957 (Fax)

Kristopher S. Gerardi

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8561 (Phone)

HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/

Lorenz F. Goette

University of Lausanne ( email )

Department of Economics
Batiment Internef
Lausanne, 1015
Switzerland
(021) 692'3496 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org

Paul S. Willen

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
78
rank
249,137
Abstract Views
1,247
PlumX Metrics