Does Loan Renegotiation Differ by Securitization Status? An Empirical Study

Abstract

This paper investigates whether mortgage loan servicers renegotiate a distressed loan differently depending on whether the loan is held on their own books or by private investors. Using the proprietary mortgage metrics database that has servicer-provided loan renegotiation details, we conduct a comprehensive empirical evaluation of the securitization impact on loan renegotiation. We focus on loan outcome, loan renegotiation frequency, and loan renegotiation effectiveness in influencing outcomes.

We find that non-renegotiated securitized loans have a significantly higher foreclosure rate than similarly situated portfolio loans. We show that servicers actually conduct fewer loan renegotiations for securitized loans. By studying multi-stage transition probabilities, we discover that the self-cure rate and re-default rate are different between securitized loans and portfolio loans. Overall this paper reveals that loan renegotiations, in particular loan outcome, loan renegotiation frequency and effectiveness, do differ by securitization status.

Keywords: Loan Renegotiation, Securitization, Foreclosure, Securitized Loans, Portfolio Loans

JEL Classification: G01, G21