59 Pages Posted: 16 May 2011 Last revised: 8 Jan 2015
Date Written: October 11, 2012
We investigate whether homeowners respond strategically to news of mortgage modification programs by defaulting on their mortgages. We exploit plausibly exogenous variation in modification policy induced by U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers with mortgages throughout the country. Using a difference-in-difference framework, we find that Countrywide's relative delinquency rate increased more than ten percent per month immediately after the program's announcement. The borrowers whose estimated default rates increased the most in response to the program were those who appear to have been the least likely to default otherwise, including those with substantial liquidity available through credit cards and relatively low combined loan-to-value ratios. These results suggest that strategic behavior of borrowers should be an important consideration in designing mortgage modification programs.
Keywords: Strategic behavior, mortgage modification, default, foreclosure crisis, Countrywide
JEL Classification: D10, G21, G33, K00
Suggested Citation: Suggested Citation
Mayer, Christopher J. and Morrison, Edward R. and Piskorski, Tomasz and Gupta, Arpit, Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide (October 11, 2012). Columbia Law and Economics Working Paper No. 404; Kreisman Working Papers Series in Housing Law and Policy No. 4. Available at SSRN: https://ssrn.com/abstract=1836451 or http://dx.doi.org/10.2139/ssrn.1836451