Download this Paper Open PDF in Browser

Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide

59 Pages Posted: 16 May 2011 Last revised: 8 Jan 2015

Christopher J. Mayer

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Edward R. Morrison

Columbia Law School

Tomasz Piskorski

Columbia Business School - Finance and Economics

Arpit Gupta

NYU Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 11, 2012

Abstract

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

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

Christopher J. Mayer

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Edward R. Morrison

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Tomasz Piskorski (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Arpit Gupta

NYU Stern School of Business ( email )

New York, NY
United States

HOME PAGE: http://arpitgupta.info

Paper statistics

Downloads
697
Rank
27,801
Abstract Views
5,377