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

58 Pages Posted: 23 May 2011 Last revised: 19 Aug 2022

See all articles by Christopher J. Mayer

Christopher J. Mayer

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Edward R. Morrison

Columbia Law School

Tomasz Piskorski

Columbia University - Columbia Business School, Finance

Arpit Gupta

NYU Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 2011

Abstract

We investigate whether homeowners respond strategically to news of mortgage modification programs. 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 subprime mortgages throughout the country. Using a difference-in-difference framework, we find that Countrywide's relative delinquency rate increased thirteen 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 should be an important consideration in designing mortgage modification programs.

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 (May 2011). NBER Working Paper No. w17065, Available at SSRN: https://ssrn.com/abstract=1848581

Christopher J. Mayer (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

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National Bureau of Economic Research (NBER)

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Edward R. Morrison

Columbia Law School ( email )

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Tomasz Piskorski

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

Arpit Gupta

NYU Stern School of Business ( email )

Suite 9-160
New York, NY
United States

HOME PAGE: http://arpitgupta.info

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