Mandatory Mediation Laws and the Renegotiation of Mortgage Contracts

Abstract

There is debate over why lenders are unwilling to modify more mortgages, ranging from structural to macroeconomic factors. This paper introduces the information problem that borrowers and lenders face and examines third party mediation as a mechanism to overcome this problem. Mediation offers both borrowers and lenders the opportunity to gain information about the potential for modifying the terms of the loan. Based on a difference in difference analysis of loans in four metropolitan statistical areas before and after at least one county imposed mediation and one did not, mediation policies appear to have positive effects on the rate of loan modifications. The use of mediation in states with judicial foreclosure proceedings may be an effective policy to increase the use of loan modifications and offers evidence that a lack of information may introduce additional barriers to modifications.

Keywords: mortgage foreclosure, mediation

JEL Classification: D12, D10, D18, D04, G21