Mortgage Modification and the Decision to Strategically Default: A Game Theoretic Approach

28 Pages Posted: 28 Dec 2012

See all articles by Andrew Collins

Andrew Collins

Old Dominion University

David M. Harrison

UCF; Texas Tech University

Michael Seiler

College of William and Mary - Finance

Date Written: September 2012

Abstract

While numerous and varied opinions abound, there remains much confusion why so few mortgages are modified at a time when demand to modify is so high. To better understand this complex issue, we build a game theoretic model to quantify a number of economic incentives and costs surrounding various issues of the lender’s decision to modify a loan and the borrower’s decision to strategically default in an attempt to encourage such a modification. We mathematically demonstrate that under current market conditions, it is rarely economically rational for lenders to modify loans. For the borrower, we find that their negative equity position, growth rate in home prices, and the probability the lender will exercise its legal right to recourse represent the top three strategic default determinants.

Keywords: strategic mortgage default, loan modification, game theory, agent-based modeling

Suggested Citation

Collins, Andrew and Harrison, David M. and Seiler, Michael, Mortgage Modification and the Decision to Strategically Default: A Game Theoretic Approach (September 2012). Available at SSRN: https://ssrn.com/abstract=2194258 or http://dx.doi.org/10.2139/ssrn.2194258

Andrew Collins

Old Dominion University ( email )

Norfolk, VA 23529-0222
United States

David M. Harrison

UCF ( email )

Orlando, FL 32816-1400
United States
407-823-1127 (Phone)

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Michael Seiler (Contact Author)

College of William and Mary - Finance ( email )

VA
United States

HOME PAGE: http://mason.wm.edu/faculty/directory/seiler_m.php

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