Effects of Government Bailouts on Mortgage Modification

52 Pages Posted: 13 Aug 2014 Last revised: 22 Jun 2017

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Yunqi Zhang

School of Finance, Nankai University; National University of Singapore

Multiple version iconThere are 2 versions of this paper

Date Written: April 27, 2017

Abstract

This paper shows, for the first time, how liquidity infusions from government bailouts affect loan modification in the mortgage market. The design of the Pooling and Service Agreement leads mortgage servicers to prefer foreclosure to modification when the servicers are liquidity constrained. Therefore, a liquidity infusion is expected to boost modification rates. Using a residential mortgage dataset, including loan-level information, we find that liquidity infusions from the Troubled Asset Relief Program significantly increased the modification rate. Our findings help us better understand the economic consequences of government intervention and have important policy implications for the renegotiation of distressed mortgages.

Keywords: loan modification, financial crisis, mortgage, TARP, government intervention, liquidity

JEL Classification: E60, E65, G18, G21, H3

Suggested Citation

Agarwal, Sumit and Zhang, Yunqi, Effects of Government Bailouts on Mortgage Modification (April 27, 2017). Georgetown McDonough School of Business Research Paper No. 2479349. Available at SSRN: https://ssrn.com/abstract=2479349 or http://dx.doi.org/10.2139/ssrn.2479349

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Yunqi Zhang (Contact Author)

School of Finance, Nankai University ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

National University of Singapore ( email )

4 Architecture Drive
Singapore, 117566
Singapore

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