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When Are Modifications of Securitized Loans Beneficial to Investors?

48 Pages Posted: 16 Nov 2014 Last revised: 25 Mar 2017

Gonzalo Maturana

Emory University - Goizueta Business School

Date Written: March 1, 2017

Abstract

Despite loan modification being widely discussed as an alternative to foreclosure, little research has focused on quantifying its effect on loan performance. I quantify the effects of additional modifications made early in the recent housing crisis by exploiting exogenous variation in the incentives to modify securitized non-agency loans. An additional modification reduces loan losses by 35.8% relative to the average loss, which suggests that the marginal benefit of modification likely exceeded the marginal cost. Consistent with the idea that higher income borrowers may be better equipped to withstand bad economic times, modifications are especially beneficial when borrowers have larger loans.

Keywords: Loan modifications, financial crisis, loan losses, mortgages, securitization, mortgage servicing

JEL Classification: G01, G21, G32

Suggested Citation

Maturana, Gonzalo, When Are Modifications of Securitized Loans Beneficial to Investors? (March 1, 2017). Available at SSRN: https://ssrn.com/abstract=2524727 or http://dx.doi.org/10.2139/ssrn.2524727

Gonzalo Maturana (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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

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