48 Pages Posted: 16 Nov 2014 Last revised: 25 Mar 2017
Date Written: March 1, 2017
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: Suggested Citation
By Nathan Swem