Resolving Residential Mortgage Distress: Time to Modify?

Abstract

In housing crises, high mortgage debt can feed a vicious circle of falling housing prices and declining consumption and incomes, leading to higher mortgage defaults and deeper recessions. In such situations, resolution policies may need to be adapted to help contain negative feedback loops while minimizing overall loan losses and moral hazard. Drawing on recent experiences from Iceland, Ireland, Spain, and the United States, this paper discusses how economic trade-offs affecting mortgage resolution differ in crises. Depending on country circumstances, the economic benefits of temporary forbearance and loan modifications for struggling households could outweigh their costs.

Keywords: Mortgages, Housing prices, Debt, Household consumption, Debt reduction, Cross country analysis, Debt overhang, foreclosure, housing crisis, mortgage distress, loan restructuring, household debt, arrears, insolvency, mortgage debt, debts, forbearance, assets, foreclosures, financial crisis, equity, lending, borrower, investment, borrowers, defaults, debt crisis, enforcement, insolvency procedures, high debt, debt relief, bankrupt, insolvency reforms, public debt, financial distress, debt burden, financial reporting, debt crises, negative equity, financial resources, accounting principles, estate, household debts, code of conduct, systemic crises, corporate insolvency, ownership, settlement, l

JEL Classification: G21, G28