Strategic Defaults Induced by Loan Modifications

Posted: 29 Mar 2015 Last revised: 31 Jan 2019

See all articles by Xianghong Li

Xianghong Li

York University - Department of Economics

Xinlei Shelly Zhao

Government of the United States of America - Office of the Currency Comptroller - Risk Analysis Division

Date Written: March 27, 2015

Abstract

Some homeowners might intentionally skip mortgage payments that they can afford to be eligible for mortgage modification programs, such as Home Affordable Mortgage Program (HAMP). We use a natural experiment to investigate such strategic behavior. We find that the modification program not only substantially increases the default rates among borrowers who were current in their loan payments, but also dramatically decreases the cure rate of those already in payment delinquency before the settlement, and the latter venue has been largely overlooked in the literature. Evidence from our base sample indicates that, four months after the modification announcement, modification-induced strategic default is about nine percentage points, on a base default rate of thirty percent. Further, modification-induced strategic defaults appear to be quite widespread and more severe among more risky loans.

Keywords: Loan modification, mortgage modification program, strategic default

JEL Classification: G18, G21

Suggested Citation

Li, Xianghong and Zhao, Xinlei, Strategic Defaults Induced by Loan Modifications (March 27, 2015). Available at SSRN: https://ssrn.com/abstract=2586072 or http://dx.doi.org/10.2139/ssrn.2586072

Xianghong Li

York University - Department of Economics ( email )

4700 Keele St.
Toronto, Ontario M3J 1P3
Canada

Xinlei Zhao (Contact Author)

Government of the United States of America - Office of the Currency Comptroller - Risk Analysis Division ( email )

250 E Street, SW
Washington, DC 20219
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,193
PlumX Metrics