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A Crisis of Missed Opportunities? Foreclosure Costs and Mortgage Modification During the Great Recession

56 Pages Posted: 31 Aug 2016 Last revised: 1 Mar 2017

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management

Matteo M. Iacoviello

Federal Reserve Board - Trade and Financial Studies

Chandler Lutz

Copenhagen Business School

Date Written: February 27, 2017

Abstract

This paper investigates the housing and broader economic effects of the 2000s crisis period California Foreclosure Prevention Laws (CFPLs). The CFPLs encouraged lenders to modify mortgage loans by increasing the required time and pecuniary costs of foreclosure. We find that the CFPLs prevented 380,000 California foreclosures, equivalent to a 16% reduction during the treatment period. These effects did not reverse after the conclusion of the policy, implying that the CFPLs were not a stopgap measure that simply pushed foreclosures further into the future. Our most conservative results show that these policies increased house prices by 6 percent and in doing so created $300 billion of housing wealth. Findings further indicate that gains in housing wealth translated into increased durable consumption as measured by auto sales. Disaggregated county and zip-code level estimates reveal that the CFPL house price increases were markedly higher in the hard hit areas of Southern California. Altogether, results suggest that the CFPLs were substantially more effective than the US Government’s HAMP Program in mitigating foreclosures and stabilizing housing markets.

Keywords: Mortgage Modification, Foreclosure Costs, Housing Crisis

JEL Classification: E52, E58, R20, R30

Suggested Citation

Gabriel, Stuart A. and Iacoviello, Matteo M. and Lutz, Chandler, A Crisis of Missed Opportunities? Foreclosure Costs and Mortgage Modification During the Great Recession (February 27, 2017). Available at SSRN: https://ssrn.com/abstract=2831830 or http://dx.doi.org/10.2139/ssrn.2831830

Stuart A. Gabriel (Contact Author)

University of California, Los Angeles - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-2922 (Phone)
310-206-5455 (Fax)

HOME PAGE: http://www.anderson.ucla.edu

Matteo M. Iacoviello

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Chandler Lutz

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

HOME PAGE: http://chandlerlutz.com/

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