Evaluating Mortgage Renegotiation Strategies: A Data-Driven Framework for Investors

69 Pages Posted: 2 Mar 2017 Last revised: 25 Mar 2024

See all articles by Sanket Korgaonkar

Sanket Korgaonkar

University of Virginia - McIntire School of Commerce

Date Written: October 18, 2021

Abstract

This paper offers a novel framework to quantify the expected gains from renegotiating delinquent loans. The framework accounts for important trade-offs between concessions to borrowers, post-delinquency loan performance and expected collateral values. The framework's parameters are calibrated using data on renegotiated 30-year residential Fixed-Rate Mortgages that went delinquent during the Great Recession. Our model-implied expected gains increase during the 2007 to 2009 period coinciding with an increase in the rate of loan renegotiation. Counterfactual analyses show that larger expected gains can be generated from employing principal forbearance and extensions of the term-to-maturity, compared to principal write-downs and interest-rate reductions. On the other hand, principal write-downs can be a powerful tool when borrowers are deeply underwater. Our analyses illustrate how lenders or policy-makers might deploy this framework when faced with another delinquency crisis.

Keywords: Mortgages, Renegotiation, Loan Modifications, Foreclosure, Financial Crises

JEL Classification: G01, G21, G5, D02

Suggested Citation

Korgaonkar, Sanket, Evaluating Mortgage Renegotiation Strategies: A Data-Driven Framework for Investors (October 18, 2021). Available at SSRN: https://ssrn.com/abstract=2924981 or http://dx.doi.org/10.2139/ssrn.2924981

Sanket Korgaonkar (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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