The Limited Benefits of Mortgage Renegotiation During the Great Recession
64 Pages Posted: 2 Mar 2017 Last revised: 1 Sep 2022
Date Written: October 18, 2021
This paper examines investors’ incentives to renegotiate residential mortgages by quantifying their expected gains from modifying delinquent loans. Based on my estimates, investors expected to recover, on average, only about 3.6% more of a delinquent mortgage’s outstanding balance compared to not renegotiating the loan. These estimates display a wide spread; the conditional standard deviation of these expected gains is 13.7%. As the housing market experiences a rapid decline post 2009, the relative expected gains from renegotiation increase as does the rate of loan modification. These findings suggest that insufficient gains to investors reduced their incentive to participate in renegotiations, thus offering one explanation for the low rate of loan modification observed during the onset of the Great Recession.
Keywords: Mortgages, Mortgage Servicing, Securitization, Loan Modifications, Financial Crisis
JEL Classification: G1, G21, D14
Suggested Citation: Suggested Citation