Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More than Self-Cures?

46 Pages Posted: 27 Nov 2018 Last revised: 21 Feb 2019

See all articles by Paul Calem

Paul Calem

Board of Governors of the Federal Reserve System

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Ramain Quinn Maingi

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: 2018-11-20

Abstract

This paper examines changes in the redefault rate of mortgages that were selected for modification during 2008–2011, compared with that of similarly situated self-cured mortgages. We find a large decline in the redefault rate of both modified and self-cured mortgages over this period, but the improvement was greatest for modifications. Our analysis has identified several important factors contributing to the greater improvement for modified loans, including an increasing share of principal-reduction modifications, which appear to be more effective than other types of modification and increasingly generous modification terms (larger payment reductions). The favorable impacts of principal and payment reductions on household finances were enhanced by improving economic conditions, resulting in more effective modifications. Even after accounting for these factors, we still observe a larger decline in the redefault rate for modifications compared with similarly situated self-cured loans. This residual effect may reflect servicer “learning-by-doing�; that is, servicers gained knowledge as modification activity ramped up, resulting in more successful modification programs for later cohorts.

Keywords: mortgage modification, mortgage default, mortgage servicing

JEL Classification: G21, G28, G40

Suggested Citation

Calem, Paul and Jagtiani, Julapa and Maingi, Ramain Quinn, Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More than Self-Cures? (2018-11-20). FRB of Philadelphia Working Paper No. 18-26. Available at SSRN: https://ssrn.com/abstract=3289013 or http://dx.doi.org/10.21799/frbp.wp.2018.26

Paul Calem (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Ramain Quinn Maingi

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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