Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide
TLDR
The authors investigated whether homeowners respond strategically to news of mortgage modification programs and found that the increase in default rates is largest among borrowers least likely to default otherwise, suggesting that strategic behavior should be an important consideration in designing mortgage modification program.Abstract:
We investigate whether homeowners respond strategically to news of mortgage modification programs. We exploit plausibly exogenous variation in modification policy induced by settlement of US state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers. Using a difference-in-differences framework, we find that Countrywide's monthly delinquency rate increased more than 0.54 percentage points—a 10 percent relative increase—immediately after the settlement's announcement. The estimated increase in default rates is largest among borrowers least likely to default otherwise. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs. (JEL D14, G21, K22, R31)read more
Figures
Figure 1: Index of Web Searches for the Term “Countrywide Modification,” as Reported by Google Trends 
Figure 2: Probability of Rolling from Current to 60 Days Past Due 
Figure 5: 2/28 ARMs: Current CLTV by Origination Quarter 
Figure 4: 2/28 ARMs: Current Vantage Score by Origination Quarter 
Figure 3: 2/28 ARMs: Current Interest Rate by Origination Quarter
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