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
Citations
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Reducing Strategic Default in a Financial Crisis
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Credit Markets with Time‐Inconsistent Agents and Strategic Loan Default
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