TY - JOUR AU - Foote,Christopher AU - Gerardi,Kristopher AU - Goette,Lorenz AU - Willen,Paul TI - Reducing Foreclosures: No Easy Answers JF - National Bureau of Economic Research Working Paper Series VL - No. 15063 PY - 2009 Y2 - June 2009 UR - http://www.nber.org/papers/w15063 L1 - http://www.nber.org/papers/w15063.pdf N1 - Author contact info: Christopher Foote Federal Reserve Bank of Boston Research Department, T-8 600 Atlantic Avenue Boston, MA 02210 Tel: 617-973-3077 E-Mail: chris.foote@bos.frb.org Kristopher Gerardi Federal Reserve Bank of Atlanta 1000 Peachtree St. NE Atlanta, GA 30309 E-Mail: kristopher.gerardi@atl.frb.org Lorenz Goette Université de Lausanne E-Mail: Lorenz.Goette@unil.ch Paul S. Willen Federal Reserve Bank of Boston 600 Atlantic Avenue Boston, MA 02210-2204 Tel: 617/973-3149 Fax: 617/973-2123 E-Mail: willen968@gmail.com AB - This paper takes a skeptical look at a leading argument about what is causing the foreclosure crisis and distills some potential lessons for policy. We use an economic model to focus on two key decisions: the borrower's choice to default on a mortgage and the lender's subsequent choice whether to renegotiate or "modify" the loan. The theoretical model and econometric analysis illustrate that "unaffordable" loans, defined as those with high mortgage payments relative to income at origination, are unlikely to be the main reason that borrowers decide to default. In addition, this paper provides theoretical results and empirical evidence supporting the hypothesis that the efficiency of foreclosure for investors is a more plausible explanation for the low number of modifications to date than contract frictions related to securitization agreements between servicers and investors. While investors might be foreclosing when it would be socially efficient to modify, there is little evidence to suggest they are acting against their own interests when they do so. An important implication of our analysis is that the extension of temporary help to borrowers suffering adverse life events like job loss could prevent more foreclosures than a policy that makes mortgages more "affordable" on a long-term basis. ER -