NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures and Securitization

Manuel Adelino, Kristopher Gerardi, Paul S. Willen

NBER Working Paper No. 15159
Issued in July 2009
NBER Program(s):   EFG

We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and for subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors.

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Document Object Identifier (DOI): 10.3386/w15159

Published: "Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures and Securitizations." With Manuel Adelino and Kris Gerardi. 2013. Journal of Monetary Economics 60(7):835-853. citation courtesy of

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