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

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.

Does Temporary Mortgage Assistance for Unemployed Homeowners Reduce Longer‐Term Mortgage Default? An Analysis of the Hardest Hit Fund Program

“…In all other years in our sample (2011 to 2013), HHF is associated with a 22‐percentage point or 35 percent reduction in default at 36 months. This is similar to other studies that found that the redefault rate of modified loans was lower for newer vintages of modifications, likely due to the economic recovery and also to improvements in program implementation over time (Calem, Jagtiani, & Maingi, 2018). Next, we estimate subsample regressions based on whether or not the original loan was originated prior to or after 2008.…”

“…Similar to these studies, we observe that the effect sizes of a payment reduction are actually larger for those who are underwater. This complements research finding that mortgage modifications that substantially reduce mortgage payments are most effective at preventing redefault (Calem, Jagtiani, & Maingi, 2018; Ganong & Noel, 2020; Haughwout, Okah, & Tracy, 2016; Scharlemann & Shore, 2016). However, prior studies estimate the effects of permanent reductions in mortgage payments.…”

“…Studies of HAMP document a substantial increase in the rate of loan modifications that can be attributed to the policy (Agarwal et al., 2017). However, there are mixed findings on the long‐term effects of HAMP on redefault and foreclosures (Calem, Jagtiani, & Maingi, 2018; Goodman et al., 2011; Voicu et al., 2012).…”