The determinants of subprime mortgage performance following a loan modification

Schmeiser, Maximilian D.; Gross, Matthew B.

doi:10.17016/feds.2015.006

Cited by 5 publications

(4 citation statements)

References 34 publications

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“…Calomiris et al (2011), Chang and Weizheng (2013), Collins and Urban (2015), Dobbie and Song (2015a), Dobbie and Song (2015b), Goodman et al (2011), Goodman et al (2012), Goodman and Woluchem (2014), Lucas et al (2011), Mayer et al (2014), McCoy (2013), Mulligan (2009), Schmeiser and Gross (2014), Gerardi and Li (2010)), and how liabilities alter household consumption and investment decisions (Baker (2015), Bhutta et al (2010), Adelino et al (2015), Cunningham and Reed (2013), Foote et al (2008), Fuster and, Guiso et al (2013), Melzer (2015)).…”

mentioning

confidence: 99%

Household Debt Overhang and Labor Supply

Bernstein

2015

SSRN Journal

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mentioning

confidence: 99%

Household Debt Overhang and Labor Supply

Bernstein

2015

SSRN Journal

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“…They examine modifications provided under the government-sponsored HAMP 2 Voicu, Weselcouch, and Tschirhart (2011), in addition to demonstrating that the likelihood of redefault is inversely related to both the amount of payment reduction and the amount of principal reduction, finds that modifications associated with the Treasury Department's Home Affordable Modification Program (HAMP) were less likely to redefault compared with non-HAMP modifications. In addition, Schmeiser and Gross (2015) also find that term extension modifications that increase the amount of principal due are most likely to redefault.…”

Section: The Literature and Our Contributionmentioning

confidence: 86%

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

Abell¹,

Calem²,

Jagtiani³

et al. 2018

Working Paper (Federal Reserve Bank of Philadelphia)

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This paper examines the redefault rate of mortgages that were selected for modification during 2008-2011, compared with that of similarly situated self-cured mortgages during the same period. We find that while the performance of both modified and self-cured loans improved dramatically over this period, the decline in the redefault rate for modified loans was substantially larger, and we attribute this difference to a few key factors. First, the repayment terms provided by modifications became increasingly generous, including the more frequent offering of principal reduction, resulting in greater financial relief to borrowers. Second, the later modifications also benefited from improving economic conditions-modification became more effective as unemployment rates declined and home prices recovered. Third, we find that the difference in redefault rate improvement between modified loans and self-cured loans is not fully explained by observable risk and economic variables. We attribute this residual difference to the servicers' learning process-so-called learning by doing. Early in the mortgage crisis, many servicers had limited experience selecting the best borrowers for modification. As modification activity increased, lenders became more adept at screening borrowers for modification eligibility and in selecting appropriate modification terms.

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“…The first hypothesis is that the potentially increased liquidity induced by modifications could help improve the performance on other accounts as well. Empirical studies have provided evidence that a loan modification, especially one that enhances a borrower's affordability (e.g., a modification that generates a lower monthly mortgage payment), is strongly associated with a lower postmodification redefault rate (Haughwout, Okah, and Tracy 2010;Quercia and Ding 2009;Agarwal et al 2012;Schmeiser and Gross 2014;Scharlemann and Shore 2015). Moreover, recent studies have also stressed the importance of liquidity on default behavior (Elul et al 2010).…”

Section: Background and Literature Reviewmentioning

confidence: 99%

Borrower credit access and credit performance after loan modifications

Ding

2017

Empir Econ

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While the preventive effect of loan modifications on mortgage default has been well-documented, evidence on the broad consequences of modifications has been fairly limited. Based on two unique loan-level data sets with borrower credit profiles, this study reports novel empirical evidence on how homeowners manage their credit before and after receiving modifications. The paper has several main findings. First, loan modifications improve borrowers' overall credit standing and access to credit. Modifications that provide principal reduction, rate reduction, or greater payment relief, as well as those received by borrowers not in financial catastrophe, lead to a larger improvement in borrowers' credit rating than others. Second, loan modifications lead to a slight increase in borrowers' debts, primarily on home equity line of credit (HELOC) accounts and auto loans. Third, borrowers' performance on nonmortgage accounts, however, has not been negatively impacted by modifications. This study demonstrates that interventions designed to improve household balance sheets could have a direct and sizable impact on borrower financial outcomes.

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The determinants of subprime mortgage performance following a loan modification

Cited by 5 publications

References 34 publications

Household Debt Overhang and Labor Supply

Household Debt Overhang and Labor Supply

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

Borrower credit access and credit performance after loan modifications

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