New Government Report: Why Don’t Lenders Renegotiate More Home Mortgages?

September 28, 2010 at 9:31 am Leave a comment

Why Don’t Lenders Renegotiate More Home Mortgages?: Redefaults, Self-Cures, and Securitization
by Manuel Adelino, Kristopher Gerardi and Paul S. Willen
Paperback, 41 pages, 2009, $20.00
ISBN: 1437928714

Servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment-reducing modifications on only 3% of seriously delinquent loans. This reluctance does not result from securitization: Servicers renegotiate similarly small fractions of loans that they hold in their portfolios. The paper’s results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. 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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