Paper on the Role of Securitization in Mortgage Renegotiation

Sumit Agarwal and Gene Amromin of the Fed, Itzhak Ben-David of the Ohio State University - Finance Department, Fisher College of Business, Souphala Chomsisengphet of the OCC, and Douglas D. Evanoff, also of the Fed, have written The Role of Securitization in Mortgage Renegotiation.  Here's the abstract:

We study the effects of securitization on post-default renegotiation of residential mortgages over the current financial crisis. Unlike prior studies, we employ unique data that directly observes lender renegotiation actions and covers more than 60% of US mortgage market. Exploiting within-servicer variation in this data, we find that bank-held loans are 26% to 36% more likely to be renegotiated than comparable securitized mortgages (4.2 to 5.7% in absolute terms). Also, modifications of bank-held loans are more efficient: conditional on a modification, bank-held loans have lower post-modification default rate by 9% (3.5% in absolute terms). Our findings support the view that frictions introduced by securitization create a significant challenge to effective renegotiation of residential loans.

Comments

[Manisha Sharma]

Excellent paper!

Thanks for bringing to our attention.

For those practitioners who have helped borrowers through HAMP, here are some notable conclusions of this paper that directly support our experience:

====> Securitization reduces the likelihood of renegotiation and increases the likelihood of foreclosure.

====> Securitization results in lower renegotiation rates and—under the assumption that bank-held loans are being renegotiated efficiently—less efficient renegotiation outcomes."

====> Redefault rates are higher when borrowers have lower credit quality and mortgages are less affordable. This is consistent with the driving idea behind the Home Affordable Modifications Program (HAMP) that provides incentives for servicers and lenders to increase mortgage affordability as much as possible.

Hope CLP blog will continue to highlight such data-driven research to better inform legal practitioners and policy makers.