Study Finds Securitized Loans Less Likely to Get Modifications

Yan Zhang of the Office of the Comptroller of the Currency, Compliance Risk Analysis Division, has written Does Loan Renegotiation Differ by Securitization Status? An Empirical Study.  Here's the abstract: 

This paper investigates whether mortgage loan servicers renegotiate a distressed loan differently depending on whether the loan is held on their own books or by private investors. Using the proprietary mortgage metrics database that has servicer-provided loan renegotiation details, we conduct a comprehensive empirical evaluation of the securitization impact on loan renegotiation. We focus on loan outcome, loan renegotiation frequency, and loan renegotiation effectiveness in influencing outcomes.

We find that non-renegotiated securitized loans have a significantly higher foreclosure rate than similarly situated portfolio loans. We show that servicers actually conduct fewer loan renegotiations for securitized loans. By studying multi-stage transition probabilities, we discover that the self-cure rate and re-default rate are different between securitized loans and portfolio loans. Overall this paper reveals that loan renegotiations, in particular loan outcome, loan renegotiation frequency and effectiveness, do differ by securitization status.

Comments

[David Pereira]

This is an interesting analysis. In the base contract you have a borrower and a lender which has inherent good faith and fair dealing components to it. This "arms-length" 1:1 relationship is clearly understood. If I have an issue, I can merely call the lender. Over time, this progressed to loans being sold in which your loan got sold to someone else and when you have an issue, you merely call the new lender that brought your loan. Securitization has eliminated this inherent good faith and fair dealing component in that you can no longer address these issues 1:1. The net result is this modern servicer between the lender and borrower model has broken down communication and the evidence shows that the borrower no longer has a good faith and fair dealing element. Sadly, the courts are unwilling to recognize good faith and fair dealing in most real estate loans therefore the consumer is screwed again.