Defaults, Self-curses and Securitization
Author:
Manuel Adelino, MIT Sloan
Paul S. Willen, Federal Reserve Bank of Boston
Kristopher Gerardi, Federal Reserve Bank of Atlanta
We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securitization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and for subprime loans. We use a theoretical model to show that 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.
This paper was presented on September 16th, 2009 at the FDIC's Seidman Center for the FHFA and the FDIC cohosted symposium on “Improving Assessment of the Default Risk of Single-Family Mortgages”. The symposium included sessions on: Collateral and Appraisal Issues, Underwriting Standards, and Issues in Default Modeling. Attendance included housing and mortgage market experts from industry, academia, and government. The research paper was selected from submissions received in response to a Call for Papers issued in the spring.
The Call for Papers can be downloaded here.