NCPA - National Center for Policy Analysis

Did Homeowners Respond Strategically to Mortgage Modification Programs?

June 22, 2011

National Bureau of Economic Research researchers Christopher J. Mayer, Edward Morrison, Tomasz Piskorski and Arpit Gupta investigate whether homeowners responded strategically to news of mortgage modification programs.  They exploited plausibly exogenous variation in modification policy induced by U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers with subprime mortgages throughout the country.

  • Using a difference-in-difference framework, the authors find that Countrywide's relative delinquency rate increased 13 percent per month immediately after the program's announcement.
  • The borrowers whose estimated default rates increased the most in response to the program were those who appear to have been the least likely to default otherwise, including those with substantial liquidity available through credit cards and relatively low combined loan-to-value ratios.
  • These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs.

The results provide evidence of strategic behavior by borrowers who were willing to suspend mortgage payments in order to qualify for a newly announced mortgage modification. 

  • In the months immediately following the announcement of the Countrywide Settlement, the number of Countrywide adjusted rate mortgage borrowers rolling from current to 60 days delinquent rose by more than 13 percent relative to comparable servicers whose mortgages were not covered by the legal settlement.
  • The estimated effects are stronger (up to over 20 percent) among those who appear least likely to have defaulted otherwise: borrowers who had the most available credit and those with lower current combined loan-to-value ratios.

Source: Christopher J. Mayer et al., "Mortgage Modification and Strategic Behavior: Evidence From a Legal Settlement with Countrywide," National Bureau of Economic Research, Working Paper No. 17065, May 2011.

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