Abstract

Loan Modifications and Redefault Risk: An Examination of Short-term Impacts [PDF]
Authors: Roberto G. Quercia and Lei Ding
July 21, 2009

One promising strategy to stem the flood of home foreclosure is to modify mortgage loans so that borrowers can remain in their homes.  However, a primary concern of loan modification efforts is the seemingly high rate of recidivism.  We examine the relationship between redefault rates and different types of loan modifications based on a large sample of recently modified loans.   We find that the key component to making modified loans more sustainable, at least in the short run, is that mortgage payments are reduced enough to be truly affordable to the borrowers.  The findings also show an even lower likelihood of redefault when the payment reduction is accompanied by a principal reduction.  Unfortunately, we also find that to reduce redefault for modified loans that are currently underwater (those with negative equity) or were poorly underwritten at origination, more significant loan restructuring or refinancing may be needed. 

Cityscape, Vol. 11, No. 3, 2009

See CCC's flowchart interpretation of the administration's mortgage stabilization plan.

Related Reports:

 

Loan Modification and Redefault Risk
Community Investments, FRB San Francisco, Spring 2010, Vol. 22, No. 1, pg. 35

 

Related Presentations:

 

Seeking Solutions to the Mortgage Dilemna [PDF]

MBA'S National Mortgage Servicing & Expo, Tampa, FL, Feb 17-20, 2009