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When Are Modifications of Securitized Loans Beneficial to Investors?

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  • Gonzalo Maturana

Abstract

Loan modification is widely discussed as an alternative to foreclosure, but little research has focused on quantifying its effect on loan performance. I quantify this effect early in the housing crisis by exploiting exogenous variation in the incentives to modify securitized nonagency loans. An additional modification reduces loan losses by 35.8% relative to the average loss; this reduction suggests that the marginal benefit of modification likely exceeded the marginal cost. Consistent with the idea that high-income borrowers may be better equipped to withstand bad economic times, I find that modifications are especially beneficial when borrowers have larger loans. Received April 25, 2016; editorial decision March 24, 2017 by Editor Philip Strahan.

Suggested Citation

  • Gonzalo Maturana, 2017. "When Are Modifications of Securitized Loans Beneficial to Investors?," The Review of Financial Studies, Society for Financial Studies, vol. 30(11), pages 3824-3857.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:11:p:3824-3857.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx053
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    Citations

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    Cited by:

    1. Piskorski, Tomasz & Seru, Amit, 2021. "Debt relief and slow recovery: A decade after Lehman," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1036-1059.
    2. Aiello, Darren J., 2022. "Financially constrained mortgage servicers," Journal of Financial Economics, Elsevier, vol. 144(2), pages 590-610.
    3. Jason Allen & Robert Clark & Shaoteng Li & Nicolas Vincent, 2022. "Debt‐relief programs and money left on the table: Evidence from Canada's response to COVID‐19," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(S1), pages 9-53, February.
    4. Tomasz Piskorski & Amit Seru, 2018. "Mortgage Market Design: Lessons from the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(1 (Spring), pages 429-513.
    5. Korgaonkar, Sanket, 2023. "The agency costs of tranching: Evidence from RMBS," Journal of Financial Intermediation, Elsevier, vol. 54(C).
    6. Kuong, John Chi-Fong & Zeng, Jing, 2021. "Securitization and optimal foreclosure," Journal of Financial Intermediation, Elsevier, vol. 48(C).
    7. Gürtler, Marc & Koch, Florian, 2021. "Multidimensional skin in the game," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    8. repec:bin:bpeajo:v:49:y:2019:i:2018-01:p:429-513 is not listed on IDEAS
    9. Hibbeln, Martin & Osterkamp, Werner, 2024. "The Impact of Risk Retention on Moral Hazard in the Securitization Market," Journal of Banking & Finance, Elsevier, vol. 163(C).
    10. Kruger, Samuel, 2018. "The effect of mortgage securitization on foreclosure and modification," Journal of Financial Economics, Elsevier, vol. 129(3), pages 586-607.
    11. Jan K. Brueckner & James N. Conklin & N. Edward Coulson & Moussa Diop, 2023. "Default Costs and Repayment of Underwater Mortgages," CESifo Working Paper Series 10755, CESifo.
    12. Sumit Agarwal & Slava Mikhed & Barry Scholnick & Man Zhang, 2022. "Reducing Strategic Default in a Financial Crisis," Working Papers 21-36, Federal Reserve Bank of Philadelphia.
    13. Peter Ganong & Pascal Noel, 2020. "Liquidity versus Wealth in Household Debt Obligations: Evidence from Housing Policy in the Great Recession," American Economic Review, American Economic Association, vol. 110(10), pages 3100-3138, October.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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