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The Imitation Game: The Imitation Game: How Encouraging Renegotiation Makes Good Borrowers Bad

Author

Listed:
  • Sean Flynn
  • Andra Ghent
  • Alexei Tchistyi

Abstract

We show that commercial mortgage borrowers behave opportunistically to attempt to obtain principal reductions. We develop a model in which lenders cannot perfectly observe borrowers’ use values and renegotiation is costly. We then exploit a tax rule change that reduced the cost of renegotiation. Consistent with the model predictions, borrowers with high private use values of the property are more likely to transfer into special servicing when lenders have a higher capacity to negotiate principal reductions after the rule change. Our results suggest adverse consequences of principal forgiveness for lenders.

Suggested Citation

  • Sean Flynn & Andra Ghent & Alexei Tchistyi, 2024. "The Imitation Game: The Imitation Game: How Encouraging Renegotiation Makes Good Borrowers Bad," The Review of Financial Studies, Society for Financial Studies, vol. 37(12), pages 3648-3709.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:12:p:3648-3709.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhae060
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    More about this item

    Keywords

    E44; G14; G21;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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