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Mortgage Modification and the Decision to Strategically Default: A Game Theoretic Approach

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  • Andrew J. Collins
  • David M. Harrison
  • Michael J. Seiler

Abstract

While numerous and varied opinions abound, there remains much confusion as to why relatively few mortgages are modified at a time when the demand to modify is historically high. To better understand this complex issue, we build a game theoretic model to quantify a number of economic incentives and costs surrounding critical dimensions of the lender's decision to modify a loan and the borrower's decision to strategically default in an attempt to encourage such a modification. We mathematically demonstrate that it is rarely economically rational for lenders to modify loans. For the borrower, we find that their negative equity position, growth rate in home prices, and the probability the lender will exercise its legal right to recourse represent the top three strategic default determinants.

Suggested Citation

  • Andrew J. Collins & David M. Harrison & Michael J. Seiler, 2015. "Mortgage Modification and the Decision to Strategically Default: A Game Theoretic Approach," Journal of Real Estate Research, Taylor & Francis Journals, vol. 37(3), pages 439-470, July.
    • Handle: RePEc:taf:rjerxx:v:37:y:2015:i:3:p:439-470
    DOI: 10.1080/10835547.2015.12091425
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    Cited by:

    1. Jackson T. Anderson & David M. Harrison & Kimberly F. Luchtenberg & Michael J. Seiler, 2023. "Legal Versus Psychological Contracts: When Does a Mortgage Default Settlement Contract Become a Contract?," The Journal of Real Estate Finance and Economics, Springer, vol. 67(2), pages 191-217, August.
    2. Michael LaCour-Little & Zhenguo Lin & Wei Yu, 2020. "Assumable Financing Redux: A New Challenge for Appraisal?," The Journal of Real Estate Finance and Economics, Springer, vol. 60(1), pages 3-39, February.
    3. Lin, Zhenguo & Liu, Yingchun & Xie, Jia, 2024. "Market distortions with collusion of agents," Journal of Banking & Finance, Elsevier, vol. 162(C).
    4. Asish Saha & Hock-Eam Lim & Goh-Yeok Siew, 2021. "Housing Loan Repayment Behaviour in Malaysia: An Analytical Insight," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 20(2), pages 1-19, September.
    5. Asish Saha & Hock-Eam Lim & Goh-Yeok Siew, 2021. "Housing Loan Repayment Behaviour in Malaysia: An Analytical Insight," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 20(2), pages 141-159, September.
    6. Yong-gui Fu & Jian-ming Zhu, 2018. "The credit game on network supplier and customer based on big data," Electronic Commerce Research, Springer, vol. 18(3), pages 605-627, September.
    7. Su Han Chan & Ko Wang & Jing Yang, 2016. "The Pricing of Construction Loans," International Real Estate Review, Global Social Science Institute, vol. 19(4), pages 411-434.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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