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ABSTRACT
I estimate the extent to which modifications of privately securitized mortgages increased or forgave debt during the Great Recession and aftermath, from 2008 to 2014. I find that loan modifications weakened household balance sheets by adding $20 billion to household debt, with the net amount of debt added per modification doubling from 2010 to 2014. I also find that the increase in debt is consistent with capitalization of fees, but not missed interest payments. Capitalization of fees is significant because it has been associated with a principal-agent problem between investors and mortgage servicers preventing efficient loss mitigation, as well as consumer financial protection abuses.
Acknowledgements
This paper has greatly benefited from comments by Robert Pollin, Michael Ash, Arindrajit Dube, Gerald Epstein, and Jennifer Taub. All errors are of course my own.
Disclosure Statement
No potential conflict of interest was reported by the author(s).
Notes
1 Data on the delinquency rate for US household mortgages is available from the St. Louis Federal Reserve FRED database. Accessed 15 June 2016 from: http://research.stlouisfed.org/.
2 Mortgage-backed securities (MBS) come in two varieties: agency and non-agency. Agency MBS are securities that are guaranteed by government agencies, which include Fannie Mae, Freddie Mac, and Ginnie Mae. Non-agency MBS are not guaranteed by a government agency, and are also known as PLS because they are securitized in private markets.
3 A description of the HAMP waterfall can be found at: https://www.hmpadmin.com/portal/learningcenter/docs/presentations/mhaservicerwebinar02292012.pdf. Accessed 17 March 2021.
4 For a formal model of the servicer’s choice between modification and foreclosure, please see Levitin and Twomey (Citation2011).
5 A description of the consent order can be found at: https://www.consumerfinance.gov/about-us/newsroom/cfpb-state-authorities-order-ocwen-to-provide-2-billion-in-relief-to-homeowners-for-servicing-wrongs/. Accessed 1 September 2017.
6 A description of the recent lawsuit can be found at: https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-ocwen-failing-borrowers-throughout-mortgage-servicing-process/. Accessed 1 September 2017.
7 This data set is publicly available from www.ctslink.com.
8 As discussed in the data description section, November 2008 is the first month for which the CCF recorded different measures of redistribution in modifications. This makes 2009 the first year for which we have complete data for redistribution in modifications.
9 It is important to note that most modifications included a combination of both capitalization and forgiveness. This is why the sum of modifications with capitalization and forgiveness is larger than the total number of redistribution modifications.
10 The year 2012 was chosen to split my sample simply because it is the middle year of my sample. The first year with complete data for redistribution in modifications in my sample is 2009, and so the choice of 2012 provides the same number of years for early and late periods. I analyze the robustness of this choice in , and find that my results are robust to alternative choices for early and late periods.
11 Corelogic is a leading data provider which constructs widely used foreclosure reports. The reports can be found here: http://www.corelogic.com/about-us/researchtrends/national-foreclosure-report.aspx?WT.mc_id=prnw_160510_IrWNB#.V1dDVJErKhc.