We investigate whether homeowners respond strategically to news of mortgage modification programs. We exploit plausibly exogenous variation in modification policy induced by settlement of U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers. Using a difference-in-difference framework, we find that Countrywide's monthly delinquency rate increased more than 0.54 percentage points – ten percent relative increase – immediately after the settlement's announcement. The estimated increase in default rates is largest among borrowers least likely to default otherwise. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs.
Banking and Finance Law | Law | Law and Economics | Property Law and Real Estate
Richard Paul Richman Center for Business, Law, and Public Policy
Christopher Mayer, Edward R. Morrison, Tomasz Piskorski & Arpit Gupta,
Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide,
Am. Econ. Rev.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/543