American Economic Review2014-10-13 4:30 PM

Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide

Abstract 

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—a 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.


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American Economic Review

The American Economic Review is a general-interest economics journal. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.

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