Why don't Lenders renegotiate more home mortgages? Redefaults, self-cures and securitization

A leading explanation for the lack of widespread mortgage renegotiation is the existence of frictions in the mortgage securitization process. This paper finds similarly small renegotiation rates for securitized loans and loans held on banks' balance sheets that become seriously delinquent, in p...

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Bibliographic Details
Published in:Journal of monetary economics 2013-10, Vol.60 (7), p.835-853
Main Authors: Adelino, Manuel, Gerardi, Kristopher, Willen, Paul S.
Format: Article
Language:English
Subjects:
Asymmetric information
Bargaining
Correlation
Correlation analysis
Delinquency
Economic crisis
Economic theory
Foreclosure
Loans
Mortgage
Mortgages
Renegotiation
Securitization
Studies
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Summary:A leading explanation for the lack of widespread mortgage renegotiation is the existence of frictions in the mortgage securitization process. This paper finds similarly small renegotiation rates for securitized loans and loans held on banks' balance sheets that become seriously delinquent, in particular during the early part of the financial crisis. We argue that information issues endemic to home mortgages, where lenders negotiate with large numbers of borrowers, lead to barriers in renegotiation. Consistent with the theory, renegotiation rates are strongly negatively correlated with the degree of informational asymmetries between borrowers and lenders over the course of the crisis. •From 2005 to 2011 lenders renegotiated a small fraction of delinquent mortgages.•Securitization cannot explain the paucity of renegotiation.•Asymmetric information between borrowers and lenders is a more likely explanation.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2013.08.002