No Silver Bullet

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by Tuck Communications   Jan 24, 2011

It seemed like a good idea at the time. But mortgage renegotiation, which policy makers consider a more palatable alternative to foreclosure, has done little to stem the tide of preventable home foreclosures in the United States.

According to Tuck assistant professor Manuel Adelino, less than 10 percent of delinquent loans are renegotiated within the first year of delinquency, and only a third of those are offered lower monthly payments. Thirty percent, meanwhile, end up in foreclosure. 

At first, securitization was thought to be the culprit. But Adelino says lenders’ reluctance to renegotiate may come down to previously hidden risks in the process that can dramatically increase its costs: delinquent borrowers who do not need assistance but renegotiate nonetheless; and so-called “redefaulters,” who wind up back in delinquency within six months of having their loans modified. With the latter group, lenders are only postponing the inevitable. But there’s a clear downside in doing so. If housing prices continue to decline, they’ll recoup even less in future foreclosures.

M. Adelino, K. Gerardi, P. Willen“Why Don’t Lenders Renegotiate More Home Mortgages? The Effect of Securitization”