EconStor >
Federal Reserve Bank of Boston >
Public Policy Discussion Papers, Federal Reserve Bank of Boston >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/59224
  
Title:Reducing foreclosures PDF Logo
Authors:Foote, Christopher L.
Gerardi, Kristopher S.
Goette, Lorenz
Willen, Paul S.
Issue Date:2009
Series/Report no.:Public policy Discussion Papers, Federal Reserve Bank of Boston 09,2
Abstract:This paper takes a skeptical look at a leading argument about what is causing the foreclosure crisis and what should be done to stop it. We use an economic model to focus on two key decisions: the borrower's choice to default on the mortgage and the lender's choice on whether to renegotiate or modify” the loan. The theoretical model and econometric analysis illustrate that unaffordable” loans, defined as those with high mortgage payments relative to income at origination, are unlikely to be the main reason that borrowers decide to default. Rather, the typical problem appears to be a combination of household income shocks and an unprecedented fall in house prices. Regarding the small number of loan modifications to date, we show, both theoretically and empirically, that the efficiency of foreclosure for investors is a more plausible explanation for the low number of modifications than contract frictions related to securitization agreements between servicers and investors. While investors might be foreclosing when it would be socially efficient to modify, there is little evidence to suggest they are acting against their own interests when they do so. An important implication of our analysis is that policies designed to reduce foreclosures should focus on ameliorating the immediate effects of job loss and other adverse life events, rather than modifying loans to make them more affordable” on a long-term basis.
JEL:D11
D12
G21
Document Type:Working Paper
Appears in Collections:Public Policy Discussion Papers, Federal Reserve Bank of Boston

Files in This Item:
File Description SizeFormat
605421870.pdf968.39 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/59224

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.