January 20, 2009
New Scholarship: Alan White on Rewriting Contracts
My colleague, Alan White, has a new greatest SSRN hit. Yes, for those of you who thought he couldn't top Behavior and Contract, Literacy and Contract, The Case for Banning Subprime Mortgages, or Risk-Based Mortgage Pricing, think again! His new article, Rewriting Contracts, Wholesale, Data on Voluntary Mortgage Modifications from 2007 and 2008 Remittance Reports, is putting up some gaudy download numbers over at SSRN.
Here's the abstract:
The 2007 subprime mortgage crisis resulted in home foreclosures at unprecedented levels, and calls for government action. The Bush Administration's response relied primarily on exhorting the mortgage industry to voluntarily modify the terms of existing mortgages to help struggling homeowners reduce their debt burden and bring mortgage debt in line with declining home values. Industry reports have tallied the rapid increase in voluntarily negotiated workouts, without specifying what the terms of those workouts have been.
To better understand the effectiveness of the voluntary mortgage crisis resolution plan, this paper reports detailed empirical information from a newly-created database. Loan-level information on the number and type of negotiated mortgage modifications was compiled from monthly servicer remittance reports from July 2007 through June 2008 for twenty-six mortgage loan pools.
The data show that while the number of modifications rose rapidly during the crisis, mortgage modifications in the aggregate are not reducing subprime mortgage debt. Mortgage modifications rarely if ever reduced principal debt, and in many cases increased the debt. Nor are modification agreements uniformly reducing payment burdens on households. About half of all loan modifications resulted in a reduced monthly payment, while many modifications actually increased the monthly payment. Finally, there is tremendous variation in the extent, if any, of payment relief offered by different mortgage servicers.
The combined effect of dwindling refinancing activity and modifications that do not write down mortgage debt, and in many cases do not even reduce monthly payments, is to delay, but not prevent, large numbers of foreclosures. Given the continuing accumulation of loans in the foreclosure and real-estate-owned categories, the subprime crisis will be worked out only over many years through painstakingly slow repayment, foreclosure and disposition of properties.
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