Mortgage Modification Program Encourages Default

More

One often hears frustrated citizens asking why the bank won't write down the principal on underwater mortgages, when after all it's better for the bank to get something than to foreclose.



Christopher J. Mayer, Edward Morrison, Tomasz Pikorski, and Arpit Gupta of Columbia University (variously Business School and Law School) find that a mortgage modification program that Countrywide Financial agreed to implement as part of a settlement with U.S. state attorneys general caused more people to become delinquent. Give people an incentive not to pay their mortgage and some of them will decide--not to pay their mortgage.

A lot of advocates have tried to frame principal mods as a "win- that makes the bank and the borrower better off.  But of course, if you modify principal for some borrowers, other borrowers will default in the hopes of getting the same deal.  If the rate is high, the savings on mortgage modifications need to be pretty spectacular to make the math work.  And the rate was pretty high--13-20% higher, which is impressive considering that the program wasn't too well publicized, and most people probably don't pay too much attention to the name of their mortgage servicer.  Plus as far as I can tell, these modifications didn't even involve principal reductions, just interest rate fixes; principal reductions should make delinquency and modification even more attractive.

Now, maybe you think we should do mortgage modifications anyway; there are arguments for it. But it's not going to be win-win.
Jump to comments
Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

Get Today's Top Stories in Your Inbox (preview)

CrossFit Versus Yoga: Choose a Side

How a workout becomes a social identity


Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

CrossFit Versus Yoga: Choose a Side

How a workout becomes a social identity

Video

Is Technology Making Us Better Storytellers?

The minds behind House of Cards and The Moth weigh in.

Video

A Short Film That Skewers Hollywood

A studio executive concocts an animated blockbuster. Who cares about the story?

Video

In Online Dating, Everyone's a Little Bit Racist

The co-founder of OKCupid shares findings from his analysis of millions of users' data.

Video

What Is a Sandwich?

We're overthinking sandwiches, so you don't have to.

Video

Let's Talk About Not Smoking

Why does smoking maintain its allure? James Hamblin seeks the wisdom of a cool person.

Writers

Up
Down

More in Business

Just In