Government data analyzed by Federal Reserve economists shows what many home owners have already learned the hard way: Consumers have a much better chance of renegotiating a distressed mortgage if the original bank lender still holds it.
Homeowners are 26 to 36 percent more likely to be able to renegotiate a bank-held mortgage than mortgages that have been securitized, or sold by the lender to another company to be bundled into securities, according to a new study to be published in the Journal of Financial Economics.
“Homeowners don’t have a say in whether their bank sells their mortgage or not, but that can have a significant impact on whether their loan is re-negotiated,” said Itzhak Ben-David, co-author of the study and assistant professor of finance at Ohio State University’s Fisher College of Business.
Ben-David, along with three economists from the Chicago Fed, concluded in the study that “frictions introduced by securitization” make it harder for homeowners to renegotiate a troubled loan.
The study drew from 2007-09 government data on more than 34 million mortgages totaling $6 trillion – about 64 percent of the U.S. home mortgage market. It included detailed data from mortgage servicers owned by 10 of the biggest U.S. banks supervised by the Office of the Comptroller of the Currency and from large thrifts regulated by the Office of Thrift Supervision.
Among the modified loans, borrowers whose loans were still held by the mortgage originator often paid higher interest rates and had a roughly 9 percent lower default rate after modification than similar borrowers whose loans were in securities regardless of the strength of their credit history. The most common type of modification was to lower or freeze the interest rate, the economists found.
The Treasury Department’s Home Affordable Modification Program (HAMP), which initially promised to help up to 4 million distressed homeowners, has been criticized by consumer advocates and a government watchdog for rejecting most borrowers for permanent mortgage modifications. Of 1.4 million homeowners who obtained trial modifications with HAMP, only 550,000 had their modifications made permanent.
Other groups have asked HAMP to release loan-level data collected from mortgage servicers which would shed light on which borrowers are getting modifications and the types of modifications.