Mortgage Modification and the Decision to Strategically Default A Game Theoretic Approach
While numerous and varied opinions abound, there remains much confusion as to why relatively few mortgages are modified at a time when the demand to modify is historically high. To better understand this complex issue, we build a game theoretic model to quantify a number of economic incentives and c...
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Published in | The Journal of real estate research Vol. 37; no. 3; pp. 439 - 470 |
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Main Authors | , , |
Format | Journal Article |
Language | English |
Published |
Clemson
The American Real Estate Society
01.07.2015
Taylor & Francis Ltd |
Subjects | |
Online Access | Get full text |
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Abstract | While numerous and varied opinions abound, there remains much confusion as to why relatively few mortgages are modified at a time when the demand to modify is historically high. To better understand this complex issue, we build a game theoretic model to quantify a number of economic incentives and costs surrounding critical dimensions of the lender’s decision to modify a loan and the borrower’s decision to strategically default in an attempt to encourage such a modification. We mathematically demonstrate that it is rarely economically rational for lenders to modify loans. For the borrower, we find that their negative equity position, growth rate in home prices, and the probability the lender will exercise its legal right to recourse represent the top three strategic default determinants. |
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AbstractList | While numerous and varied opinions abound, there remains much confusion as to why relatively few mortgages are modified at a time when the demand to modify is historically high. To better understand this complex issue, we build a game theoretic model to quantify a number of economic incentives and costs surrounding critical dimensions of the lender’s decision to modify a loan and the borrower’s decision to strategically default in an attempt to encourage such a modification. We mathematically demonstrate that it is rarely economically rational for lenders to modify loans. For the borrower, we find that their negative equity position, growth rate in home prices, and the probability the lender will exercise its legal right to recourse represent the top three strategic default determinants. |
Author | Collins, Andrew J. Harrison, David M. Seiler, Michael J. |
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Copyright | Copyright American Real Estate Society Jul-Sep 2015 |
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Snippet | While numerous and varied opinions abound, there remains much confusion as to why relatively few mortgages are modified at a time when the demand to modify is... |
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SubjectTerms | Credit scores Decision making Default Equilibrium Expected utility Foreclosure Foreclosures Game theory Games Growth rate Housing Incentives Lenders Loan agreements Loan defaults Loan payments Loan workouts Loans Modifications Mortgage loans Mortgages Nash equilibrium Studies United States |
Subtitle | A Game Theoretic Approach |
Title | Mortgage Modification and the Decision to Strategically Default |
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