Abstract
Some homeowners might intentionally skip mortgage payments that they can afford to be eligible for mortgage modification programs, such as Home Affordable Mortgage Program (HAMP). The loan modification program established as part of the October 2008 Countrywide legal settlement provides a valuable natural experiment for investigation of such strategic behavior. We find that the Countrywide modification program not only substantially increases the default rates among borrowers who were current in their loan payments, but also dramatically decreases the cure rate of those already in payment delinquency before the settlement, and the latter venue has been largely overlooked in the literature. Evidence from our base sample indicates that, by January 2009, modification-induced strategic default is about nine percentage points, on a base default rate of thirty percent. Further, modification-induced strategic defaults appear to be quite widespread and more severe among more risky loans.
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