Effects of Government Bail-Out on Mortgage Modification

Posted: 1 Jul 2018

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Yunqi Zhang

School of Finance, Nankai University; National University of Singapore

Multiple version iconThere are 2 versions of this paper

Date Written: June 17, 2018


This paper shows how liquidity infusions affect loan modification in the mortgage market. The design of pooling and servicing agreements leads mortgage servicers to prefer foreclosure over modification when they are liquidity constrained. Therefore, a positive liquidity shock is expected to boost modification rates. Using a residential mortgage dataset that includes loan-level information, we find that the Troubled Asset Relief Program significantly increased the modification rate. Our findings help us better understand the economic consequences of government intervention and have important policy implications for the renegotiation of distressed mortgages.

Keywords: Mortgage Modification, Financial Crisis, TARP, Government Intervention, Liquidity

JEL Classification: E60, E65, G18, G21, H3

Suggested Citation

Agarwal, Sumit and Zhang, Yunqi, Effects of Government Bail-Out on Mortgage Modification (June 17, 2018). Journal of Banking and Finance, Vol. 93, 2018, Available at SSRN: https://ssrn.com/abstract=3197772

Sumit Agarwal

National University of Singapore ( email )

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Singapore, 117592
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HOME PAGE: http://www.ushakrisna.com

Yunqi Zhang (Contact Author)

School of Finance, Nankai University ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350

National University of Singapore ( email )

4 Architecture Drive
Singapore, 117566

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