The Determinants of Subprime Mortgage Performance Following a Loan Modification

We examine the evolution of mortgage modification terms obtained by distressed subprime borrowers during the recent housing crisis and the effect of the various types of modifications on the subsequent loan performance. Using the CoreLogic Loan Performance dataset that contains detailed loan level information on mortgages, modification terms, second liens, and home values, we estimate a discrete time proportional hazard model with competing risks to examine the determinants of post-modification mortgage outcomes. We find that principal reductions are particularly effective at improving loan outcomes, as high loan-to-value ratios are the single greatest contributor to re-default and foreclosure. However, any modification that reduces total payment and interest (P&I) reduces the likelihood of subsequent re-default and foreclosure. Modifications that increase the loan principal—primarily through capitalized interest and fees—are more likely to fail, even while controlling for changes in P&I.