Essays on mortgage finance and housing markets



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I first study the effects of additional loan modifications on loan losses during the recent financial crisis. Despite loan modification being widely discussed as an alternative to foreclosure, little research has focused on quantifying its effect on loan performance. By exploiting plausible exogenous variation in the incentives to modify securitized non-agency loans, I find that an additional modification reduces loan losses by 34.5% relative to the average loss. Consistent with theory, modifications are especially beneficial when borrowers are less likely to return to a current status without help and when foreclosure losses are higher. Modification types that grant greater concessions to borrowers are the most effective for minimizing losses. Overall, additional modifications prevent borrower foreclosure while simultaneously benefiting investors. I then study the relation between originators that misreported mortgages and house price movements. ZIP codes with high concentrations of misreporting originators experienced a 75% larger relative increase in house prices from 2003 to 2006 and a 90% larger relative decrease from 2007 to 2012 compared to other ZIPs. Six causality related tests suggest that high fractions of bad originators in a ZIP result in larger price swings. In areas of elastic land supply, ZIPs with bad originators are associated with a building boom and a subsequent price bust that is much more severe than in similar ZIPs without bad originators. Originators with high misreporting seemed to have both given credit to borrowers of a higher stated risk and further understated the borrowers' true risk. Overall, the findings suggest that there are settings where questionable business practices can lead to large distortionary effects.