Selling these houses in depressed housing markets and

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up from 6% in 2007. Selling these houses in depressed housing markets, and alongside the
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72 repossessed properties of banks and thrifts, has led to losses as large as 40% of the value of the mortgage. Because the sales price of a foreclosed home is on average 27% below that of a comparable home not in foreclosure, these sales depress real estate prices and slow the recovery. Mortgage modifications have become an important component of public interventions that are designed to reduce foreclosures. The GSEs are a key tool in this effort. In November 2008-January 2009, the GSEs introduced a moratorium on foreclosures alongside private sector lenders. The federal government’s Home Affordable Modification Program (HAMP), started in April 2009, was targeted to help 3.2 million homeowners that were struggling. With efforts ramped up substantially in 2010, 1.3 million loans had received a trial HAMP modification and 0.4 million a permanent HAMP modification by the end of July 2010. In addition, another 0.5 million borrowers received a FHA loss mitigation intervention and 1.4 million a HOPE Now modification, for a total of 3.6 million government-subsidized modifications. Some have argued that modifying mortgages is more difficult when these mortgages reside in securitization pools: win-win modifications do not take place and loans are more likely to go into foreclosure when they are securitized. 33 Piskorski, Seru, and Vig (2009) find that loans that end up in banks’ portfolios ultimately perform better than those held in securities, possibly because of an increased willingness by banks to offer modifications on loans of which they are the sole owners. 34 This argument would suggest a tradeoff between the added liquidity of securitization and the ease of modification. A careful study by Hunt (2009), however, finds no evidence of legal impediments on loan modifications. 35 This leaves open the possibility that it is not in the loan servicers’ financial interest to pursue modifications, perhaps because banks are unwilling to recognize the low economic value of defaulted loans. What seems less controversial is the conclusion that, even when modification does take place, its success is often temporary. Using data on subprime modifications that received modification between December 2005 and March 2009 (before the start of the HAMP program), a recent study shows a 56% re-default rate within twelve months of modification. 36 The success rate increases when the modification takes place through principal forgiveness, rather than lower interest rates. 5.4 The Federal Home Loan Bank System during the Crisis The Federal Home Loan Bank System, the third GSE, which we have largely left out of our discussion so far, played a similar role to that of Freddie and Fannie. In particular, it proved
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73 to be a useful crisis management tool during the crisis, but it was used for purposes that are arguably beyond its mandate.
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