paper about MBS

Some have argued that modifying mortgages is more

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Unformatted text preview: 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 73 to be a useful crisis management tool during the crisis, but it was used for purposes that are arguably beyond its mandate. The financial crisis started in earnest in August 2007, when the $1.2 trillion asset-backed commercial paper (ABCP) market froze. 37 Investors were unwilling to renew the financing of the special purpose vehicles (SPVs) that housed the ABCP and the banks that set them up for fear that these banks were insolvent. With little or no access to other private market funding, the banks (through their SPVs) turned to the FHLB System. The FHLB System gives “advances” (loans) to commercial banks, thrifts, credit unions, and insurance companies that are the owner- members of the System. The advances are collateralized by residential mortgage-related assets, Agencies, and Treasuries. During the second half of 2007, the FHLB System increased its advance lending by $235 billion to $875 billion by the end of that year, a 36.7% increase. 38 In fact, the decline in the ABCP market is almost perfectly mirrored in the growth of the FHLB advances. Ten banks accounted for $150 billion of these advances. Washington Mutual, Bank of America, and Countrywide borrowed the largest amounts. As of June 30, 2008, advances stood at $914 billion. For comparison, the $1.3 trillion in total assets controlled by the FHLB System exceeded those for comparison, the $1....
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Some have argued that modifying mortgages is more difficult...

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