Working Paper

A Crisis of Missed Opportunities? Foreclosure Costs and Mortgage Modification During the Great Recession

Abstract: We investigate the impact of Great Recession policies in California that substantially increased lender pecuniary and time costs of foreclosure. We estimate that the California Foreclosure Prevention Laws (CFPLs) prevented 250,000 California foreclosures (a 20% reduction) and created $300 billion in housing wealth. The CFPLs boosted mortgage modifications and reduced borrower transitions into default. They also mitigated foreclosure externalities via increased maintenance spending on homes that entered foreclosure. The CFPLs had minimal adverse side effects on the availability of mortgage credit for new borrowers. Altogether, findings suggest that policy interventions that keep borrowers in their homes may be broadly beneficial during times of widespread housing distress.

Keywords: Foreclosure crisis; Mortgage forbearance; Mortgage modification; Great recession;

JEL Classification: E52; E58; R20; R30;

https://doi.org/10.17016/FEDS.2020.053

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2020-07-06

Number: 2020-053