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| Residential Loan Renegotiation: Theory
and Evidence Author: Terrence M. Clauretie and Mel Jameson Start Page: 153 Abstract: If loan renegotiations
are not uncommon, this alternative should be modeled into the contingent claims framework
of mortgage pricing. There is no direct evidence on the frequency of loan renegotiation,
however. A simple model of default indicates that renegotiation should occur more
frequently in conventional loans versus FHA loans and in states with higher foreclosure
costs versus those with lower costs. Since empirical tests using delinquency and
foreclosure placement rates demonstrate no such behavioral difference, we conclude loan
renegotiation does not occur frequently enough to warrant its consideration in mortgage
pricing models. The rarity of circumstances under which renegotiation is mutually
beneficial may account for this funding. |
