Data Management

Reducing Foreclosures: No Easy Answers

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Executive Summary

This paper takes a skeptical look at a leading argument about what is causing the foreclosure crisis and what should be done to stop it. The authors use an economic model to focus on two key decisions: the borrower's choice to default on a mortgage and the lender's subsequent choice whether to renegotiate or modify the loan. The theoretical model and econometric analysis illustrate that unaffordable loans, defined as those with high mortgage payments relative to income at origination, are unlikely to be the main reason that borrowers decide to default.

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