The private sector resolution of defaulted residential mortgages

This paper examines the challenges a private-sector firm faces when trying to resolve distressed residential mortgages. Exploiting unique data from a mortgage resolution specialist who attempts to keep defaulting borrowers in their homes by offering substantial equity in their home to all its borrowers, we document a number of empirical regularities. First, foreclosure remains the most likely outcome for these defaulted mortgages despite the offer of re-equitization. Second, among all defaulted mortgages in a given county, the firm’s investment strategy led it to own those secured by lower-valued homes. Finally, it is typically a number of years before a defaulted mortgage is owned by a specialist with the incentives to resolve the distress in a way that avoids foreclosure. We develop a model capable of delivering these predictions and argue that the effectiveness of mortgage resolution tools likely relates to the lender attempting to address the distress.