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Why Lenders should Forgive, not Forsake Mortgages
The current housing crisis has resulted in several homeowners defaulting on their mortgages. Foreclosure lings numbered 321,480 during May 2009 (approximately 1 of every 400 homes), up 18% from the previous year. 2 When dealing with failing borrowers, lenders need to decide between modifying the loan or foreclosing. Modification results in a lowering of the present value of
the loan. Foreclosing incurs deadweight costs that reduce the recovery value of the home. This paper develops a framework for reducing foreclosure losses by loan modification, and how best to implement it. Foote, Gerardi, Goette and
Willen (2009) estimate that loan modification versus premature foreclosure will save $180 billion, or 1% of GDP a year.