Home loans owned by banks and mortgage lenders are up to a third more likely to be renegotiated compared to similar mortgages sold and turned into securities, according to a new study from Ohio State University’s Fisher College of Business.
Researchers found that such mortgages were 26 to 36 percent more likely to receive some kind of workout, such as a repayment plan or a loan modification.
“Homeowners don’t have a say in whether their bank sells their mortgage or not, but that can have a significant impact on whether their loan is re-negotiated,” said Itzhak Ben-David, co-author of the study and assistant professor of finance at Ohio State University’s Fisher College of Business, in a release.
“From the homeowners’ perspective, whether their mortgage is traded among investors is completely outside of their control.”
As to why loan servicers are less likely to offer a loan workout, Ben-David said it probably has to do with costs and coordination issues between servicer and owner, along with a lack of incentive to modify from the servicer’s perspective because they don’t own the loan.
The research also found that bank-held loans had a roughly nine percent lower default rate after modification than similar securitized loans, despite being modified with tougher terms.
“The bank knows these borrowers better, so even if they give less concessions they still have better outcomes. They know exactly how much they have to give,” said Ben-David.
Oh, and originate-to-distribute loans also exhibited a higher default rate, so it’s double trouble.