Foreclosure loss severity and distressed home mortgage refinance
Abstract
Purpose
The problem in alleviating homeowner mortgage distress through refinance is how to achieve meaningful alleviation without prospectively harming the financier. The problem revolves around two parameters from real estate finance – the probability that the distress leads to foreclosure and resulting foreclosure loss severity for the financier if foreclosure does occur. Previous analysis focuses on reducing the probability that homeowner distress leads to foreclosure. By contrast, the purpose of this paper is to focus on reducing foreclosure loss severity.
Design/methodology/approach
The study develops a new intuitive formula for foreclosure loss severity to quantify its dependence on transaction costs. The study shows that foreclosure loss severity reduction is feasible by introducing a new refinancing instrument that lowers foreclosure transaction costs and applying property law to derive the structure of the refinancing instrument.
Findings
Foreclosure loss severity reduction can subsidize concessions on scheduled payments for homeowners with arbitrarily poor credit without prospective harm to the financier.
Research limitations/implications
Quantification of mortgage distress relief is limited to distressed mortgages described by representative parameter values from various government studies.
Practical implications
For most distressed homeowners, payment and principal reductions could exceed those available from the recent government programs.
Social implications
Implementation should significantly enlarge the pool of homeowners eligible for mortgage distress relief.
Originality/value
The mortgage refinance is qualitatively different from that available under existing government refinance programs because it is based on an arms-length exchange of property rights that makes market sense regardless of whether the refinancing results in subsequent homeowner default.
Keywords
Citation
Graff, R.A. (2017), "Foreclosure loss severity and distressed home mortgage refinance", Journal of Property Investment & Finance, Vol. 35 No. 3, pp. 244-263. https://doi.org/10.1108/JPIF-06-2016-0040
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited