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Economic Review

Mortgage Foreclosure Prevention Efforts

Kristopher Gerardi and Wenli Li
Vol. 95, No. 2, 2010

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In 2007, the United States began to experience its worst housing and foreclosure crisis since the Great Depression. In response, policymakers have been devising foreclosure prevention plans, most of which focus on loan modifications.

This article begins with an overview of the different loss mitigation tools that mortgage lenders and policymakers have used in the past to combat foreclosure and then briefly summarizes the main U.S. programs of the past few years. By most analyses, the authors note, these recent programs have had poor results in terms of significantly reducing foreclosures, and borrowers who have received modifications are redefaulting at extremely high rates.

The authors then review both the theoretical academic literature of the 1990s and early 2000s and the more recent empirical literature generated by the recent foreclosure crisis. Many of the recent studies have focused on loan modification as a loss mitigation tool.

Given the limited success of government loan modification programs, the authors believe that policymakers will likely turn their attention to other alternatives. The authors point to signs that the focus is now shifting to programs that do not attempt to prevent foreclosures but rather try to help homeowners who have already experienced foreclosure.

October 2010