The meltdown in residential real-estate prices that commenced in 2006 resulted in unprecedented mortgage delinquency rates. Until mid-2009, lenders and servicers pursued their own individual loss mitigation practices without being significantly influenced by government intervention. Using a unique dataset that precisely identifies loss mitigation actions, we study these methods-liquidation, repayment plans, loan modification, and refinancingand analyze their effectiveness. We show that the

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... ity of delinquent mortgages do not enter any loss mitigation program or become a part of foreclosure proceedings within 6 months of becoming distressed. We also find that it takes longer to complete foreclosures over time, potentially due to congestion. We further document large heterogeneity in practices across servicers, which is not accounted for by differences in borrower population. Consistent with the idea that securitization induces agency conflicts, we confirm that the likelihood of modification of securitized loans is up to 70% lower relative to portfolio loans. Finally, we find evidence that affordability (as opposed to strategic default due to negative equity) is the prime reason for redefault following modifications. While modification terms are more favorable for weaker borrowers, greater reductions in mortgage payments and/or interest rates are associated with lower redefault rates. Our regression estimates suggest that a 1 percentage point decline in mortgage interest rate is associated with a nearly 4 percentage point decline in default probability. This finding is consistent with the Home Affordable Modification Program (HAMP) focus on improving mortgage affordability. § Office of the Comptroller of the Currency 2 delinquent loan undergoing modification, the dataset contains information on specific changes in original loan terms, reduction in interest rate, amount of principal deferred or forgiven, extension of the repayment period, etc. To our knowledge, this is the only comprehensive data source on loss mitigation efforts and mortgage performance. We first describe the process of loss mitigation in the context of the financial crisis and study the determinants of each of the resolution methods. For modified loans, we further study the factors influencing changes in contractual terms. Finally, we evaluate the effect of various modification terms on mortgage performance post-modification. An evaluation of the choice between different loss mitigation practices is the thrust of our study. We classify resolution practices into four main categories: liquidation, repayment plans, modification, and refinancing. Liquidation includes foreclosure, deed-in-lieu, and short sales. Repayment plans are short-term programs that allow borrowers to repay late mortgage payments, typically, over a six to twelve month period. In modifications, mortgage terms are altered. Modification programs sometimes begin with a trial period of a few months, at the end of which, conditional on success, modification becomes permanent. Modifications could result in lenders altering the mortgage interest rate, balance, and/or term. Refinancing occurs when a new loan is issued in place of the existing one. 3 We find that within six months after becoming seriously delinquent, about 31% of the troubled loans that enter our sample in 2008 are in liquidation (either voluntary or through foreclosure), 2.4% enter a repayment plan, 2.2% get refinanced, and 10.4% are modified. The rest (about 54%) have no recorded action. The staggering amount of delinquent loans that see no action from lenders/investors is consistent both with the idea of an industry overwhelmed by the wave of problem mortgages and with the difficulty in overcoming the severe asymmetries of information that inhibit active loss mitigation. While liquidation implies that the borrower loses his house, the three other resolution categories imply that the borrower can stay in the house.