Mortgage Loss Severities: What Keeps Them So High?

Supersedes Working Paper 17-08, Regime Shift and the Post-crisis World of Mortgage Loss Severities and Working Paper 19-19, Mortgage Loss Severities: What Keeps Them So High?

Our results indicate that the sustained high LGDs post-crisis is due to a combination of an overhang of crisis-era foreclosures and prolonged liquidation timelines, which have offset higher sales recoveries. Simulations show that cutting foreclosure timelines by one year would cause LGD to decrease by 5 to 8 percentage points, depending on the tradeoff between lower liquidation expenses and lower sales recoveries. Using difference-in-differences tests, we also find that recent consumer protection programs have extended foreclosure timelines and increased loss severities despite their potential benefits of increasing loan modifications and enhancing consumer protections.