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Abstract

This paper offers a simple theoretical and empirical exploration of homeowner assistance programs. We model seeking and receiving assistance as strategic interaction between the homeowner and lender. In the absence of lender and homeowner incentives, the theory predicts that with full information, the lender’s optimal action would be to offer assistance only to those who would not redefault or self-cure. In this case, assistance enables homeowners who would otherwise have been foreclosed on to remain in their homes, i.e., to be cured. We show that the introduction of incentives into the model can, under certain conditions, induce lenders to offer assistance to homeowners who subsequently redefault. We construct logit models based on the predictions of our theory to more fully evaluate the probability of being cured. We find that assistance, loan-to-value ratios and negative shocks significantly affect the probability of being cured.

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