This paper examines changes in the redefault rate of mortgages that were selected for modification during 2008-2011, compared with that of similarly situated self-cured mortgages. We find a large decline in the redefault rate of both modified and self-cured mortgages over this period, but the improvement was greatest for modifications. Our analysis has identified several important factors contributing to the greater improvement for modified loans, including an increasing share of principal-reduction modifications, which appear to be more effective than other types of modification and increasingly generous modification terms (larger payment reductions). The favorable impacts of principal and payment reductions on household finances were enhanced by improving economic conditions, resulting in more effective modifications. Even after accounting for these factors, we still observe a larger decline in the redefault rate for modifications compared with similarly situated self-cured loans. This residual effect may reflect servicer "learning-by-doing"; that is, servicers gained knowledge as modification activity ramped up, resulting in more successful modification programs for later cohorts.

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There have been increasing concerns about the potential of larger banks acquiring community banks and the declining number of community banks, which would significantly reduce small business lending (SBL) and disrupt relationship lending. This paper examines the roles and characteristics of U.S. community banks in the past decade, covering the recent economic boom and downturn. We analyze risk characteristics (including the confidential ratings assigned by bank regulators) of acquired community banks, compare pre-and post-acquisition performance, and investigate how the acquisitions have affected SBL. Contrary to concerns, our regression analysis shows that the overall amount of SBL increases more after a merger when a large bank acquires a community bank. Data suggest an overall (regardless of mergers) declining SBL trend for all size groups. In fact, the decline in the SBL ratio has been more severe among community banks on average, relative to large banks. Community banks that were merged during the financial crisis were less healthy than in earlier periods. Our results indicate that mergers involving community bank targets over the past decade have enhanced the overall safety and soundness of the banking system without adversely impacting SBL. Supervisory policies that discourage mergers between community banks and large banks could potentially result in an unintentional dampening effect on the supply of SBL.

We investigate the shrinking community banking sector and the impact on local small business lending (SBL) in the context of mergers and acquisitions. From all mergers that involved community banks, we examine the varying impact on SBL depending on the local presence of the acquirers' and the targets' operations prior to acquisitions. Our results indicate that, relative to counties where the acquirer had operations before the merger, local SBL declined significantly more in counties where only the target had operations before the merger. This result holds even after controlling for the general local SBL market or local economic trends. These findings are consistent with an argument that SBL funding has been directed (after the mergers) toward the acquirers' counties. We find even stronger evidence during and after the financial crisis. Overall, we find evidence that local community banks have continued to play an important role in providing funding to local small businesses. The absence of local community banks that became a target of a merger or acquisition by nonlocal acquirers has, on average, led to local SBL credit gaps that were not filled by the rest of the banking sector.

There have been increasing concerns about the potential of larger banks acquiring community banks and the declining number of community banks, which would significantly reduce small business lending (SBL) and disrupt relationship lending. This paper examines the roles and characteristics of U.S. community banks in the past decade, covering the recent economic boom and downturn. We analyze risk characteristics (including the confidential ratings assigned by bank regulators) of acquired community banks, compare pre-and post-acquisition performance, and investigate how the acquisitions have affected SBL. Contrary to concerns, our regression analysis shows that the overall amount of SBL increases more after a merger when a large bank acquires a community bank. Data suggest an overall (regardless of mergers) declining SBL trend for all size groups. In fact, the decline in the SBL ratio has been more severe among community banks on average, relative to large banks. Community banks that were merged during the financial crisis were less healthy than in earlier periods. Our results indicate that mergers involving community bank targets over the past decade have enhanced the overall safety and soundness of the banking system without adversely impacting SBL. Supervisory policies that discourage mergers between community banks and large banks could potentially result in an unintentional dampening effect on the supply of SBL.