Mandatory Mediation and the Renegotiation of Mortgage Contracts*

Scholars have studied the use of mediation – a third party to facilitate the settlement of a dispute – in a variety of settings. The theoretical literature asserts that mediated negotiation weakly dominates unmediated negotiation, increasing the flow of information between the principal and the agent. This study tests these predictions using a mandatory mediation policy for mortgage contracts in default. Difference-in-differences estimates from three metropolitan statistical areas before and after at least one sub-jurisdiction imposed mandatory mediation show that mediation increased the flow of information, especially for selected sub-groups, as demonstrated by increasing rates of loan contract modifications.