The Effect of Mortgage Payment Reduction on Default: Evidence from the Home Affordable Refinance Program

This paper evaluates the effect of payment reduction on mortgage default within the context of the Home Affordable Refinance Program (HARP). We find that mortgage default is sensitive to payment reduction across univariate, duration, and hazard modeling approaches. A relative risk Cox model of default with time-varying covariates estimates that a 10% reduction in mortgage payment is associated with about a 10 to 11% reduction in monthly default hazard for loans. This finding is robust to the inclusion of empirically important mortgage risk drivers (such as current LTV and FICO score) as well as controlling for selection effects based on observables.

Keywords: mortgage default, credit risk

JEL Classification: G23, R38, G01

Suggested Citation: Suggested Citation

Zhu, Jun and Janowiak, Jared and Ji, Lu and Karamon, Kadiri and McManus, Douglas A., The Effect of Mortgage Payment Reduction on Default: Evidence from the Home Affordable Refinance Program (October 12, 2014). Available at SSRN: https://ssrn.com/abstract=2522749 or http://dx.doi.org/10.2139/ssrn.2522749