The Effect of Mortgage Payment Reduction on Default: Evidence from the Home Affordable Refinance Program
23 Pages Posted: 12 Nov 2014
Date Written: October 12, 2014
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