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

23 Pages Posted: 12 Nov 2014

See all articles by Jun Zhu

Jun Zhu

Federal Home Loan Mortgage Corporation (FHLMC)

Jared Janowiak

Independent

Lu Ji

Federal Home Loan Mortgage Corporation (FHLMC)

Kadiri Karamon

Federal Home Loan Mortgage Corporation (FHLMC)

Douglas A. McManus

Federal Home Loan Mortgage Corporation (FHLMC)

Date Written: October 12, 2014

Abstract

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

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

Jun Zhu

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States

Jared Janowiak

Independent ( email )

Lu Ji

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States

Kadiri Karamon

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States

Douglas A. McManus (Contact Author)

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States
703-903-2953 (Phone)

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