The Determinants of Subprime Mortgage Performance Following a Loan Modification

FEDS Working Paper No. 2015-006

http://dx.doi.org/10.17016/FEDS.2015.006

39 Pages Posted: 14 Feb 2015

Multiple version iconThere are 2 versions of this paper

Date Written: December 15, 2014

Abstract

We examine the evolution of mortgage modification terms obtained by distressed subprime borrowers during the recent housing crisis, and the effect of the various types of modifications on the subsequent loan performance. Using the CoreLogic LoanPerformance dataset that contains detailed loan level information on mortgages, modification terms, second liens, and home values, we estimate a discrete time proportional hazard model with competing risks to examine the determinants of post-modification mortgage outcomes. We find that principal reductions are particularly effective at improving loan outcomes, as high loan-to-value ratios are the single greatest contributor to re-default and foreclosure. However, any modification that reduces total payment and interest (P&I) reduces the likelihood of subsequent re-default and foreclosure. Modifications that involve increasing the loan principal -- primarily through capitalized interest and fees -- are more likely to fail, even controlling for changes in P&I.

Keywords: Foreclosure, HAMP, Mortgage Default, Mortgage Modifications, Subprime

JEL Classification: D12, G21, R20, R28

Suggested Citation

Schmeiser, Maximilian D. and Gross, Matthew, The Determinants of Subprime Mortgage Performance Following a Loan Modification (December 15, 2014). FEDS Working Paper No. 2015-006. Available at SSRN: https://ssrn.com/abstract=2561537 or http://dx.doi.org/10.2139/ssrn.2561537

Maximilian D. Schmeiser (Contact Author)

Amazon Lending ( email )

Seattle, WA 98144
United States

Matthew Gross

Federal Reserve Banks ( email )

United States

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