Do Large-Scale Refinancing Programs Reduce Mortgage Defaults? Evidence from a Regression Discontinuity Design

51 Pages Posted: 4 Nov 2015

See all articles by Gabriel Ehrlich

Gabriel Ehrlich

University of Michigan at Ann Arbor

Jeffrey Perry

Government of the United States of America - Congressional Budget Office (CBO)

Date Written: October 22, 2015

Abstract

In 2012, the Federal Housing Administration (FHA) reduced fees to refinance FHA-insured mortgages obtained before -- but not after -- a retroactive deadline. We use a natural experiment to study how reduced mortgage payments affect default rates. Using a regression discontinuity design, we find that reducing payment size by 1 percent lowers conditional default rates by 2.75 percent. Evidence suggests that those effects are larger for borrowers with negative equity and lower credit scores. We estimate that the policy will prevent more than 35,000 defaults of FHA-insured mortgages, saving FHA nearly $1 billion in present-value terms.

Keywords: FHA, mortgage, default, refinance, payment reduction, regression discontinuity

JEL Classification: G18, G21, E65, H50

Suggested Citation

Ehrlich, Gabriel and Perry, Jeffrey, Do Large-Scale Refinancing Programs Reduce Mortgage Defaults? Evidence from a Regression Discontinuity Design (October 22, 2015). Available at SSRN: https://ssrn.com/abstract=2678425 or http://dx.doi.org/10.2139/ssrn.2678425

Gabriel Ehrlich (Contact Author)

University of Michigan at Ann Arbor ( email )

110 Tappan Hall
855 S. University Ave
Ann Arbor, MI 48109
United States

Jeffrey Perry

Government of the United States of America - Congressional Budget Office (CBO) ( email )

Ford House Office Building
2nd & D Streets, SW
Washington, DC 20515-6925
United States

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