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

20 Pages Posted: 26 Oct 2015

See all articles by Jun Zhu

Jun Zhu

The Urban Institute

Jared Janowiak

The Boeing Company - Boeing Employee Credit Union

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: Winter 2015

Abstract

This article evaluates the effect of payment reduction on mortgage default within the context of the Home Affordable Refinance Program. We find that mortgage default is sensitive to payment reduction using 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 10–11% reduction in monthly default hazard for loans. This finding is robust to the inclusion of empirically important mortgage risk drivers (such as current loan‐to‐value and FICO score) as well as controlling for selection effects based on observables.

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 (Winter 2015). Real Estate Economics, Vol. 43, Issue 4, pp. 1035-1054, 2015, Available at SSRN: https://ssrn.com/abstract=2679167 or http://dx.doi.org/10.1111/1540-6229.12104

Jun Zhu (Contact Author)

The Urban Institute ( email )

2100 M Street, NW
Washington, DC 20037
United States

Jared Janowiak

The Boeing Company - Boeing Employee Credit Union ( email )

United States

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

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

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

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