Spillover Effects of Continuous Forbearance Mortgages

22 Pages Posted: 12 Feb 2016

See all articles by Kadiri Karamon

Kadiri Karamon

Federal Home Loan Mortgage Corporation (FHLMC)

Douglas A. McManus

Federal Home Loan Mortgage Corporation (FHLMC)

Elias Yannopoulos

Federal Home Loan Mortgage Corporation (FHLMC)

Date Written: February 11, 2016

Abstract

This paper examines the potential market impacts of continuous forbearance mortgages (CFM). This mortgage design embeds an insurance contract at origination that reduces the interest bearing balance to the smaller of the unpaid balance and an estimate of the current home value in exchange for an additional premium in the mortgage note rate. Thus the CFM mortgage payment is reduced in periods in which the estimated home value falls below the unpaid balance and is reduced fractionally based on the ratio of home value to loan balance. We consider a counterfactual in which all U.S. mortgages had this CFM feature at the start of 2006 and estimate the mortgage payment savings to borrowers at a loan level. Estimated mortgage payment savings are then used to estimate the effect on mortgage default. At the aggregate level, the sum of the mortgage payment savings at the state level is used to estimate potential impacts to regional employment.

Keywords: Mortgage modification, financial crisis, economic stimulus

JEL Classification: D14, G21, R2

Suggested Citation

Karamon, Kadiri and McManus, Douglas A. and Yannopoulos, Elias, Spillover Effects of Continuous Forbearance Mortgages (February 11, 2016). Available at SSRN: https://ssrn.com/abstract=2731214 or http://dx.doi.org/10.2139/ssrn.2731214

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)

Elias Yannopoulos

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States

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