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The Effect of Mortgage Payment Reduction on Default: Evidence from the Home Affordable Refinance Program
Author(s) -
Zhu Jun,
Janowiak Jared,
Ji Lu,
Karamon Kadiri,
McManus Douglas
Publication year - 2015
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.12104
Subject(s) - payment , actuarial science , context (archaeology) , mortgage underwriting , shared appreciation mortgage , mortgage insurance , loan , default , business , reduction (mathematics) , probability of default , default risk , proportional hazards model , economics , econometrics , finance , insurance policy , statistics , credit risk , mathematics , casualty insurance , geometry , paleontology , biology
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.