Payment Changes and Default Risk: The Impact of Refinancing on Expected Credit Losses

Abstract

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

“…Our findings complement recent research on the effect of payment reduction on ARM defaults, and are of a similar magnitude to those computed by Fuster and Willen () and Tracy and Wright (). Taken together, these empirical results demonstrate a material reduction in mortgage default rates in response to payment reduction.…”

“…Thus, if a HARP-eligible loan had an expected lifetime default rate of 5% and experienced a 20% payment reduction through the refinance, the new expected default rate for the HARP refinance would be about 4%. This result is consistent with the studies of Fuster and Willen (2012) and Tracy and Wright (2012) on payment reduction in ARM loans and extends this area of research to a set of mortgages with potentially greater relevance to policy makers.…”

“…An important limitation of their research is that it focuses on a narrow segment of the market: Interest‐only ARMs backing private‐label mortgage‐backed securities. Tracy and Wright () examine a broader sample of ARMs securitized by Freddie Mac and Fannie Mae but for smaller changes in payment reduction. They find that a 10% payment reduction leads to a 22.5% reduction in monthly default hazard.…”

The Influence of Delayed Payment Obligation on Purchase Decision of Household: Evidence from Nigerian Data

“…Conversely, the table also revealed that when the purchase decision of household is "Yes", the household will have more share of "Yes" delayed payment obligation and less share of "No" delayed payment obligation for both urban and rural household. The outcome of the table agreed with previous studies (Agarwal et al, 2006;Tracy & Wright, 2012;Fuster & Willen, 2013;Adelino et al, 2013). The current study attests that purchase decision by household plays an important role in increasing the delayed payment obligation by household.…”

“…The second factor that could be important in understanding the dynamics of delayed payment obligation in Nigeria is the degree of purchase decision. Some studies in the extant literature (Agarwal et al, 2006;Tracy & Wright, 2012;Fuster & Willen, 2013;Adelino et al, 2013) revealed that purchase decision contribute to lower default risk of hybrid mortgage at the rate reset, helps to lower the rates of default in prime adjustable-rate mortgages and lower re-default rates in modified loans.…”