Spillover Effects of Continuous Forbearance Mortgages

Karamon, Kadiri; McManus, Douglas A.; Yannopoulos, Elias

doi:10.2139/ssrn.2731214

Cited by 1 publication

(1 citation statement)

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“…The financial crisis highlighted the role mortgage contracts play in homeowners' ability to weather systemic shocks to housing markets. Since then, economists and policymakers have sought to design mortgage contracts and modifications to improve stability during widespread housing market downturns (Eberly & Krishnamurthy, 2014; Guren et al., 2017; Karamon et al., 2016; Piskorski & Tchistyi, 2017). But long before the financial crisis, the GSEs, FHA, and mortgage servicers were experimenting with mortgage modifications, and researchers were learning from them (Ambrose & Buttimer, 2000; Ambrose & Capone, 1996).…”

Section: Introductionmentioning

confidence: 99%

The effect of changing mortgage payments on default and prepayment: Evidence from HAMP resets

Scharlemann

Shore

2022

Real Estate Economics

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After 5 years of subsidy, interest rates for mortgages modified under the Home Affordable Modification Program (HAMP) reset, increasing annually in increments of up to 1 percentage point until they reach a predetermined rate. We identify the causal effect of increasing interest rates on default, delinquency, and prepayment using an event study design and confirm the effects using a regression kink design. New delinquency and default spike at time of reset among those whose rates increase, with smaller persistent effects continuing. These delinquency and default effects are smaller for lower balance loans in the second reset, for which additional subsidies at the time of second reset are relatively more valuable.We find that a 1 percentage point increase in the mortgage rate led to a roughly 20% increase in the default hazard. This implies that the reset rate increase is costeffective for lenders given the default environment at the time of reset: increased revenue from higher rates exceeds estimated losses from additional defaults.

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