 The effect of changing mortgage payments on default and prepayment: Evidence from HAMP resetsTherese C. Scharlemann and Stephen H. Shore Real Estate Economics, 2022, vol. 50, issue 5, 1231-1256 Abstract: 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 cost‐effective for lenders given the default environment at the time of reset: increased revenue from higher rates exceeds estimated losses from additional defaults. Date: 2022 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:reesec:v:50:y:2022:i:5:p:1231-1256 Ordering information: This journal article can be ordered from Access Statistics for this article Real Estate Economics is currently edited by Crocker Liu, N. Edward Coulson and Walter Torous More articles in Real Estate Economics from American Real Estate and Urban Economics Association Contact information at EDIRC. |
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