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Payment changes and default risk: The impact of refinancing on expected credit losses

Joseph Tracy () and Joshua Wright

Journal of Urban Economics, 2016, vol. 93, issue C, 60-70

Abstract: This paper analyzes how access to credit and the path of mortgage rates can affect borrower credit risk. This is a crucial issue for evaluating refinance programs as a form of loss mitigation, and it became prominent in the debates around the Treasury Department's Home Affordable Refinance Program (HARP). These debates exposed gaps in the literature on the relationship between credit performance and changes in borrowers’ monthly mortgage payments. Since then, several new studies have attempted to fill these holes, each pursing a different methodology. In this paper, we review the relevant debates and look at what downward adjustments in prime adjustable-rate mortgages can tell us about modifications of prime fixed-rate mortgages. We argue that this method better addresses the various sampling biases that plague all attempts to predict HARP's impact. Our analysis indicates that typical monthly payment reductions under HARP would reduce credit losses by 56 basis points.

Keywords: Mortgages; Refinancing; Default; HARP (search for similar items in EconPapers)
JEL-codes: G18 G21 R51 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Payment changes and default risk: theimpact of refinancing on expected credit losses (2012) Downloads
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