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The Journal of Real Estate Finance and Economics

Erschienen in:

28.06.2016

Refinance and Mortgage Default: A Regression Discontinuity Analysis of HARP’s Impact on Default Rates

verfasst von: Kadiri Karamon, Douglas McManus, Jun Zhu

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 4/2017

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This paper examines the impact of refinancing on mortgage defaults based on an empirical investigation of the Home Affordable Refinance Program (HARP). We study a unique dataset from Freddie Mac which includes loans funded right before and after the HARP eligibility cutoff date, an exogenous event. Using a Fuzzy Regression Discontinuity Design method, we show that receiving a HARP refinance decreases the expected monthly default rate by about 48–62 percent using different bandwidth specifications.

Vorheriger Artikel Under the Lender’s Looking Glass

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See Elmer and Seelig (1999), Campbell and Cocco (2015), and Elul et al. (2010) for a discussion of the ‘dual trigger’ model of mortgage default.

We found quantitatively similar results when the analysis sample was extended to include other fixed rate and ARM mortgages.

The effect of payment change on default among distressed loans has also been examined, and shows that a 10 % payment reduction leads to about a 8–13 % default rate reduction (e.g., Agarwal et al. (2011) and Haughwout et al. (2009)). See also Scharlemann and Shore (2015) for an analyses of principal reduction’s impact on the default rates of distressed loans.

For interest-only mortgages changes in the interest payment is analogous to the principal and interest payment of a fixed-rate mortgage because it is a portion of the mortgage payment which excludes taxes, insurance, and association fees.

Our research also contributes to the analysis of interventions to reduce mortgage default after the financial crisis (see, for example, Cordell et al. (2009) and Gerardi and Li (2010)) and a broader literature of mortgage default. See, for example, Kau, Keenan and Kim (1994), and Vandell (1995) for an extensive review of the ‘option to default’ literature.

See Barclays Capital, Securitized Products Weekly. 28 Oct 2011, and Securitized Products Weekly. 6 Jan. 2012.

See Nomura, 2011. Securitized Products Weekly, 28 Oct 2011 for more details.

Agarwal, S., Amromin, G., Ben-David, I., Chomsisengphet, S., & Evanoff, D. D. (2011). Market-based loss mitigation practices for troubled mortgages following the financial crisis. Chicago: SSRN Working Paper Series.

Campbell, J. Y., & Cocco, J. F. (2015). A model of mortgage default. The Journal of Finance, 70(4), 1495–1554.CrossRef

Cordell, L., Dynan, K., Lehnert, A., Liang, N., & Mauskopf, E. (2009). Designing loan modifications to address the mortgage crisis and the making home affordable program. Finance and Economic Discussion Series: Federal Reserve Board.

Demyanyk, Y. S., Koijen, R. S. J., & Van Hemert, O. (2011). Determinants and consequences of mortgage default. Unpublished working paper.

Ehrlich, G., & Perry, J. (2015). Do large-scale refinancing programs reduce mortgage defaults? Evidence from a regression discontinuity design: working paper 2015–06 (No. 50871).

Elmer, P. J., & Seelig, S. A. (1999). Insolvency, trigger events, and consumer risk posture in the theory of single-family mortgage default. Journal of Housing Research, 10(1), 1–25.

Elul, R., Souleles, N. S., Chomsisengphet, S., Glennon, D., & Hunt, R. (2010). What ‘triggers’ mortgage default? American Economic Review, 100(2), 490–494.CrossRef

Fuster, A., & Willen, P. S. (2012). Payment Size, Negative Equity, and Default. Federal Reserve Bank of New York (No. 582). Staff Report.

Gerardi, K., & Li, W. (2010). Mortgage foreclosure prevention efforts. Economic Review-Federal Reserve Bank of Atlanta, 95(2), II.

Hahn, J., Todd, P., & Van der Klaauw, W. (2001). Identification and estimation of treatment effects with a regression-discontinuity design. Econometrica, 69(1), 201–209.CrossRef

Haughwout, A., Okah, E., & Tracy, J. S. (2009). Second chances: subprime mortgage modification and re-default. FRB of New York Staff Report, 417.

Kau, J. B., Keenan, D. C., & Kim, T. (1994). Default probabilities for mortgages. Journal of Urban Economics, 35, 278–296.CrossRef

Lee, D. S. (2008). Randomized experiments from non-random selection in U.S. house elections. Journal of Econometrics, 142, 675–697.CrossRef

Lee, D. S., & Lemieux, T. (2010). Regression discontinuity designs in economics. Journal of Economic Literature, 48, 281–355.CrossRef

McCrary, J. (2008). Manipulation of the running variable in the regression discontinuity design: a density test. Journal of Econometrics, 142, 698–714.CrossRef

Scharlemann, T. C., & Shore, S. H. (2015). The Effect of Negative Equity on Mortgage Default: Evidence from HAMP PRA. Office of Financial Research Working Paper, (15–06).

Tracy, J. & Wright, J. (2012) Payment Changes and Default Risk: The Impact of Refinancing on Expected Credit Losses” FRB of New York Staff Report No. 562. Available at SSRN: http://ssrn.com/abstract=2080261 or doi:10.2139/ssrn.2080261

Trochim, W. M. (1984). Research design for program evaluation: the regression-discontinuity approach (Vol, 6). Inc: SAGE Publications.

Vandell, K. (1995). How ruthless is mortgage default? A review and synthesis of the evidence. Journal of Housing Research, 6(2), 245–264.

Zhu, J., Janowiak, J., Ji, L., Karamon, K., & McManus, D. (2015). The effect of mortgage payment reduction on default: evidence from the home affordable refinance program. Real Estate Economics, 43(4), 1035–1054.CrossRef

Titel: Refinance and Mortgage Default: A Regression Discontinuity Analysis of HARP’s Impact on Default Rates
verfasst von: Kadiri Karamon
Douglas McManus
Jun Zhu
Publikationsdatum: 28.06.2016
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 4/2017
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-016-9566-z

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