Payment Changes and Default Risk: The Impact of Refinancing on Expected Credit Losses
34 Pages Posted: 12 Jun 2012
Date Written: June 2012
Abstract
This paper analyzes the relationship between changes in borrowers' monthly mortgage payments and future credit performance. This relationship is important for the design of an internal refinance program such as the Home Affordable Refinance Program (HARP). We use a competing risk model to estimate the sensitivity of default risk to downward adjustments of borrowers' monthly mortgage payments for a large sample of prime adjustable-rate mortgages. Applying a 26 percent average monthly payment reduction that we estimate would result from refinancing under HARP, we find that the cumulative five-year default rate on prime conforming adjustable-rate mortgages with loan-to-value ratios above 80 percent declines by 3.8 percentage points. If we assume an average loss given default of 35.2 percent, this lower default risk implies reduced credit losses of 134 basis points per dollar of balance for mortgages that refinance under HARP.
Keywords: refinancing, default
JEL Classification: G21, G18, R51
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Securitization and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage Crisis
By Tomasz Piskorski, Amit Seru, ...
-
Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures and Securitization
By Manuel Adelino, Kristopher Gerardi, ...
-
Recourse and Residential Mortgage Default: Evidence from U.S. States
By Andra C. Ghent and Marianna Kudlyak
-
Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and Securitization
By Manuel Adelino, Kristopher Gerardi, ...
-
Moral and Social Constraints to Strategic Default on Mortgages
By Luigi Guiso, Paola Sapienza, ...
-
Moral and Social Constraints to Strategic Default on Mortgages
By Luigi Guiso, Paola Sapienza, ...
-
Reducing Foreclosures: No Easy Answers
By Christopher L. Foote, Kristopher Gerardi, ...
-
Reducing Foreclosures: No Easy Answers
By Christopher L. Foote, Kristopher Gerardi, ...
-
An Empirical Model of Subprime Mortgage Default from 2000 to 2007
By Patrick Bajari, Chenghuan Sean Chu, ...