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The Effect of Negative Equity on Mortgage Default: Evidence from HAMP PRA

Author

Listed:
  • Therese C. Scharlemann

    (Office of Financial Research)

  • Stephen H. Shore

    (Georgia State University)

Abstract
The Home Affordable Modification Program’s Principal Reduction Alternative (HAMP PRA) is a government-sponsored program to reduce the principal balances and monthly mortgage payments of borrowers with negative equity (mortgage balances in excess of their home value, or "under water") who are in danger of default. We use administrative data to examine the impact of principal forgiveness -- a permanent mortgage balance reduction -- on borrowers' subsequent mortgage default. The program's rules imply a kink in the relationship between principal forgiveness and a borrower's initial equity level ceteris paribus. Our identification strategy exploits the quasi-experimental variation in principal forgiveness generated by this kink using a regression kink design (RKD), which compares the relationship between initial equity and default on either side of the kink. The quarterly hazard -- the proportion of loans that become more than 90 days delinquent and consequently exit the program -- in our sample is 3.1 percent; we estimate that it would have been 3.8 percent absent principal forgiveness, which averaged 28 percent of the initial mortgage balance.

Suggested Citation

  • Therese C. Scharlemann & Stephen H. Shore, 2015. "The Effect of Negative Equity on Mortgage Default: Evidence from HAMP PRA," Working Papers 15-06, Office of Financial Research, US Department of the Treasury.
    • Handle: RePEc:ofr:wpaper:15-06
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    References listed on IDEAS

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    Cited by:

    1. Lei Ding, 2016. "Borrower Credit Access And Credit Performance After Loan Modifications," Working Papers 16-26, Federal Reserve Bank of Philadelphia.
    2. Kadiri Karamon & Douglas McManus & Jun Zhu, 2017. "Refinance and Mortgage Default: A Regression Discontinuity Analysis of HARP’s Impact on Default Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 55(4), pages 457-475, November.
    3. Karamon, Kadiri & McManus, Douglas & Yannopoulos, Elias, 2016. "Spillover effects of continuous forbearance mortgages," Journal of Economics and Business, Elsevier, vol. 84(C), pages 95-108.
    4. Lei Ding, 2017. "Borrower credit access and credit performance after loan modifications," Empirical Economics, Springer, vol. 52(3), pages 977-1005, May.

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