Abstract
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.
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Notes
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.
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Any views expressed are solely those of the authors and do not necessarily represent the opinions of Freddie Mac or its Board of Directors and should not be attributed to the Urban Institute, its trustees, or its funders. We thank Edward Golding for suggesting this as a research topic. Any shortcomings are the responsibility of the authors.
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Karamon, K., McManus, D. & Zhu, J. Refinance and Mortgage Default: A Regression Discontinuity Analysis of HARP’s Impact on Default Rates. J Real Estate Finan Econ 55, 457–475 (2017). https://doi.org/10.1007/s11146-016-9566-z
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DOI: https://doi.org/10.1007/s11146-016-9566-z