Friday, Jan. 5, 2018 10:15 AM - 12:15 PM
- Chair: Chester Spatt, Carnegie Mellon University and Massachusetts Institute of Technology
The Effect of Changing Mortgage Payments on Default and Prepayment: Evidence From HAMP Resets
AbstractThe Home Affordable Modification Program (HAMP) is a government-sponsored program to reduce the monthly mortgage payments of borrowers who are in danger of default. After five years of below-market interest rates, HAMP interest rates jump predictably, increasing annually in increments of up to one percentage point until they reach a pre-determined market rate. We identify the causal effect of increasing interest rates (and with them, monthly payments) on default (as well as on delinquency transitions and prepayment) with an event study design, comparing default rates immediately before and after rate reset times for loans that do and do not reset. Since the size of the interest rate reset is a kinked function of the difference between the subsidized interest rate and the market interest rate, we also identify the effect using a regression kink design (RKD). We find that a one percentage point rate increase leads to a roughly 20 percent increase in the default hazard (e.g., from 0.6 percent per month to 0.72 percent per month). The one percentage point rate change we study has a similar default-reducing effect as principal reduction in HAMP's Principal Reduction Alternative (as estimated by Scharlemann and Shore (2016)), but reduces default at much lower cost.
The Effect of Interest Rates on Home Buying: Evidence From a Discontinuity in Mortgage Insurance Premiums
AbstractRegression discontinuity estimates indicate that home buying is highly responsive to interest rates in a large segment of the population. A surprise 50 basis point cut in the effective interest rate for mortgages insured by the Federal Housing Administration (FHA) led to an immediate 14 percent increase in home buying among the FHA-reliant population. The effect of the rate cut holds across regions with varying economic conditions. Higher income households show far less sensitivity to rates, which has important implications for other stimulus policies.
Liquidity Provision, Credit Risk and the Bond Spread: New Evidence From the Subprime Mortgage Market
AbstractWe study the determinants of the subprime mortgage loan spread, with a particular focus on funding liquidity and default-liquidity interaction effects. We find that sector-level as well as macro funding liquidity provision affected subprime loan rates, explaining a significant portion of the variation in spreads. Liquidity conditions just prior to loan default mattered, indicating destabilizing liquidity-driven default effects. A reduction in macro funding liquidity provision at the time of loan origination predicts worsening credit performance, implying a stabilizing default-driven liquidity component in the loan spread. Positive default-liquidity feedback (spiraling) effects are also documented.
- G2 - Financial Institutions and Services
- K2 - Regulation and Business Law