FRBB | Payment Size, Negative Equity, and Mortgage Default

Strategic Default

Payment Size, Negative Equity, and Mortgage Default

Abstract:

Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifications are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced large rate reductions over the past years and are largely immune to these selection concerns. We show that interest rate changes dramatically affect repayment behavior. Our estimates imply that cutting a borrower’s payment in half reduces his hazard of becoming delinquent by about two-thirds, an effect that is approximately equivalent to lowering the borrower’s combined loan-to-value ratio from 145 to 95 (holding the payment fixed). These findings shed light on the driving forces behind default behavior and have important implications for public policy.

Full paper below…

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FRBB | Payment Size, Negative Equity, and Mortgage Default

Comments
One Response to “FRBB | Payment Size, Negative Equity, and Mortgage Default”
  1. bobbi swann says:

    Well, all this is fine and dandy but the fact of the matter is when the socio economics of this country are falling faster than rain it does not make a hill of beans when it comes to ARM’s. ARMs are a good product when you have a stable economy back in the day when holding a job had SOME sense of job security. You could count on pay increases and rising property values which is where the foundation of ARMs came into play. When the economy tilts so far to the left and those values start diminishing, it makes no difference if you are in an ARM program or fixed rate program. Job loss or regain of employment at a much decreased amount of income will have the same effects on defaults. I hate when they ‘nationalize’ these figures since the economic crisis has had such fluctuation across all areas of the US. I don’t compare Florida’s economic decline to that of say, Idaho or Montana, but hubs like New York, Miami, Pittsburg, Atlanta and various other larger metro areas have a much larger scale of defaults when the economy tanks. The bad ARMs were the OPTION ARMS and the NEG-AM ARMS which should have never entered the market in the first place. Those programs were more of a guarantee to fail.

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