The Determinants of Subprime Mortgage Performance Following a Loan Modification

Matthew B. Gross and Maximilian Schmeiser

No 2015-6, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We examine the evolution of mortgage modification terms obtained by distressed subprime borrowers during the recent housing crisis, and the effect of the various types of modifications on the subsequent loan performance. Using the CoreLogic LoanPerformance dataset that contains detailed loan level information on mortgages, modification terms, second liens, and home values, we estimate a discrete time proportional hazard model with competing risks to examine the determinants of post-modification mortgage outcomes. We find that principal reductions are particularly effective at improving loan outcomes, as high loan-to-value ratios are the single greatest contributor to re-default and foreclosure. However, any modification that reduces total payment and interest (P&I) reduces the likelihood of subsequent re-default and foreclosure. Modifications that involve increasing the loan principal--primarily through capitalized interest and fees--are more likely to fail, even controlling for change in P&I.

Keywords: Mortgage Modification; Subprime; Mortgage Default; Foreclosure; HAMP (search for similar items in EconPapers)
JEL-codes: D12 G21 R20 R28 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2015-01-06
New Economics Papers: this item is included in nep-ban, nep-mfd and nep-ure
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http://www.federalreserve.gov/econresdata/feds/2015/files/2015006pap.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/FEDS.2015.006 http://dx.doi.org/10.17016/FEDS.2015.006 (application/pdf)

Related works:
Journal Article: The Determinants of Subprime Mortgage Performance Following a Loan Modification (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2015-06

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