Board of Governors of the Federal Reserve System (U.S.)
Finance and Economics Discussion Series
The Determinants of Subprime Mortgage Performance Following a Loan Modification
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.
Cite this item
Maximilian D. Schmeiser & Matthew B. Gross, The Determinants of Subprime Mortgage Performance Following a Loan Modification, Board of Governors of the Federal Reserve System (U.S.), Finance and Economics Discussion Series 2015-6, 06 Jan 2015.
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General
- R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy
Keywords: Mortgage Modification; Subprime; Mortgage Default; Foreclosure; HAMP
This item with handle RePEc:fip:fedgfe:2015-06
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