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Federal Reserve Bank of New York
Staff Reports
Second chances: subprime mortgage modification and re-default
Andrew F. Haughwout
Ebiere Okah
Joseph Tracy
Abstract

Mortgage modifications have become an important component of public interventions designed to reduce foreclosures. In this paper, we examine how the structure of a mortgage modification affects the likelihood of the modified mortgage re-defaulting over the next year. Using data on subprime modifications that precede the government's Home Affordable Modification Program, we focus our attention on those modifications in which the borrower was seriously delinquent and the monthly payment was reduced as part of the modification. The data indicate that the re-default rate declines with the magnitude of the reduction in the monthly payment, but also that the re-default rate declines relatively more when the payment reduction is achieved through principal forgiveness as opposed to lower interest rates.


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Andrew F. Haughwout & Ebiere Okah & Joseph Tracy, Second chances: subprime mortgage modification and re-default, Federal Reserve Bank of New York, Staff Reports 417, 2009.
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Keywords: Subprime mortgage ; Foreclosure ; Default (Finance)
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Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

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