HOW LOAN MODIFICATIONS INFLUENCE the PREVALENCE of MORTGAGE DEFAULTS

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

How much can government-driven mortgage modification programs reduce the mortgage default rate? I compare an economy without a modification option to one with easy modifications, and evaluate the impact of these loan modifications on the foreclosure rate. Through loan modification, mortgage servicers can mitigate their losses and households can improve their financial positions without having to walk away from their homes. When modifying loan contracts is prohibitively costly, the default rate increases 1.5 percentage points in response to a 2007-style unexpected drop in housing prices of 30%. I calibrate the cost of modification after the financial crisis to match the Home Affordable Modification Program (HAMP) modification rate of 0.68%. My quantitative exercises show that current government efforts to promote mortgage modifications reduce the mortgage default rate by 0.63 percentage points.

Original languageEnglish
Pages (from-to)55-105
Number of pages51
JournalMacroeconomic Dynamics
Volume21
Issue number1
DOIs
Publication statusPublished - 2017 Jan 1

Fingerprint

Loans
Default rate
Mortgages
Government
Mortgage default
Household
Exercise
Housing prices
Costs
Foreclosure
Financial crisis

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Cite this

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HOW LOAN MODIFICATIONS INFLUENCE the PREVALENCE of MORTGAGE DEFAULTS. / Kim, Jiseob.

In: Macroeconomic Dynamics, Vol. 21, No. 1, 01.01.2017, p. 55-105.

Research output: Contribution to journalArticle

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