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Spillover effects of continuous forbearance mortgages

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  • Karamon, Kadiri
  • McManus, Douglas
  • Yannopoulos, Elias

Abstract

This paper examines the potential market impacts of continuous forbearance mortgages (CFM). This mortgage design embeds an insurance contract at origination that reduces the interest bearing balance to the smaller of the unpaid balance and an estimate of the current home value in exchange for an additional premium in the mortgage note rate. Thus the CFM mortgage payment is reduced in periods in which the estimated home value falls below the unpaid balance and is reduced fractionally based on the ratio of home value to loan balance. We consider a counterfactual in which all U.S. mortgages had this CFM feature at the start of 2006 and estimate the mortgage payment savings to borrowers at a loan level. Estimated mortgage payment savings are then used to estimate the effect on mortgage default. At the aggregate level, the sum of the mortgage payment savings at the state level is used to estimate potential impacts to regional employment.

Suggested Citation

  • Karamon, Kadiri & McManus, Douglas & Yannopoulos, Elias, 2016. "Spillover effects of continuous forbearance mortgages," Journal of Economics and Business, Elsevier, vol. 84(C), pages 95-108.
    • Handle: RePEc:eee:jebusi:v:84:y:2016:i:c:p:95-108
    DOI: 10.1016/j.jeconbus.2016.02.001
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    References listed on IDEAS

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    1. Jun Zhu & Jared Janowiak & Lu Ji & Kadiri Karamon & Douglas McManus, 2015. "The Effect of Mortgage Payment Reduction on Default: Evidence from the Home Affordable Refinance Program," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(4), pages 1035-1054, November.
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    Cited by:

    1. Therese C. Scharlemann & Stephen H. Shore, 2022. "The effect of changing mortgage payments on default and prepayment: Evidence from HAMP resets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(5), pages 1231-1256, September.

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