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Second Chances: Subprime Mortgage Modification and Redefault

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  • ANDREW HAUGHWOUT
  • EBIERE OKAH
  • JOSEPH TRACY

Abstract

We examine how the structure of mortgage modification affects the likelihood that the mortgage redefaults over the next year. We focus on pre‐HAMP (Home Affordable Modification Program) subprime modifications where the borrower was seriously delinquent and the monthly payment was reduced. The average redefault rate over the year following the modification is 56%. Redefault rates decline with the magnitude of reduction in monthly payments, and redefault rates decline more when the payment reduction is achieved through principal forgiveness as compared to lower interest rates.

Suggested Citation

  • Andrew Haughwout & Ebiere Okah & Joseph Tracy, 2016. "Second Chances: Subprime Mortgage Modification and Redefault," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(4), pages 771-793, June.
    • Handle: RePEc:wly:jmoncb:v:48:y:2016:i:4:p:771-793
    DOI: 10.1111/jmcb.12317
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    1. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1848-1880.
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