The Effect of Negative Equity on Mortgage Default: Evidence From HAMP’s Principal Reduction Alternative

Therese C. Scharlemann; Stephen H. Shore

doi:10.1093/rfs/hhw034

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The Effect of Negative Equity on Mortgage Default: Evidence From HAMP’s Principal Reduction Alternative

Therese C. Scharlemann^1,2; Stephen H. Shore³

¹ Financial Research (Hungary) · ² United States Department of the Treasury · ³ Georgia State University

Review of Financial Studies 2016

The Home Affordable Modification Program’s (HAMP’s) Principal Reduction Alternative (PRA) is a government-sponsored program to reduce the principal balances and monthly mortgage payments of troubled borrowers. We examine the effect of principal forgiveness on borrowers’ subsequent mortgage default. The program’s rules imply a kink in the relationship between principal forgiveness and a borrower’s initial equity level. Our identification strategy exploits the quasi-experimental variation in principal forgiveness generated by this kink using a regression kink design (RKD), which compares the relationship between initial equity and default on either side of the kink. We estimate that HAMP PRA reduced the quarterly default hazard from <f>3.8\%</f> to <f>3.1\%</f>. Received February 4, 2015; accepted August 2, 2015 by Editor Philip Strahan.

DOI: 10.1093/rfs/hhw034
Volume: 29 (10)
Pages: 2850-2883
Language: en
Export: BibTeX
Sources: openalex crossref