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HOW LOAN MODIFICATIONS INFLUENCE THE PREVALENCE OF MORTGAGE DEFAULTS

Published online by Cambridge University Press:  20 June 2016

Jiseob Kim
Jiseob Kim*
Affiliation:
Korea Development Institute (KDI)
*
Address correspondence to: Jiseob Kim, Korea Development Institute (KDI), 15 Giljae-gil, Sejong-si 339-007, Korea; e-mail: jiseob83@gmail.com
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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.

Keywords

Mortgage DefaultMortgage ModificationHome Affordable Modification Program (HAMP)Financial Crisis
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 1 , January 2017 , pp. 55 - 105
Copyright
Copyright © Cambridge University Press 2016 

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