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Refinance and Mortgage Default: A Regression Discontinuity Analysis of HARP’s Impact on Default Rates

Author

Listed:
  • Kadiri Karamon

    (Freddie Mac)

  • Douglas McManus

    (Freddie Mac)

  • Jun Zhu

    (Urban Institute)

Abstract

This paper examines the impact of refinancing on mortgage defaults based on an empirical investigation of the Home Affordable Refinance Program (HARP). We study a unique dataset from Freddie Mac which includes loans funded right before and after the HARP eligibility cutoff date, an exogenous event. Using a Fuzzy Regression Discontinuity Design method, we show that receiving a HARP refinance decreases the expected monthly default rate by about 48–62 percent using different bandwidth specifications.

Suggested Citation

  • Kadiri Karamon & Douglas McManus & Jun Zhu, 2017. "Refinance and Mortgage Default: A Regression Discontinuity Analysis of HARP’s Impact on Default Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 55(4), pages 457-475, November.
    • Handle: RePEc:kap:jrefec:v:55:y:2017:i:4:d:10.1007_s11146-016-9566-z
    DOI: 10.1007/s11146-016-9566-z
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    References listed on IDEAS

    as
    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.
    2. Tracy, Joseph & Wright, Joshua, 2016. "Payment changes and default risk: The impact of refinancing on expected credit losses," Journal of Urban Economics, Elsevier, vol. 93(C), pages 60-70.
    3. David S. Lee & Thomas Lemieux, 2010. "Regression Discontinuity Designs in Economics," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 281-355, June.
    4. Kau James B. & Keenan Donald C. & Kim Taewon, 1994. "Default Probabilities for Mortgages," Journal of Urban Economics, Elsevier, vol. 35(3), pages 278-296, May.
    5. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, vol. 142(2), pages 698-714, February.
    6. John Y. Campbell & João F. Cocco, 2015. "A Model of Mortgage Default," Journal of Finance, American Finance Association, vol. 70(4), pages 1495-1554, August.
    7. 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.
    8. Therese C. Scharlemann & Stephen H. Shore, 2015. "The Effect of Negative Equity on Mortgage Default: Evidence from HAMP PRA," Working Papers 15-06, Office of Financial Research, US Department of the Treasury.
    9. Gabriel Ehrlich & Jeffrey Perry, 2015. "Do Large-Scale Refinancing Programs Reduce Mortgage Defaults? Evidence From a Regression Discontinuity Design: Working Paper 2015-06," Working Papers 50871, Congressional Budget Office.
    10. Hahn, Jinyong & Todd, Petra & Van der Klaauw, Wilbert, 2001. "Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design," Econometrica, Econometric Society, vol. 69(1), pages 201-209, January.
    11. Lawrence R. Cordell & Karen E. Dynan & Andreas Lehnert & J. Nellie Liang & Eileen Mauskopf, 2009. "Designing loan modifications to address the mortgage crisis and the making home affordable program," Finance and Economics Discussion Series 2009-43, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Katya Kartashova & Xiaoqing Zhou, 2020. "How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers," Staff Working Papers 20-18, Bank of Canada.
    2. Robert Forster & Xiaojin Sun, 2024. "Heterogeneous Effects of Mortgage Rates on Housing Returns: Evidence from an Interacted Panel VAR," The Journal of Real Estate Finance and Economics, Springer, vol. 69(3), pages 477-504, October.
    3. James E. Payne & Xiaojin Sun, 2023. "Time‐varying connectedness of metropolitan housing markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(2), pages 470-502, March.
    4. Kristopher Gerardi & Lara Loewenstein & Paul S. Willen, 2021. "Evaluating the Benefits of a Streamlined Refinance Program," Housing Policy Debate, Taylor & Francis Journals, vol. 31(1), pages 51-65, January.
    5. David M. Brasington, 2022. "Cutting Funding for Police Protection: The Consequences for the Size of Newly-Constructed Housing," The Journal of Real Estate Finance and Economics, Springer, vol. 65(4), pages 549-571, November.
    6. William D. Larson, 2023. "The riskiness of outstanding mortgages in the United States, 1999–2019," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(2), pages 279-310, March.
    7. Goodman, Laurie & Zhu, Jun, 2023. "Single borrowers versus coborrowers in the pandemic: Mortgage forbearance take-up and performance," Journal of Housing Economics, Elsevier, vol. 59(PB).
    8. repec:fip:a00001:89431 is not listed on IDEAS
    9. repec:fip:a00001:88481 is not listed on IDEAS

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    More about this item

    Keywords

    HARP; Refinance; Mortgage default; Fuzzy RDD;
    All these keywords.

    JEL classification:

    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy

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