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Posted by: Doug Henwood | June 5, 2012

New York Fed: lower payments = lower default rate!

The New York Fed is out with a new paper (“Payment Changes and Default Risk: The Impact of Refinancing on Expected Credit Losses”) that shows that reducing monthly mortgage payments “significantly” reduces future default risks. (Abstract follows.) The details of the paper strike me as less interesting than the fact that this basilica of High Finance is arguing that some degree of debt reduction is prudent—bolder than anything that a mainstream politician would ever say. Remember, these are the folks who had David Graeber in recently to talk about debt (and debt forgiveness).

Payment Changes and Default Risk: The Impact of Refinancing on Expected Credit Losses

June 2012 Number 562
JEL classification: G21, G18, R51

Authors: Joseph Tracy and Joshua Wright

This paper analyzes the relationship between changes in borrowers’ monthly mortgage payments and future credit performance. This relationship is important for the design of an internal refinance program such as the Home Affordable Refinance Program (HARP). We use a competing risk model to estimate the sensitivity of default risk to downward adjustments of borrowers’ monthly mortgage payments for a large sample of prime adjustable-rate mortgages. Applying a 26 percent average monthly payment reduction that we estimate would result from refinancing under HARP, we find that the cumulative five-year default rate on prime conforming adjustable-rate mortgages with loan-to-value ratios above 80 percent declines by 3.8 percentage points. If we assume an average loss given default of 35.2 percent, this lower default risk implies reduced credit losses of 134 basis points per dollar of balance for mortgages that refinance under HARP

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Responses

  1. “…these are the folks who had David Graeber in recently to talk about debt (and debt forgiveness).”

    I wish I could believe David Graeber’s talking to the Fed was a sign of enlightenment on the part of the Fed and not the sign of an Establishment metamorphosis on Graeber’s part.

    How can we denounce “Lesser Evilism” and yearn for a labor movement that, as of old, stands for all the workers and against the bosses, and yet hold out hope for the corporatist system enshrined in the Federal Reserve?

    Mind you, I am always grateful for your lucidity where the Dismal Science is concerned.

    Just this evening, I caught the first in the Republican’s breathtakingly audacious commercials–the biggest of big lies, even if the bastard Obama is the subject–in which they referred smugly to Obama’s “behaving as though our national credit card had no limits.”

    What genius, to create a nation bled white by consumer debt and the misappropriation of public funds on behalf of the wealthiest–and then use the terror of that to bully the 99% into doing the will of those who are robbing them and throwing them out of their homes!! It’s dizzying.

    If America had ears for Graeber’s ideas about debt, there is no doubt that this kind of sinister manipulation would not be the surefire winner it now seems to be. (Of course Obama uses the same theme–no space to discuss.)

    But hope for the people from the Federal Reserve?


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