Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93611
Authors: 
Fuster, Andreas
Willen, Paul S.
Year of Publication: 
2012
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 582
Abstract: 
Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifi cations are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced large rate reductions over the past years and are largely immune to these selection concerns. We show that interest rate changes dramatically affect repayment behavior. Our estimates imply that cutting a borrower's payment in half reduces his hazard of becoming delinquent by about two-thirds, an effect that is approximately equivalent to lowering the borrower's combined loan-to-value ratio from 145 to 95 (holding the payment fi xed). These findings shed light on the driving forces behind default behavior and have important implications for public policy.
Subjects: 
mortgage finance
delinquency
ARMs
Alt-A
TrueLTV
JEL: 
G21
E43
Document Type: 
Working Paper

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