A new research paper examining the effect of payment reduction on default finds that a 10% payment reduction decreases expected defaults by 10 to 11%. In fact, there are significantly lower default rates for loans receiving larger reductions in payment. The analysis looked at a population of 30-year fixed rate borrowers with little or negative equity that refinanced into 30-year fixed rate mortgages under the Home Affordable Refinance Program (HARP). The results also showed that the estimated effect of payment reduction is similar for borrowers of differing FICO credit scores, and is relatively stronger for those with negative equity.
More information is available in working paper, "The Effect of Mortgage Payment Reduction on Default: Evidence from the Home Affordable Refinance Program."
This is good news for borrowers and taxpayers. More than 3.2 million homeowners have refinanced through the HARP program since its debut. Those who refinanced under the HARP program in the third quarter of 2014 will save an average of $2,900 during the first 12 months. Find out if you're eligible.
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