We examine how the structure of mortgage modification affects the likelihood that the mortgage redefaults over the next year. We focus on pre‐HAMP (Home Affordable Modification Program) subprime modifications where the borrower was seriously delinquent and the monthly payment was reduced. The average redefault rate over the year following the modification is 56%. Redefault rates decline with the magnitude of reduction in monthly payments, and redefault rates decline more when the payment reduction is achieved through principal forgiveness as compared to lower interest rates.
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Haughwout et al. (2016) studied this question.
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