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Evaluating Real Mortgage Mitigation Options of US Subprime Mortgage Homeowners

Flanagan, M (2014) Evaluating Real Mortgage Mitigation Options of US Subprime Mortgage Homeowners. In: 8th Portuguese Finance Network International Conference.

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Abstract

We provide a comprehensive model using a bivariate stochastic DTI (Debt to Income) and LTV (Loan to Value) formulation to assess the likely contribution of the current US government programs(HAMP) to alleviate homeownership financial distress. In a simulation of five available mortgage distress termination options plus continuation and repayment, the HAMP program appears to foster mortgage mitigation, given our parameter value assumptions. HAMP reduces foreclosures, but also incentivises householders to voluntary sell their property at a higher LTV than without a HAMP program. It might also reduce a homeowner’s propensity to strategically default. However, conclusive policy appraisal awaits satisfactory empirical work regarding DTI and LTV drifts and volatilities.

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