HAMP, Home Attachment, and Mortgage Default

This paper studies the Homeowner Affordability Modification Program (HAMP), a 2009 federal program reducing delinquent homeowners mortgage payments to 31 percent of monthly income. To assess the program I propose and estimate a structural model of mortgage default using program results. The model allows for income, house prices, and exit preference shocks to induce default, and allows homeowners to vary by an unobserved permanent attachment, or sentimental, value to their home. Counterfactual simulations suggest HAMP has prevented 515,354 defaults as of June 2013 at an expected five year cost per prevented default of $41,096. Back-of-the-envelope calculations estimate the social cost of foreclosure at $16,000 suggesting a net program loss of $12.7 billion. Simulation results indicate the program needs to raise the target payment level to 52 percent of monthly income to become socially beneficially. JEL Classification Codes: R21, H5, I38