JPMorgan Chase: Mortgage modifications just as effective without principal reduction

Credit card behavior remains the same

Reducing the amount a homeowner, facing default, owes on their mortgage sounds like it would be a great idea to include in a mortgage modification.

But it’s likely just a feel-good factor, according to newly released research from JPMorgan Chase Institute, a think tank arm of the bank.

JPMorgan just released the results of its mortgage modification programs, in a report found here.

The survey looked at data from more than 1 million Chase mortgage customers who received a modification, and created a data asset of 450,000 de-identified modification recipients.

Some of the findings are logical. For example, a 10% mortgage payment reduction reduced default rates by 22%.

Others, like the subject of this article’s headline, are not as obvious.

“There was no material difference between the post-modification default rates of borrowers who received principal plus payment reduction and borrowers who received only payment reduction,” the study finds. “This finding suggests that 'strategic default' was not the primary driver of default decisions for these underwater borrowers, meaning that they were not defaulting simply because they owed more on their mortgage than their house was worth.”

Another unusual finding is that, even when facing mortgage default, homeowners continued to use their credit cards in the same way both pre-mod and post-mod. This suggests that overall household consumption behavior is largely independent of a pending mortgage default.

This type of behavior was anecdotally observed back in 2010, though this column describing this kind of event was criticized widely at the time.

Here’s the best part of the conclusion, though the entire report is fascinating and valuable:

"To the extent that a mortgage modification can be considered a re-origination, our findings may have application to underwriting standards as well. The fact that default was correlated with income loss provides evidence that static affordability measures such as debt-to-income ratio were not a good predictor of default.

"Both high and low mortgage PTI borrowers experienced a similar income drop just prior to default, suggesting that even among those borrowers whose mortgages would be categorized as unaffordable by conventional standards, it was a drop in income rather than a high level of payment burden that triggered default. Therefore, policies that help borrowers establish and maintain a suitable cash buffer that can be drawn down in the event of an income shock or an expense spike could be an effective tool to prevent mortgage default."

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