Association for Public Policy Analysis & Management

The U.S. Department of the Treasury’s $9.6 billion Hardest Hit Fund (HHF) provided mortgage assistance to unemployed and underemployed homeowners beginning in 2010. Through HHF, homeowners receive direct assistance paying their mortgages until they secure employment, up to a maximum of 15 or 18 months. This target group and structure of assistance is different from that of other foreclosure prevention initiatives. Mortgage payment assistance acts as a complement to traditional unemployment insurance that targets specifically the mortgage payment—often the largest expense for most households. In this paper, we estimate the impact of the HHF program on the default and foreclosure outcomes of individual homeowners. We compare the relative effectiveness of more standard loan modifications for distressed homeowners, including principal reductions, and mortgage payment assistance.

We identify homeowners who received HHF assistance between 2010 and 2015 using CoreLogic public property records and transaction data. We then merge these data with CoreLogic loan data, which includes borrower and mortgage characteristics and allows us to track loan performance over time. We compare the loan outcomes of HHF assisted mortgage borrowers to a matched sample of otherwise similar borrowers who did not receive HHF assistance. To account for selection into HHF, we exploit the fact that some states were not eligible to offer an HHF program and that certain Metropolitan Statistical Areas (MSAs) encompass jurisdictions in both HHF and non-HHF states. We match HHF-assisted homeowners to otherwise similar non-assisted homeowners who lived in the same MSA but were not eligible for HHF assistance because they lived in a non-HHF state. We estimate the competing risks of mortgage default or prepayment using multinomial logit regression models, following homeowners from a baseline period prior to the HHF assistance date through December 31, 2016.

After controlling for a variety of loan and borrower characteristics and accounting for the competing risk of prepayment, receipt of HHF is associated with a 24.5 percentage point reduction in the probability of redefault at 36 months. To put the size of this effect in perspective, we estimate that the receipt of a loan modification prior to the baseline period is associated with an 11.5 percentage point reduction in the probability of default at 36 months. Not only is our paper the first empirical analysis of the impact of the HHF program at the borrower level, the findings make significant contributions to the broader literature on mortgage default and promising strategies to extend homeownership to low income and vulnerable populations while reducing the risk of default. While income and employment shocks have been associated with mortgage default in a number of prior studies (HUD, 2010; Gardner & Mills, 1989; Quercia et al., 2013), no prior study has estimated the impact of an intervention that stabilizes the mortgage payment while homeowners search for a job. Even though the HHF program has ended, our study informs innovations to mortgage product designs to assist low-income homeowners, such as mortgage payment insurance for income shocks incorporated as a standard part of affordable mortgage programs.