Does Temporary Mortgage Assistance for Unemployed Homeowners Reduce Longer Term Mortgage Default? An Analysis of the Hardest Hit Fund Program

The substantial costs of foreclosures to individuals and society motivated nearly $40 billion in government subsidies to homeowners during the Great Recession. Most of these subsidies were in the form of permanent loan modifications with mixed evidence of effectiveness. This paper estimates the loan outcomes of an alternative form of mortgage subsidy that provided unemployed homeowners with temporary mortgage payment assistance, through the U.S. Department of Treasury’s Hardest Hit Fund (HHF). Our primary empirical strategy exploits 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. By 48 months after the start of assistance, receipt of HHF is associated with a 28 percentage point reduction in the probability of default, which is a 49 percent reduction in the average default rate of 57 percent. In support of the liquidity hypothesis, we find that the HHF effect is not driven by a reduction in mortgage balance, which only occurs for about 10 percent of HHF borrowers. Further, the effect is larger for borrowers who were underwater on their mortgages at the time of assistance.