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The Effect of the Principal Reduction Alternative (PRA) on Redefault 

Rates in the Home Affordable Modification Program (HAMP)

Executive Summary

In 2012 the Making Home Affordable Program analyzed the effect of Principal Reduction Alternative 

(PRA) on modifications in the Home Affordable Modification Program. The key findings in that analysis 

were:

• Payment reduction is an important driver of HAMP modification performance. 

• HAMP modification re-default rates also fall as the loan’s after-modification mark-to-market 

loan-to-value, or MTMLTV, ratio decreases (i.e. as the size of the loan’s current principal balance 

relative to the home’s value decreases). 

• HAMP PRA participating servicers tend to use the principal reduction feature on loans that have 

relatively riskier credit characteristics than the overall HAMP population - borrowers with much 

lower credit scores and that are more seriously delinquent at time of modification. 

• A logistic regression controls for these riskier characteristics. The regression shows that for a 

given payment reduction, homeowners who received a HAMP modification with principal 

reduction perform better than homeowners who receive a HAMP modification without principal 

reduction.

Due to the limited availability of seasoned PRA modifications in 2012, the original analysis focused on 

“early re-default”—meaning a modified loan goes 90+ days delinquent and loses good standing in HAMP 

within the first six months.

With the benefit of a higher volume of seasoned modified loans, Making Home Affordable has reperformed the analysis, confirmed the original findings, extended the window of observation to 24 

months and shown that the default reducing benefit of Principal Reduction Alternative persists over time.

Changes in Available Data

In March 2012, although PRA modifications had higher re-default rates than the remaining non-PRA 

modifications, the regression analysis demonstrated that PRA modifications performed better than nonPRA modifications with comparable risk factors. Subsequent vintages have performed better, so today 

even single-variable analysis shows PRA modifications performing better than HAMP modifications as a 

whole.

Table 1: 2012 HAMP Performance without controlling for risk 

characteristics

All Modifications PRA Modifications

Number of 

Permanent 

Modifications

Percent 90+ 

Days Delinquent 

at 6 months

Number of 

Permanent 

Modifications

Percent 90+ 

Days Delinquent 

at 6 months

800,613 5.8% 30,345 6.3%

Source: Making Home Affordable Program System of Record – data through March 2012
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Table 2: 2016 Tier 1 HAMP Performance without controlling for risk 

characteristics

All Modifications PRA Modifications

Number of 

Permanent 

Modifications

Percent 90+ 

Days Delinquent 

at 6 months

Number of 

Permanent 

Modifications

Percent 90+ 

Days Delinquent 

at 6 months

1,278,498 5.5% 147,790 4.9%

Source: Making Home Affordable Program System of Record – data through March 2016

As we observed originally in 2012, however, PRA modifications still represent riskier loans. PRA 

modifications to date still have lower FICO scores, higher LTV ratios before modification, are more 

delinquent at the time of the trial modification.

Table 3: Credit Characteristics All Modifications vs. PRA Modifications

Measure

All Modifications PRA Modifications

Mean Median Mean Median

Months DLQ 7 5 11 7

Credit Score 578 565 571 560

Before Mod LTV 143.30% 125.00% 191.60% 163.70%

After Mod LTV 133.90% 115.00% 121.90% 115.00%

Monthly Gross Income $4,335 $3,913 $4,481 $3,976

Source: Making Home Affordable Program System of Record – data through March 2016

New Model 

The re-estimated logistic regression model uses permanent HAMP modifications aged 6 months or more

as of March 2016. The new model largely uses the same control variables as the original study with only 

minor changes in how the variables enter the regression. Payment change and after-modification loan-tovalue ratio were once again confirmed to be the most significant factors in predicting re-default. 
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Figure 1: Delinquency Curves by Post-Modification MTMLTV

Figure 2: Delinquency Curves by Payment Change

The regression results allow us to show the change in default likelihood attributable to the different 

modification features. 

0%

5%

10%

15%

20%

25%

30%

35%

3 6 9 12 15 18 21 24

60+ Delinquency Rate

Months After Permanent Modification

HAMP 60+ by After Mod LTV Ratio

<= 80%

( 80%, 90%]

( 90%,100%]

(100%,110%]

(110%,120%]

(120%,130%]

(130%,140%]

(140%,150%]

(150%,160%]

(160%,170%]

> 170%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

3 6 9 12 15 18 21 24

60+ Delinquency Rate

Months after permanent modification

HAMP 60+ Rates by Payment Change

<= 20% DECREASE

20 - 30% DECREASE

30 - 40% DECREASE

40 - 50% DECREASE

> 50% DECREASE
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Table 4 below compares the default estimates using models for both 6- and 24-month regressions,

estimated separately using both the original 2012 study population1 and the full population of HAMP 

Modifications as of March 2016. The comparison shows estimates for a loan with 570 FICO score, 3 

months delinquent, in a private label security, originated at 95% LTV, in Florida, loan aged 36 months at 

time of modification, 1 unit, $180,000 UPB after capitalizing arrearages, 170% LTV ratio, and witnessing 

a 2% home price appreciation in the following 12 months. Unmodified, the model estimates the loan’s 

probability of default by 24 months to be 94.6%. A HAMP modification reducing the monthly P&I 

payment by 20%-30% lowers default probability to 44.4%. The default probability for a HAMP 

modification with principal forbearance is 36.9% and with 29.1% for one with principal forgiveness down 

to 115% LTV. Probability estimates are fairly consistent between the two loan populations.

Study Population

6 Months 24 Months

Original 

Mar 2012

P-T-D

Mar 2016

Original 

Mar 2012

P-T-D

Mar 2016

Loans in estimation 614,450 1,222,112 610,571 1,133,918

A) No Payment Reduction 10.2% 10.7% 48.0% 48.2%

B) P&I Reduction, LTV = 170, No Forgiveness 4.1% 4.2% 24.9% 24.1%

C) P&I Reduction with Forbearance 3.9% 3.9% 21.5% 21.1%

D) P&I Reduction, with PRA Forgiveness2 3.6% 3.3% 20.5% 19.2%

Conclusion

The new study confirms the effects observed in 2012 on a larger and more seasoned population of 

modified loans. HAMP modified loans with principal reduction perform better than loans without. The 

benefit of principal reduction is more significant at 24 months and more also more significant when 

evaluating the full population of permanent modifications.

Appendix

The original full-length paper summarized the econometric analysis performed to evaluate the effect of 

principal reduction on the performance of loan modifications made under the Home Affordable 

Modification Program (HAMP). It was based on data related to modifications with principal reduction 

entered into the HAMP system of record by HAMP participating servicers in 2012. 

 1 The original study had 620,673. 6,102 of these loans (mostly GSE) are no longer available for study due to data 

issues or missing data in IR2. Repurchased loans are an example of such an issue.

2 As observed in the original analysisthe model measures an effect from principal forgiveness unrelated to either 

the payment change or change in LTV. We cut this effect in half to conservatively correct for the possibility that it 

may represent borrower and servicer selection effects.