Sample Modification

Post date: Apr 29, 2011 11:33:53 PM

The loan contract shown below is a modification contract. The person in need of help went to the bank and asked for a loan modification; instead of principal forgiveness, this person's late fees were added to the end of a loan in a one-time balloon payment. The interest rate was lowered for 5 years, but it begins to increase again (a 2 fold increase!). If its possible to track down the security pools that include many loans like this, then its possible to trade based on modification terms.

Key Question: Under what conditions is this person likely to default again (even after modification)? My simulated hazard model makes this precise.