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«Urban Problems and sPatial methods VolUme 17, nUmber 1 • 2015 U.S. Department of Housing and Urban Development | Office of Policy Development and ...»

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Notes: Model—Linear probability. Additional controls include a no-documentation dummy, a prepayment penalty dummy, metropolitan statistical area-level fixed effects, and FICOTM credit score and combined loan-to-value ratio quartiles. Black, Hispanic, and Asian are based on Home Mortgage Disclosure Act data. Non-Hispanic White is the excluded group. ARM is a dummy for an adjustable rate mortgage. Income (logged) is at the time of application. Interest rate decreased and loan balance decreased are dummies equal to 1 if the loan interest rate or principal balance, respectively, was reduced with the modification. HAMP-eligible is determined at the point of modification. More than 60 days behind before modification marks the delinquency status the month before modification. House price change is measured as the difference in house prices between 6 or 12 months after modification and the time of modification.

Source: Corporate Trust Services (CTS)

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Total observations 24,926 24,926 24,926 24,905 19,657 19,657 19,657 19,481 ARM = adjustable-rate mortgage. HAMP = Home Affordable Modification Program.

*p 0.05. **p 0.01. ***p 0.001.

Notes: Model—Linear probability. Additional controls include a no-documentation dummy, a prepayment penalty dummy, metropolitan statistical area-level fixed effects, and FICOTM credit score and combined loan-to-value ratio quartiles. Black, Hispanic, and Asian are based on Home Mortgage Disclosure Act data. Non-Hispanic White is the excluded group. ARM is a dummy for an adjustable rate mortgage. Income (logged) is at the time of application. Interest rate decreased and loan balance decreased are dummies equal to 1 if the loan interest rate or principal balance, respectively, was reduced with the modification. HAMP-eligible is determined at the point of modification. More than 60 days behind before modification marks the delinquency status the month before modification. House price change is measured as the difference in house prices between 6 or 12 months after modification and the time of modification.

Source: Corporate Trust Services (CTS)

Cityscape 181Collins, Reid, and Urban

Conclusions Confronted with a rising number of foreclosures, the federal government launched HAMP in 2009, with the goal of increasing the scale and impact of loan modifications. Since then, concerns have emerged about whether loan modifications are successful at preventing foreclosure and whether racial or ethnic differences influence who benefits from a modification. Using a sample of national subprime and Alt-A loans, we find no evidence of racial disparities in the types of loan modifications received. Overall, race or ethnicity is not a significant factor in predicting loan modification terms. The one exception is in the area of monthly payment reductions; we find that Black, Hispanic, and Asian borrowers receive modifications that entail a greater reduction in monthly payments than non-Hispanic White borrowers, although the additional amount of payment relief is small. These findings stand in stark contrast to the literature on mortgage originations, which has revealed persistent differences in loan outcomes by race and ethnicity in terms of loan pricing and terms (Avery, Brevoort, and Canner, 2006;

Bocian, Li, and Ernst, 2008; Nichols, Pennington-Cross, and Yezer, 2004).

Our findings on the effectiveness of loan modifications are more mixed. We find that modifications do reduce the likelihood of delinquency and foreclosure, and that substantive differences in the effectiveness of modifications are very little across racial and ethnic groups.

HAMP-eligible modifications (those that were made after HAMP was officially launched and that met loan amount criteria) display significantly lower subsequent rates of delinquency and foreclosure, as do modifications with reductions in monthly payments. These findings suggest that the focus of HAMP on the affordability of payments may facilitate better borrower outcomes than earlier voluntary modification efforts in which monthly payments would often increase (White, 2009a, 2009b). Because we cannot directly observe HAMP versus proprietary modifications, however, the direct impact of HAMP remains an important avenue for future research. Another important question for future research is whether the modification terms (for example, interest rate reductions) will remain in place and contribute to the sustainability of the loan beyond the 1 year we can observe.

Beyond the primary questions driving this study, several other issues are raised by this research.

First, the models show that the affordability of monthly payments is a key factor influencing redefault, suggesting that affordability concerns are an important component of any lossmitigation program. Under HAMP, interest rate reductions are required to be in place only for 5 years. As loans modified under HAMP revert to premodification interest rate levels in the coming years, some borrowers will have recovered from the recession sufficiently to manage these increased payments. Other borrowers, however, may need ongoing attention from servicers to develop alternative payment arrangements or to even sell the property to avoid default.

The needs of borrowers with modified mortgage loans will require additional capacity from servicers and deserve ongoing oversight by regulators. Future research should also focus on racial and ethnic differences as borrowers reach the 5-year limit of their loan modifications.





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Second, housing counseling has been an emphasis of the response to rising foreclosures, as evidenced by the National Foreclosure Mitigation Counseling Program. This program is associated with increased rates of loan modifications for troubled borrowers (Collins and Schmeiser, 2013; Collins, Schmeiser, and Urban, 2013; Mayer et al., 2009). Existing datasets on loan performance, including the one used in this study, unfortunately do not include information about whether borrowers received counseling either prepurchase or during the loan renegotiation process. The role of counseling needs to be considered in any review of policies responding to borrowers in distress as policymakers consider ways to stimulate loan workouts in other markets, particularly the student loan market, which has garnered increased attention in recent years.

Third, our research demonstrates that not all loan modifications are successful, and we believe that a lot can still be learned about which types of modifications and post-purchase interventions are the most effective at sustaining homeownership. As with other research focused on loan modifications, our study is limited in its coverage of the mortgage market; existing datasets generally either focus on one market segment (for example, subprime and Alt-A loans as with the CTS) or do not include a specific loan modification flag, requiring that researchers make assumptions about which loan changes are because of a modification. Increased transparency in servicing practices and better publicly available data on loan modification terms and outcomes by race and ethnicity (and by income and gender) for the entire mortgage market would increase our ability to assess the relative strengths and weaknesses of different loan modification practices and develop policies to better assist borrowers who face mortgage distress. HMDA, and the role it played in increasing transparency about mortgage applications, offers one potential model. Servicers could be required to disclose loan modification terms and borrower characteristics using a similar annual reporting mechanism as is used for home mortgage loan applications. Evidence is emerging that simply enforcing reporting requirements might shift servicer behavior (Collins and Urban, 2014).

Finally, our finding that one-third of modified, subprime loans still end in foreclosure raises the larger question of how to reduce the vulnerability of lower wealth and lower income households in the homeownership market. The Consumer Financial Protection Bureau and the reforms enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act expand consumer protections while limiting the ability of financial institutions to engage in high-risk lending practices. Mortgage terms are not the only predictors of the sustainability of homeownership, however. Borrowers of color, especially those who have lower incomes or who work in lower skilled jobs, may face increased risk and income volatility associated with structural changes in the labor market (Reid, 2014). In addition, lower income homeowners have a smaller financial cushion with which to withstand the impact of negative life events, such as unemployment or serious illness, or to meet unanticipated repair costs (Mallach, 2011). For these borrowers, loan terms may not be the only, or even the most important, factor influencing the sustainability of homeownership. Although transparent and effective guidelines for loan servicing are critical, greater emphasis and funding for policies that provide post-purchase support can help to ensure that borrowers of color are able to stay in their homes and experience the potential benefits of homeownership.

Cityscape 183Collins, Reid, and Urban

Acknowledgments This research was funded by the University of Washington-Seattle’s West Coast Poverty Center 2010 small grants program and the Institute for Research on Poverty at the University of Wisconsin-Madison. Collins gratefully acknowledges support from the John D. and Catherine T. MacArthur Foundation’s How Housing Matters initiative. The authors thank three anonymous reviewers for helpful suggestions.

Authors J. Michael Collins is an associate professor of public affairs and consumer science at the University of Wisconsin-Madison.

Carolina K. Reid is an assistant professor in the Department of City and Regional Planning at the University of California, Berkeley.

Carly Urban is an assistant professor in the Department of Agricultural Economics and Economics at Montana State University.

References Adelino, Manuel, Kristopher Gerardi, and Paul S. Willen. 2013. “Why Don’t Lenders Renegotiate More Home Mortgages? Redefault, Self-Cures, and Securitization,” Journal of Monetary Economics 60 (7): 835–853.

Agarwal, Sumit, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, and Douglas D. Evanoff. 2011. “The Role of Securitization in Mortgage Renegotiation,” Journal of Financial Economics 102 (3): 559–578.

Agarwal, Sumit, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, Tomasz Piskorski, and Amit Seru. 2012. Policy Intervention in Debt Renegotiation: Evidence From the Home Affordable Modification Program. Working Paper W18311. Cambridge, MA: National Bureau of Economic Research. http://www.nber.org/papers/w18311.

Ambrose, Brent W., and Charles A. Capone. 1996. “Do Lenders Discriminate in Processing Default?” Cityscape 2 (1): 89–98.

Andrews, Alexandra, and Emily Witt. 2009. “The Secret Test That Ensures Lenders Win on Loan Mods.” ProPublica. http://www.propublica.org/article/the-secret-test-that-ensureslenders-win-on-loan-mods-915.

Avery, Robert B., Kenneth P. Brevoort, and Glenn B. Canner. 2006. “Higher Priced Home Lending and the 2005 HMDA Data,” Federal Reserve Bulletin 92 (September): a123–a166.

Been, Vicki, Mary Weselcouch, Ioan Voicu, and Scott Murff. 2013. “Determinants of the Incidence of U.S. Mortgage Loan Modifications,” Journal of Banking and Finance 37: 3951–3973.

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Bocian, Debbie Gruenstein, Keith S. Ernst, and Wei Li. 2008. “Race, Ethnicity and Subprime Loan Pricing,” Journal of Economics and Business 60 (1–2): 110–124.

Bocian, Debbie Gruenstein, Wei Li, Carolina Reid, and Roberto G. Quercia. 2011. Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures. Washington, DC: Center for Responsible Lending.

California Reinvestment Coalition. 2011. Race to the Bottom: An Analysis of HAMP Loan Modification Outcomes by Race and Ethnicity for California. San Francisco: California Reinvestment Coalition.

Chan, Sewin, Claudia Sharygin, Vicki Been, and Andrew Haughwout. 2014. “Pathways After Default: What Happens to Distressed Mortgage Borrowers and Their Homes?” Journal of Real Estate Finance and Economics 48: 342–379.

Collins, J. Michael, and Carolina Reid. 2010. Who Receives a Mortgage Modification? Race and Income Differentials in Loan Workouts. Working Paper 2010-07. San Francisco: Federal Reserve Bank of San Francisco.

Collins, J. Michael, and Maximilian D. Schmeiser. 2013. “The Effects of Foreclosure Counseling for Distressed Homeowners,” Journal of Policy Analysis and Management 32 (1): 83–106.

Collins, J. Michael, Maximilian D. Schmeiser, and Carly Urban. 2013. “Protecting Minority Homeowners: Race, Foreclosure Counseling and Mortgage Modifications,” Journal of Consumer Affairs 47 (2): 289–310.

Collins, J. Michael, and Carly Urban. 2014. “The Dark Side of Sunshine: Regulatory Oversight and Status Quo Bias,” Journal of Economic Behavior & Organization 107: 470–486.

Cordell, Larry, Karen Dynan, Andreas Lehnert, Nellie Liang, and Eileen Mauskopf. 2009.

Designing Loan Modifications To Address the Mortgage Crisis and the Making Home Affordable Program. Federal Reserve Board Finance and Economics Discussion Series, 2009-43.

Cordell, Larry, Karen Dynan, Andreas Lehnert, Nellie Liang, Eileen Mauskopf, and Robert W.

Kolb. 2010. “The Incentives of Mortgage Services and Designing Loan Modifications To Address the Mortgage Crisis.” In Lessons From the Financial Crisis: Causes, Consequences, and Our Economic Future, edited by R. Kolb. Hoboken, NJ: John Wiley & Sons: 231–238.

Cutts, Amy Crews, and William A. Merrill. 2008. “Interventions in Mortgage Default: Policies and Practices To Prevent Home Loss and Lower Costs.” In Borrowing To Live: Consumer and

Mortgage Credit Revisited, edited by Nicolas P. Retsinas and Eric S. Belsky. Washington, DC:

Brookings Institution Press: 203–254.

Ding, Lei. 2013. “Servicer and Spatial Heterogeneity of Loss Mitigation Practices in Soft Housing Markets,” Housing Policy Debate 23 (3): 521–542.

Ding, Lei, Roberto G. Quercia, Carolina Reid, and Alan White. 2012. “The Impact of Federal Preemption of State Anti-Predatory Lending Laws on the Foreclosure Crisis,” Journal of Policy Analysis and Management 31 (2): 367–387.

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