J. M. COLLINS*, C. K. REID^ * CENTER FOR FINANCIAL SECURITY, UNIVERSITY OF WISCONSIN-MADISON ^FEDERAL RESERVE BANK OF SAN FRANCISCO Who Receives a Mortgage Modification? Race and Income Differentials in Loan Workouts West Coast Poverty Center Seminar January 24, 2011
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J. M. COLLINS*, C. K. REID^ * CENTER FOR FINANCIAL SECURITY, UNIVERSITY OF WISCONSIN-MADISON ^FEDERAL RESERVE BANK OF SAN FRANCISCO Who Receives a Mortgage.
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J. M. COLLINS* , C. K . REID^* C E N T E R F O R F I N A N C I A L S E C U R I T Y, U N I V E R S I T Y
O F W I S C O N S I N - M A D I S O N^ F E D E R A L R E S E RV E B A N K O F S A N F R A N C I S C O
Who Receives a Mortgage Modification? Race and Income Differentials in Loan Workouts
West Coast Poverty Center Seminar January 24, 2011
Overview
Homeownership boom and bustRemedies for Borrowers in DistressPolicy Response: HAMPConcerns about Financial Literacy, Racial &
Income DisparitiesDataFindingsFuture ResearchA bit of a commercial…
Boom and Bust
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National Housing PricesThrough July 2010
National 10 City Composite
National 20 City Composite
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Source: Case-Shiller Index
Foreclosures Spike
Source: National Delinquency Survey
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00.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%
0.99%
4.63%
Percentage of loans in the foreclosure process
Distressed Sales Rising
National Home Sales by Segment
CoreLogic, formerly First American Corporation, www.corelogic.com
• Home Affordable Mortgage Program - Federal subsidy
Goal: More lender/servicer modifications Emphasis on ‘waterfall’
Capitalization of arrearages (past payments and fees) Move from ARM to FRM (frozen or reset mod) Reduction in the interest rate (time limited) Reduce principal (very rare)
Goal: bringing monthly payments to 31% of their income
American Indicator, Hispanic\Latino, Asian \Pacific Islander, Log Income($)
Terms of Modifications: Rate Drops
Growing Balance
Findings
Loan modifications are rarely used overall
No evidence that minority borrowers are less likely to receive a modification or less aggressive modification than white borrowers.
Most modifications involve reductions in the loan’s interest rate, and an increase in principal balance.
Modifications reduce the likelihood of subsequent default
Q & A
1. Controlling for borrower risk factors, loan characteristics, and labor and housing market conditions, who loses a home to foreclosure?
A. No evidence of income effects, loan terms matter, racial effects (Hisp/Latino & Asian/other)
2. Among borrowers in distress, who gets a modification?
A. Modest income and racial effects (Afr Amer & Hisp/Latino); subprime
3. For borrowers in distress, does a modification reduce the likelihood of a subsequent foreclosure?
A. Yes.
4. Does a modification result in a significant rewriting of the mortgage contract, such as a reduced interest rate (A. yes) and/or principal balance? (A. no – increases balance)
More questions
Standardized modification terms – removing discretion as a policy?
Type of servicer effects? (better and worse systems)
Role of counseling? $475 million in NFMC funds
Effects of state mediation policies?
Heterogeneity of borrowers / periods – ongoing study
Counseling Effects
Counseled when current Counseled at 30 days delinquent
Counseled at 60 days delinquent
Counseled at 90 days delinquent
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Effects Vary Depending on When Counseling Occurs
Pr(Mod) Pr(REO)
Source: Collins & Schmeiser, 2010
Mediation Policies
Mediation (conciliation) Out of court meeting with a neutral third party appointed
by the court in an attempt to resolve a dispute. If the parties to come to a resolution, foreclosure
dismissed
21 states have some form of foreclosure mediation 13 statewide 8 with county or court-district based
Mediation Effects?
Typology of Borrowers in Default
Income disruption Job loss/cutback (relocation options) Divorce (child support issues) Widow/er (may have limited work options)
Disability Chronic (DI application process)
Health crisis Acute or ongoing expenses (medical debt management)
Investor (not all are speculators) tenant eviction issues subsidized units
Small business failure (non-real estate) Sale / bankruptcy (special issues if farm)
Strategic defaulters
Policies for Homeowners in Distress
Prevention People not in default, but worried
Early Intervention Missed 1-2 payments
Late Intervention Missed 3+ payments
Transitional Support Short sale or foreclosure auction
Center for Financial Security
Financial Literacy Research Consortium of the Social Security Administration Wisconsin, Rand, Boston College FY 12 projects due late spring
Financial capacity building Life course models (not just retirement) Focus on vulnerable populations Balance sheet approach (not just saving)
Counseling, education, advice, disclosures, reminders, etc.
J. Michael CollinsFaculty Director, Center for Financial SecurityUniversity of Wisconsin-Madison7401 Social Science, 1180 Observatory DriveMadison, WI [email protected]