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
Remedies
Counseling: 888-HOPE & NFMC Program In 2009, received 1.89 million calls and counseled more
than 430,000 distressed homeowners Averages 135,000 calls per month and 5,500 calls per
day Mediation (conciliation)
Out of court meeting with a neutral third party appointed by the court in an attempt to resolve a dispute.
21 states have some form of foreclosure mediation Loan modifications: permanently alter original loan
contract Lower interest rates, Extending loan term, and/or Reducing principal balance owed.
Federal Modification Initiative: HAMP
• 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
HAMP Goal: 3 Million Loans
3rd Q 2009 4th Q 2009 1st Q 2010 2nd Q 2010 3rd Q 2010Other Modifications 130,464 102,820 129,572 159,073 175,063 HAMP Modifications 783 21,878 100,301 108,257 58,790 Other Trial-Period Plans 127,902 95,250 87,143 88,919 70,264 HAMP Trial-Period Plans 272,709 258,905 184,171 65,484 43,739 Payment Plans 163,551 121,722 120,439 145,157 122,465 Total 695,409 600,575 621,626 566,890 470,321
Source: Office of the Comptroller of the Currency and the Office of Thrift Supervision Mortgage Metrics Report, Third Quarter 2010
Slow to implementMany iterations: much confusionLong delays and overall volume trails projections
Financial Literacy & Disparities
Opt-in mechanism: borrowers need to seek out potential solutions Failure to take enroll in programs that require an opt-
in (e.g. Heckman & Smith, 2004; Thaler & Sunstein, 2008)
Navigating process, advocacy with lenders Persistence required
Lack of financial literacy and familiarity with the mortgage market (Agnew & Szykman, 2005; Bucks & Pence, 2008; Campbell, 2006) Technical document reviews (legalese)
Borrower Communication
Cutts and Merrill (2008) find that 52 percent of foreclosure sales lack reciprocal lender contact Lack of trust in institutions
Afraid of accelerating process Inbound calls to servicer not always successful
Wrong call center / dept Timelines
Borrower outbound communication is challenge Lack internet, limited phone, time constrained
Research Questions
1. Controlling for borrower risk factors, loan characteristics, and labor and housing market conditions, who loses a home to foreclosure?
2. Among borrowers in distress, who gets a modification?
3. For borrowers in distress, does a modification reduce the likelihood of a subsequent foreclosure?
4. Does a modification result in a significant rewriting of the mortgage contract, such as a reduced interest rate and/or principal balance?
Data
Subprime loans made in 2005 in California, Oregon and Washington Mortgage remittances for investors managed by
Corporate Trust Services (CTS) of Wells Fargo Bank, N.A.
Only 15% are loans originated and serviced by Wells Fargo; CTS covers more than 100 lenders/servicers
Merged dataset: Mortgage applications from public 2005 Home Mortgage
Disclosure Act (HMDA) dataset. Observe differences by income and race
Tracks the monthly performance of loans and the incidence of loan modifications
105,769 observations observed for 39 months, from December 2006 through May 2010.
Descriptive Data
All CA OR WA | 60 day
Del | 60 day
Del & Mod
Total Number of Loans 105,769 92,829 4,065 8,875 36,248 5,745
Average Loan Amount (at origination) $395,007 $415,657 $219,670 $259,370 $376,220 $368,179
Average Income (at origination) $126,590 $131,444 $87,786 $93,592 $117,778 $109,976
Average FICO Score (at origination) 689 691 676 680 668 650
Percent Loans -Purchase 46% 45% 53% 55% 55% 45%
Percent Adjustable )ARM at origination) 85% 85% 78% 83% 91% 90%Percent Adjustable (at final observation) 82% 82% 76% 81% 85% 52%
White 49% 45% 84% 77% 37% 36%Black 5% 5% 2% 4% 6% 9%Hispanic 32% 35% 8% 8% 43% 43%
Asian\Hawaiian\Pacific Islander Indicator 14% 14% 5% 11% 14% 12%
Percent of Loans -Paid Off (in final observation) 40% 38% 57% 59% 14% 6%
Percent of Loans -REO (in final observation) 15% 17% 4% 3% 45% 11%
Models
1. Who loses a home to foreclosure? • competing risks (pre-pay, cure, reo)
2. Who gets a modification? • Restricted to those loans being 60+ days delinquent• survival analysis
3. Does a modification reduce the likelihood of a subsequent foreclosure? • Restricted to 60+ days delinquent• competing risks
4. Does a modification result in a significant rewriting of the mortgage contract? • Difference in difference
Models
Reduced form specification :
Time Varying controls: ARM Indicator, FICO, FICO2, Housing Price Index(HPI),
(HPI)6monthslag, MSA Unemployment, Loan Interest Rate, Months Delinquent,
Months Delinquent 3 month lag, Months Delinquent 6 month lag, PMMS
Non-Time Varying: High-Cost Loan(>300BPSIndicator), Log Loan Amount($),
Combined Loan-to-Value, Payment:Income Ratio, Purchase Indicator, African
American Indicator, Hispanic\Latino, Asian \Pacific Islander, Log Income($)
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
-0.1
-0.05
0
0.05
0.1
0.15
0.2
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
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]
For More Information: cfs.wisc.edu