Preventive servicing is good for business and affordable homeownership policy

Abstract

This article documents the growing importance of preventive servicing—business practices that emphasize early intervention in delinquency and default management practices that also help financially troubled borrowers avoid foreclosure. We suggest that the loan servicing side of the affordable housing delivery system may be underappreciated and undercapitalized.

We use a database of more than 28,000 affordable housing loans to test several preventive servicing‐related propositions and find that after we control for loan and borrower characteristics, the likelihood that a delinquent mortgagor within this universe will ultimately default varies significantly across servicers. This suggests that loan servicing is an important factor in determining whether low‐ and moderate‐income borrowers who fall behind in their mortgage payments will end up losing their homes through foreclosure. It also suggests a need for policy makers to incorporate preventive servicing into affordable homeownership programs.     

Comment on Michael A. Stegman et al.’s “Preventive servicing is good for business and affordable homeownership policy”: What prevents loan modifications?

Abstract

After discussing the article by Stegman et al., this comment describes the barriers to preventive servicing for securitized residential loans and assesses the importance of loan modifications, given the recent increases in default and foreclosure rates for subprime loans. Several hurdles slow or reduce such modifications, even those that help borrowers and investors alike. For example, self‐interest may reduce servicers’ willingness to modify loans rapidly. In addition, underlying securitization agreements may impede servicers’ ability and discretion in this area. Further, tax laws that govern a common securitization entity may limit modifications, as may accounting standards. Finally, “tranche warfare,” the sometimes contradictory fiduciary duties servicers have toward investors holding different tranches of securitized pools, may decrease their ability or their willingness to modify loans.

This comment concludes that barriers to effective loan modifications should be reduced or eliminated where feasible, but that the securitization of subprime loans creates risks for borrowers.     

State mortgage foreclosure policies and lender interventions: Impacts on borrower behavior in default

Due to the rise in foreclosure filings, policymakers are increasingly concerned with helping families in financial distress keep their homes. This paper tests the extent to which distressed mortgage borrowers benefit from three types of state foreclosure polices: (1) judicial foreclosure proceedings, (2) statutory rights of redemption, and (3) statewide foreclosure‐prevention initiatives. Based on an analysis of borrowers in default who reside in 22 cross‐state metropolitan statistical area pairs, state policies generally have weak effects. Both judicial foreclosure proceedings and foreclosure prevention initiatives are associated with modest increases in loan modification rates. Using a matching procedure, a lender's letter promoting mortgage default counseling was associated with increases in loan modifications, decreases in loan cures, and decreases in foreclosure starts. The effects of the letter were also stronger in states with judicial proceedings. © 2011 by the Association for Public Policy Analysis and Management.     

The Effects of Foreclosure Counseling for Distressed Homeowners

In the face of the housing market downturn of the late 2000s, policymakers promoted third‐party mortgage default counseling as a way to help people at risk of losing their homes to avoid foreclosure. Using a unique data set of monthly loan payments remitted to investors combined with administrative data from a national counseling agency, this study estimates the effects of default counseling on the probability that troubled mortgage borrowers will lose their homes to foreclosure. Borrowers are actually more likely to miss loan payments after receiving counseling, but the probability of losing a home to foreclosure drops after counseling, suggesting that counseling policies may be beneficial during housing crises.     

Loan delinquency in community lending organizations: Case studies of neighborworks organizations

Abstract

This article reports on qualitative data gathered through interviews conducted in 1996 with key leadership and staff from 13 community lending organizations. Loan servicing and collection procedures within the organizations were examined. Findings suggest that several organizational factors of nonprofit lenders are related to their loan delinquency rates: social networks, business culture, funding sources, composition of the board and loan committees, staff structure, loan intake, and collection tools.

The study also finds that the nonprofit sector's institutional environment and its partnership with the private sector in a mutually beneficial process influence the loan delinquency rate. More specifically, active participation of local bankers in NeighborWorks¹ loan committees, diverse funding sources (from both the public and private sectors), and a diffusion of business practices through dense social networks are related to NeighborWorks’ loan servicing and collection policy and procedures. These factors in turn influence NeighborWorks’ rehabilitation loan delinquency rates.     

Bankruptcy During Foreclosure: Home Preservation Through Chapters 7 and 13

Filing for bankruptcy is the primary legal mechanism by which homeowners in foreclosure can exert control over ownership of their home, yet little is known about the interplay among bankruptcy types, mortgage servicers, state foreclosure laws, and home foreclosure auctions. We analyze 4,280 lower-income homeowners in the United States who were more than 90 days late paying their 30-year fixed-rate mortgages. Two dozen organizations serviced these mortgages and initiated foreclosure between 2003 and 2012. We identify wide variation between mortgage servicers in their likelihood of bringing a property to auction. We also show that when homeowners in foreclosure filed for bankruptcy, foreclosure auctions were 70% less likely. Chapters 7 and 13 filings both reduce the hazard of auction, but the effect is 5 times greater for Chapter 13, which contains enhanced tools to preserve homeownership. Bankruptcy's effects are strongest in states that permit power-of-sale foreclosure or withdraw homeowners' right-of-redemption at the time of auction.     

The Influence of Homebuyer Education on Default and Foreclosure Risk: A Natural Experiment

The recent housing crisis has generated debate over the benefits and risks of policies and programs promoting homeownership for low and moderate income households. One important facet of this conversation is whether prepurchase homebuyer education (HBE) is effective in reducing default or foreclosure risk. Studies to date have primarily focused on default risk and have faced challenges in accounting for borrower selection into HBE. This study analyzes the outcomes of a natural experiment in the provision of a classroom‐based HBE program during the start‐up phase of a down payment assistance loan program at Tennessee's state housing finance agency in 2002. A competing risks analysis of monthly payment data from 2002 to 2009 for 732 mortgages indicates that, after controlling for borrower, mortgage, and economic factors, HBE did not reduce default risk, but was associated with 42 percent lower odds of foreclosure. Among borrowers who defaulted, HBE was associated with an increased probability of curing a first default and of avoiding foreclosure post‐default. Policymakers should consider the timing and intensity of HBE programs needed to influence default risk and how HBE may promote sustainable homeownership by influencing borrowers’ help‐seeking behavior and strategies for resolving defaults.     

Originating lender localness and mortgage sustainability: an evaluation of delinquency and foreclosure in Indiana's mortgage revenue bond program

Originating lenders play a vital role in selecting and preparing borrowers for homeownership, directly and through partnerships with community entities. While previous research demonstrates the importance of originating lenders for mortgage access to low- and moderate-income borrowers, this analysis evaluates the influence of the originating lender, and in particular the localness of the lender, on mortgage sustainability (reduced delinquency and foreclosure). Employing data on more than 5,000 low- and moderate-income borrowers participating in Indiana's Mortgage Revenue Bond (MRB) program from 2004–2006, this analysis finds that the localness of the originating lender is significantly predictive of mortgage sustainability. After controlling for borrower, mortgage, and market characteristics, an increase in the localness of the lender is associated with a decrease in the probability of delinquency and foreclosure, particularly for higher risk (lower credit score) borrowers participating in the MRB program.     

Segregation and the Geography of Creditworthiness: Racial Inequality in a Recovered Mortgage Market

The subprime boom and subsequent foreclosure crisis highlighted risk associated with pursuit of the American Dream of homeownership. People of color and those living in segregated areas were particularly harmed by the dramatic rise and fall of the housing market. Almost a decade after the economy’s collapse, questions remain about racial and spatial disparities in access to mortgage credit. I leverage Home Mortgage Disclosure Act data to explore mortgage application outcomes in 2014. Well into the economy’s recovery, minority borrowers remained at a disadvantage in the mortgage approval process. Whereas 71% of White applicants were approved for home loans, approval rates were lower for Asians (68%), Latinos (63%), and Blacks (54%). Black and Latino borrowers were also significantly more likely to receive higher cost loans than Whites, a practice that has accelerated since the foreclosure crisis. Results suggest that segregation exacerbated racial disparities as lenders funneled expensive credit into isolated minority communities. Furthermore, the differences between White and minority outcomes were largest in census tracts where subprime lending was common in 2006 and foreclosures accumulated during the Great Recession. Together, these findings indicate how spatially organized markets have racialized consequences in a highly segregated society.     

To pay or not to pay: A model of international defaults

Most lenders in international financial markets accede to reschedule overdue payments when sovereign borrowers fail to meet repayment requirements rather than foreclose and force a default. This practice provides borrowers with strong incentives to avoid prompt payment and to sak rescheduling instead. Because lenders cannot distinguish between borrowers who are unable, and those who are merely unwilling, to repay the loan, they will agree to reschedule loans of borrowers who would choose to pay rather than face outright default. This paper augments the traditional lender-borrower model by explicitly considering rescheduling, in addition to default and repayment, and places it in a game theoretic context. It develops a theory of unwillingness to pay, as opposed to inability to pay, and derives strategies by which lenders can at least partially protect themselves against rescheduling requests by borrowers unwilling, but not unable, to fulfill their obligation.     

Indebted life and money culture: payday lending in the United Kingdom

Critical social scientific research holds that credit–debt is a principal economic and governing relation in contemporary economy and society, but largely neglects money’s role in indebted life. Drawing on qualitative research in the payday loan market in the United Kingdom, the paper shows that borrowers typically relate to loans in monetary rather than financial terms and incorporate them into practices of payment, spending and online banking. To analyse how indebted life is variously experienced and enacted through money, the concept of money culture is developed to refer to money’s culture, money’s meanings and money’s affects. Borrowers enter into and negotiate payday loans through a digitally mediated money culture that both mobilizes and runs counter to money’s powerful fictions as circulating universal equivalent and calculative means of account.     

Comment on Kerry D. Vandell's “FHA restructuring proposals: Alternatives and implications”

Abstract

New Orleans, a highly segregated city with low homeownership, experienced a tremendous number of housing foreclosures between 1985 and 1990. This study highlights the process and impact of foreclosure in the urban housing market, which contributes to an understanding of their impact on the spatial structure of the city. Two aspects of foreclosure are examined: the differential impacts of foreclosure on low‐income and African‐American householders and changes in socioeconomic conditions (neighborhood change and the spatial structure of the city) resulting from foreclosure.

Conventional wisdom holds that urban neighborhood transformation is driven largely by white flight. The data presented in this article suggest a counterhypoth‐esis. Middle‐income professional whites employed in businesses impacted by recession who had recently bought housing with high loan‐to‐value ratios were forced to sell or have their houses foreclosed upon. The depressed market, in turn, made such housing affordable to middle‐class blacks interested in homeownership. Thus, black economic opportunity, rather than white flight, dramatically transformed the racial composition of many New Orleans East neighborhoods.     

A study on loan approval and non‐performing asset—Segment identification

Nonperforming assets (NPAs) are a huge challenge infront of the Indian economy. Accumulating NPA is forming a burden and obstacle for economic growth. Financial institutions are struggling with nonperforming loans, and their efficiency is getting tremendously impacted. The aims of this study are to find out the critical factors for granting mortgage loan and to develop a formula that can help financial institutions in identifying and differentiating a possible loan defaulter from a non‐defaulter. The formula developed and the identification of defaulters could help in reducing NPA of financial institutions. Managers and loan approvers can use this model to grant loans to verified borrowers and can also keep an eye on their existing customers.     

Discrimination in urban credit markets: What we don't know and why we don't know it

Abstract

Research on discrimination in housing credit has focused primarily on the outcomes of a complex process in which many parties play a role. The lender— or prospective lender—is only one party in the process that results in decisions by individuals and households to buy homes and finance their purchases. To focus solely on lenders would make it difficult to measure the nature and extent of discrimination and its effects on housing outcomes.

After discussing limitations of housing credit discrimination research, the author suggests two relatively underexplored areas: studying housing search behavior and auditing lenders to assess their treatment of prospective borrowers before the stage at which written loan applications are submitted. Both suggested avenues of research might better address three public policy questions for which our knowledge is incomplete: Is there discrimination? Where does it occur in the home‐buying process? What are the effects of discrimination on household behavior?     

Policy incentives and the extension of mortgage credit: Increasing market discipline for subprime lending

The lax underwriting in non‐prime mortgage markets is widely perceived as one cause of the recent difficulties in the housing market. Policymakers are currently considering moves such as enforcing more careful underwriting to provide additional discipline to mortgage markets. This research explores the possibility of another approach to supplement or replace some of these efforts, namely the use of policy to create incentives for Fannie Mae and Freddie Mac (together, the GSEs) to help “check” behavior in non‐prime markets. The hypothesis is that the GSE Act affordable housing goals have increased GSE focus on targeted loan purchases, which in turn has led prime market lenders to compete more aggressively for borrowers on the margin between prime and subprime credit quality. As a consequence, these marginal borrowers will be more inclined to take prime mortgages rather than higher‐cost subprime loans. We test this hypothesis and find empirical support for it. We observe a negative relationship between the growth in GSE market share and the growth in subprime market share over time, and find that the impact of the GSEs on subprime lending tends to be stronger in high‐minority neighborhoods, where subprime lending has been concentrated and growing the fastest. Simulations show that a 10 percent increase in GSE market share (for example, from 20 to 22 percent) can cause 45,000 borrowers using prime instead of subprime loans a cost savings of about $1.7 billion. These results suggest that the GSEs, regardless of their postconservatorship form, should continue to devote attention to serving underserved populations and suggest that significant welfare benefits will accrue. © 2009 by the Association for Public Policy Analysis and Management.     

Can Local Ordinances Prevent Neighborhood Destabilization?

This article assesses the ability of local housing ordinances to prevent neighborhood destabilization, specifically that arising as a consequence of the most recent housing crisis. We evaluate the degree to which vacancy registrations and point-of-sale inspection requirements influenced housing market outcomes during the housing crisis. With comprehensive real property data from Cuyahoga County, Ohio, we measure outcomes that characterize housing market distress including foreclosures, sales below the tax-assessed value, bulk sales, flipping, and property tax delinquency. We evaluate outcomes across properties in regulated and unregulated municipalities using matching procedures on linked data containing property, neighborhood, loan, and transaction characteristics. We find evidence that vacancy registrations substantially reduce foreclosures. In contrast, we find little evidence that point-of-sale inspections reduce undesirable transactions. Rather, properties in cities with inspection requirements displayed higher levels of foreclosure and tax delinquency relative to the control group during the study period.     

次贷危机与我国金融安全

随着美国次贷危机的蔓延,资产证券化的风险对金融安全的影响不容忽视。结合对美国次贷危机诱因及目前资产证券化风险的分析,提出防范风险的核心是建立一套与我国金融安全相适应的一系列机制。     

Evaluating the Concept of Location Affordability: Recent Data on the Relationship Between Transportation,Housing, and Urban Form

The concept of location affordability holds that housing affordability should be augmented to include transportation cost as a related and substantial household cost burden. The recent United States foreclosure crisis of 2006–2008 offers an opportunity to evaluate location affordability as a concept for policy and practice by investigating the relationship between transportation cost burdens and negative housing outcomes. This article contributes to the growing literature on location affordability and the recent crisis with an analysis of default and foreclosure data for 70 metropolitan areas. The analysis includes transportation and housing cost burdens and demographic data, as well as multidimensional measures of urban form. High rates of automobility are associated with increased foreclosure. The urban form variables yield mixed results, suggesting the relationship between urban sprawl and affordability is complex. However, across a range of specifications, high levels of development intensity are associated with increased foreclosure rates. The results have implications for both the housing and transportation sectors and lend support for the notion of location affordability.