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Who receives a mortgage modification? Race and income differentials in loan workouts

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  • J. Michael Collins
  • Carolina Reid
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    Abstract

    Loan modifications offer one strategy to prevent mortgage foreclosures by lowering interest rates, extending loan terms and/or reducing principal balance owed. Yet we know very little about who receives loan modifications and/or the terms of the modification. This paper uses data from a sample of subprime loans made in 2005 to examine the incidence of loan modifications among borrowers in California, Oregon and Washington. The results suggest although loan modifications remain a rarely used option among the servicers in these data, there is 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. We also find that modifications reduce the likelihood of subsequent default, particularly for minority borrowers.

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    File URL: http://www.frbsf.org/publications/community/wpapers/2010/who-receives-mortgage-modification.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of San Francisco in its series Community Development Investment Center Working Paper with number 2010-07.

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    Date of creation: 2010
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    Handle: RePEc:fip:fedfcw:2010-07

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    Keywords: Mortgage loans;

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    1. Manuel Adelino & Kristopher Gerardi & Paul S. Willen, 2009. "Why don't lenders renegotiate more home mortgages?: redefaults, self-cures, and securitization," Public Policy Discussion Paper, Federal Reserve Bank of Boston 09-4, Federal Reserve Bank of Boston.
    2. Larry Cordell & Karen Dynan & Andreas Lehnert & Nellie Liang & Eileen Mauskopf, 2009. "Designing loan modifications to address the mortgage crisis and the making home affordable program," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2009-43, Board of Governors of the Federal Reserve System (U.S.).
    3. Chan, Sewin & Gedal, Michael & Been, Vicki & Haughwout, Andrew, 2011. "The role of neighborhood characteristics in mortgage default risk: evidence from New York City," MPRA Paper 33941, University Library of Munich, Germany.
    4. Ambrose, Brent W & Capone, Charles A, Jr, 1996. "Cost-Benefit Analysis of Single-Family Foreclosure Alternatives," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 13(2), pages 105-20, September.
    5. Joseph Nichols & Anthony Pennington-Cross & Anthony Yezer, 2004. "Borrower Self-Selection, Underwriting Costs, and Subprime Mortgage Credit Supply," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 30(2), pages 197-219, November.
    6. Mark Doms & Fred Furlong & John Krainer, 2007. "Subprime mortgage delinquency rates," Working Paper Series, Federal Reserve Bank of San Francisco 2007-33, Federal Reserve Bank of San Francisco.
    7. Andrew Haughwout & Ebiere Okah & Joseph Tracy, 2009. "Second chances: subprime mortgage modification and re-default," Staff Reports, Federal Reserve Bank of New York 417, Federal Reserve Bank of New York.
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