Servicer and Spatial Heterogeneity of Loss Mitigation Practices in Soft Housing Markets

Although loan modifications are being widely used as a way to stabilize housing markets by preventing avoidable foreclosures, not much is known about the ways in which specific servicer-related factors affect the likelihood of modifications. Using a large sample of nonprime loans, this study examines recent loan modification practices adopted by different servicers in two types of soft markets, in neighborhoods differently affected by the foreclosure crisis, and among borrowers in different racial and ethnic groups. The results demonstrate striking variations in the incidence of loan modifications by servicers and significant differences between the servicers more likely to modify troubled loans and those who are less likely to do so. Loan modifications are less frequent where they are needed the most: among savable borrowers in the neighborhoods hardest hit by the crisis. This considerable variation in modification practices across servicers and neighborhoods likely reflects both structural obstacles to modifications and the absence of a uniform approach to loss mitigation.