Isn't it about time for some good news on mortgage modifications? Here is some, in the form of a paper titled Who Receives a Mortgage Modification? Race and Income Differentials in Loan Workouts. The authors use data from the Home Mortgage Disclosure Act (HMDA) to assess borrower characteristics against the incidence of loan defaults and modifications on a group of more than 100,000 subprime loans.
The first two findings are depressing and not surprising: loan modifications are rare, and minority borrowers are more likely to be delinquent. The good news is that minorities are faring well in seeking modifications. As a descriptive matter, among those 60 or more days delinquent, 11 percent of blacks and 9 percent of Hispanics received a loan modification, compared to 5 percent of whites. In regression modeling that controlled for borrower, loan, and housing/labor market conditions, blacks were slightly more likely to get modifications, conditional on being delinquent, than other races. This effect persists even when researchers control for the fact (also good news in my mind) that borrowers who got a high-cost loan are more likely to get a loan modification. In further analysis, the authors find that blacks receive a similar interest rate reductions to borrowers of other races.
As with any empirical study, there are some limitations. The authors use data from only trustee (although several servicers) and examine loans originated in only three states--all Western and all non-judicial foreclosure. And, as the authors note, they cannot assess whether there are differences in loan modification denial rates. Put concretely, if blacks are applying at twice as high of a rate for loan modifications as whites, their analysis would not pick up this high rate of denial compared to applications. This paper ends with interesting thoughts on the racial disparities in loan origination, and why these patterns are not found in loan modifications. It asks whether there are lessons from HAMP or the loan modification process generally that could be useful in designing loan origination programs that reduce the longstanding racial disparity in that crucial financial transaction.
by Katie Porter
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