Who Receives a Mortgage Modification? Race and Income Differentials in Loan Workouts

WCPC Seminar Series on Poverty and Policy: Winter 2011

Presented by J. Michael Collins
Assistant Professor of Consumer Science
University of Wisconsin, Madison
Monday, January 24, 12:30 - 1:30, questions /discussion until 2:00 p.m.
Parrington Hall Forum, 309
University of Washington


Michael Collins is faculty director of the Center for Financial Security at the University of Wisconsin, Madison. He is a faculty affiliate of the Wisconsin Cooperative Extension, the Institute for Research on Poverty, and the La Follette School of Public Affairs. Collins studies consumer decision-making in the financial marketplace, including the role of public policy in influencing credit, savings and investment choices. His work includes the study of financial capability with a focus on low-income families. He directs the Social Security Administration Financial Literacy Research Consortium site at Wisconsin, a 5 year multi-disciplinary project focused on financial literacy for vulnerable populations. He is also working on projects related to mortgage foreclosure supported by the John D and Catherine T. MacArthur foundation, as well as work on financial counseling and coaching supported by the Annie E. Casey foundation. Collins brings nearly a decade of applied experience to his research. He founded PolicyLab Consulting Group, a research consulting firm working with national foundations and government agencies, and co-founded MortgageKeeper Referral Services, an online database for mortgage servicers and counselors. He also worked for NeighborWorks America (Neighborhood Reinvestment Corporation) and the Millennial Housing Commission. He holds a Masters from the John F. Kennedy School of Government, a PhD from Cornell University, and a BS from Miami University (OH).


Loan modifications offer one strategy to prevent mortgage foreclosures by lowering interest rates, extending loan terms and/or reducing principal balance owed. Yet modifications are largely at the discretion of loan servicers and not as systematically transparent as loan application approvals and denials. Who is offered a modification and what form of modification could result in disparate impacts for low-income and minority communities as some households are able to access modifications and others are not. This paper uses data on 105,769 non-agency securitized subprime loans made in 2005 to examine the incidence of defaults and modifications of loans managed by one large trustee of securitized loans covering more than 50 loan servicers in California, Oregon and Washington. Data from Home Mortgage Disclosure Act (HMDA) data is used to approximate borrower characteristics. The results suggest although loan modifications remain a rarely used option among the servicers in these data, there is no evidence of borrowers minority borrowers less likely to receive a modification or less aggressive modifications. These borrowers are more likely to be delinquent, but controlling for delinquencies we find no evidence of disparate impact. In fact we find preliminary performance of loans post-modification is positive, particularly for minority borrowers. Generally modifications involve modest interest rate reductions and increasing loan balances.


See the slides from this presentation here.