Sustaining Homeownership After Delinquency: The Effectiveness of Loan Modifications by Race and Ethnicity

J. Michael Collins
University of Wisconsin-Madison

Carolina K. Reid
University of California, Berkeley

Carly Urban
Montana State University

Refereed Papers
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As mortgage foreclosures spiked beginning in 2007, federal policymakers focused on loan modifications as a primary tool for preventing foreclosure and initiated programs to increase the number and effectiveness of loan renegotiations. Yet, loan modifications are largely undertaken at the discretion of private loan servicers and are not as transparent as lender mortgage decisions. Systematic differences are possible in the types of loan modifications that borrowers receive. To be specific, borrowers of color may be receiving less favorable modification terms than comparably situated White borrowers. Because the terms of a loan modification influence the likelihood that a borrower will be able to retain his or her home, it is important to understand who gets what kind of modification and whether that modification succeeds in preventing foreclosure.

This study uses data on a national sample of approximately 42,000 privately securitized subprime loans originated between 2004 and 2006 to examine modification types and foreclosure outcomes by race and ethnicity. We find no evidence of significant differences in modification types across borrowers; indeed, we find that Black, Hispanic, and Asian borrowers receive slightly larger reductions in monthly payments than comparably situated non-Hispanic White borrowers. The results also reveal that loan modifications that entail payment reductions reduce the likelihood of redefault and foreclosure 1 year after modification. This finding is consistent across all racial and ethnic demographic