Estimating the Effects of Foreclosure Counseling for Troubled Borrowers

42 Pages Posted: 20 Jul 2010

Multiple version iconThere are 2 versions of this paper

Date Written: July 19, 2010

Abstract

Starting in 2008, the number of homeowners losing their homes to foreclosure began increasing dramatically. Given that troubled borrowers may not fully understand their options for modifying their mortgage, lenders and policymakers have reacted to rising foreclosure filings by increasing the use of third-party default counseling programs. However, the existing literature on mortgage default counseling provides little convincing evidence on the effectiveness of counseling on borrower outcomes. This study employs multiple identification strategies to assess the impacts of counseling on receipt of loan modifications and keeping one’s home. We find evidence of negative selection into counseling; however, once this negative selection is controlled for, counseling is consistently found to increase the probability that borrowers will receive a modification. We also find some evidence that counseling reduces the probability that a borrower will lose his or her home to foreclosure. Moreover, among borrowers who received a loan modification, those who were counseled were less likely to subsequently default. Lastly, we consistently find that when a homeowner receives counseling is an important determinant of his or her final outcome: those who receive counseling when current or in the early stages of default are much more likely to receive a modification or keep their homes than those who receive counseling when seriously delinquent.

Keywords: counseling, foreclosure, mortgage default

JEL Classification: G21, R2

Suggested Citation

Collins, J. Michael and Schmeiser, Maximilian D., Estimating the Effects of Foreclosure Counseling for Troubled Borrowers (July 19, 2010). Available at SSRN: https://ssrn.com/abstract=1645339 or http://dx.doi.org/10.2139/ssrn.1645339

J. Michael Collins (Contact Author)

Follette School of Public Affairs ( email )

1180 Observatory Drive
Madison, WI 53706-1393
United States

Maximilian D. Schmeiser

Amazon Lending ( email )

Seattle, WA 98144
United States

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