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

Abstract

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 they receive could result in disparate impacts for low-income and minority communities. This paper uses data on 105,769 non-agency securitized subprime loans made in 2005 to examine the incidence of defaults and modifications among loans managed by one large trustee of securitized loans covering 94 loan servicers in California, Oregon and Washington. Data from Home Mortgage Disclosure Act (HMDA) data is used to assess borrower characteristics. The results suggest although loan modifications remain a rarely used option among the servicers in these data, there is no evidence that minority borrowers are less likely to receive a modification or less aggressive modification. These borrowers are more likely to be delinquent, but controlling for delinquencies we find no evidence of disparate impact. We also find that preliminary performance of loans post-modification is positive, particularly for minority borrowers. Generally modifications involve modest interest rate reductions and increasing loan balances.

Keywords: Mortgage Default and Foreclosure, Housing Policy, Loan Modifications

JEL Classification: D1, D12, D14, I38