Barriers to Foreclosure Prevention During the Financial Crisis

Patricia A. McCoy

Boston College Law School

November 16, 2013

55 Arizona Law Review 723 (2013)

The number of modifications to distressed residential loans has been subpar to date compared to the number of foreclosures. This raises concerns about the presence of artificial barriers to loan modifications in situations where foreclosure should be avoidable. Numerous theories have been advanced for the relatively low level of modifications, including restrictions on loan modifications in private-label servicing agreements, threats of lawsuits by private-label investors, servicer compensation arrangements, the high cost of loss mitigation, accounting rules, junior liens, and tax considerations. This Article concludes that servicer compensation coupled with the costly nature of loan workouts, accounting standards and junior liens form the biggest impediments to an efficient level of loan modifications. These factors also distort the mix of loan modifications that are made toward types of modifications with higher redefault rates. Other explanations, such as servicing agreement restrictions, tax consequences, and the threat of lawsuits, either are not at play or are of second order importance.

Number of Pages in PDF File: 51

Keywords: loan modification, loss mitigation, foreclosure prevention, foreclosure, delinquent loans

JEL Classification: D21, D62, G21, G28, K11, K20, R31, R38

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Date posted: April 22, 2013 ; Last revised: July 8, 2016

Suggested Citation

McCoy, Patricia A., Barriers to Foreclosure Prevention During the Financial Crisis (November 16, 2013). 55 Arizona Law Review 723 (2013). Available at SSRN: https://ssrn.com/abstract=2254662

Contact Information

Patricia Ann McCoy (Contact Author)
Boston College Law School ( email )
885 Centre Street
Newton, MA 02459-1163
United States

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