Cost-Benefit of Single-Family Foreclosure Alternatives

Abstract

Over the last ten years single-family mortgage lenders have become more aware of the financial benefits of finding alternatives to foreclosure for borrowers who default on their mortgage obligations. In this paper, expected costs of foreclosure alternatives are parmeterized to solve for minimum probabilities of borrower success necessary to make pursuing them profitable for lenders. These break-even probabilities are found to be very insensitive to changes in a variety of factors, including interest-rate environments and time horizons. Simulations are performed across house-price-deflation scenarios, loan-to-value ratios, and post-default cure rates. Stochastic process are introduced through time distributions for foreclosure processing, property disposition, and house price appreciation.

JEL Classification: G21