FORECLOSURE COUNSELING

Default and Foreclosure Counseling

Default and Foreclosure Counseling

With rising levels of home mortgage foreclosure filings, policymakers are increasingly exploring how public programs and processes can be designed to prevent families from losing their homes. This paper tests the extent to which consumers may benefit from three types of state foreclosure polices: (1) judicial foreclosure proceedings, (2) rights of redemption, and (3) statewide foreclosure-prevention initiatives.

This paper also tests how lenders' voluntary efforts to promote third-party mortgage default counseling may benefit consumers, as well as whether these efforts may be more beneficial in states that have each of the three types of state policies tested. Using data on 32,000 consumers in default from one national lender during the 15-month period from January 2007 through March 2008, this paper finds weak effects of state policies in general, with the effects mixed between benefiting (including improvements in consumer-lender contact rates) and worsening loan outcomes (including foreclosure filings).

No state policy was associated with either an increase or a decrease in consumers losing their homes to foreclosure. Lenders' voluntary offers of telephone-based default counseling are associated with about a 14 percent reduction in the number of days delinquent. When offers of counseling are implemented in states with foreclosure-prevention policies or programs, consumer-lender contact rates are about 11 percent higher, rates of foreclosure filings 35 percent lower, and number of days delinquent 12 percent lower than when implemented in states without such policies.

These findings suggest that state policy efforts aimed at preventing foreclosure may be enhanced through coordination with financial institutions and counseling providers. The most relevant prior study was conducted by Ding, Quercia, and Ratcliffe (forthcoming), who examine the association between telephone counseling and the likelihood of curing a delinquency among loans made to low-income consumers. Specifically, the study examines outcomes among roughly 3,000 consumers at least 60 days delinquent, of which nearly 1,000 were notified by their lender that they would be contacted by a nonprofit counseling agency via telephone.

The counseling agency then attempted to contact the consumers to offer assistance in assessing their situation and to provide advice about the best ways to work with their lender to resolve the situation. Ding et al. find that the receipt of counseling is associated with a higher likelihood of loans curing. The study employs a Heckman-type two-stage model to account for self-selection by consumers to receive counseling and finds that the association between counseling and loan cures remains.

Cutts and Merrill (2008) also present information on telephone-based counseling services offered to consumers who were at least 60 days delinquent on their mortgages. Although the authors present information on the consumer contact rate and the cure rates for contacted consumers, they do not attempt to estimate the impact of counseling on cure rates. Another relevant study was conducted by Pence (2006), who examines the impact of the use of a judicial foreclosure process on average loan sizes.

Pence finds that mortgage loans in states with judicial court foreclosure processes are smaller than in ...