Foreclosure's Wake: The Credit Experiences of Individuals Following Foreclosure

While a substantial literature has examined the causes of mortgage foreclosure, there has been relatively little work on the consequences of foreclosure for the borrowers themselves. Using a large sample of anonymous credit bureau records, observed quarterly from 1999 through 2010, we examine the credit experiences of 330,000 borrowers before and after a foreclosure start. Our analysis documents the substantial declines in credit scores that accompany a foreclosure start and examines the length of time it takes individuals to return their credit scores to predelinquency levels. The results suggest that, particularly for prime borrowers, credit score recovery comes slowly, if at all. The lack of recovery appears to be driven by persistently higher delinquency rates on consumer credit (such as auto and credit card loans) in the years that follow their foreclosure start. Our results also indicate that the experiences of individuals whose mortgages entered foreclosure from 2007 to 2009 have followed a similar path to borrowers foreclosed earlier in the decade, though their postforeclosure‐start delinquency rates have been higher and, consequently, credit score recovery appears to be taking longer.     

Modeling the Conditional Probability of Foreclosure in the Context of Single-Family Mortgage Default Resolutions

Both empirical and pricing-simulation models of mortgage default focus on foreclosure in a one-step decision framework. Such models are misspecified to the extent that mortgage default and foreclosure are two separate decisions or events, where foreclosure is but one outcome of a default episode. This study examines the dynamics of mortgage borrower default episodes using a large sample of FHA-insured single-family mortgages. We estimate the influence of borrower characteristics, mortgage terms, and economic conditions on probabilities of various resolutions, highlighting under what conditions foreclosure is more likely to result from mortgage default.     

The Cost of Foreclosure Delay

We measure the cost of foreclosure delay by estimating time‐related foreclosure costs using a large national sample of residential mortgages before, during, and after the recent U.S. housing crisis. The large volume of foreclosures, coupled with an unprecedented series of government interventions in mortgage servicing practices, significantly extended foreclosure timelines during and after the crisis.  Costs were especially pronounced in judicial review states, which saw average foreclosure costs go up 15 percentage points, 24 percentage points in the highest cost state.  Cost increases of this magnitude are likely to have consequences for servicing practices and mortgage credit availability.     

Lender Forbearance: Evidence from Mortgage Delinquency Patterns

The length of time that residential mortgages remain in delinquency prior to foreclosure is examined using an Accelerated Failure Time (AFT) model and a database of 207 foreclosed conventional and Veteran's Administration (VA) mortgages. The results suggest that the primary factors influencing the timing of the lender's foreclosure decision are the borrower's equity position and the erosion of that position with continuing delinquency. Borrower bankruptcy and VA guarantees also lengthen the delinquency period. Delinquency periods for fixed rate mortgages (FRM) decrease when the market interest rate increases.     

Home Ownership,Household Leverage and Hyperbolic Discounting

I examine tenure and mortgage choice in an equilibrium model in which households make decisions as if they discount hyperbolically rather than exponentially. Overall, hyperbolic discounting does not seem to explain the high rates of home ownership or portfolio concentration in housing in the data. I then study the choice between mortgages that require a substantial down payment and mortgages that require no down payment. Allowing households access to no‐down‐payment mortgages exacerbates rather than mitigates the undersaving of hyperbolic discounters. However, even when households discount hyperbolically, welfare is higher when households have access to no‐down‐payment mortgages.     

The Subprime Virus

We examine the correlation between prime mortgage default risk and the introduction of subprime mortgages in a local area. We motivate our analysis with a model of a default contagion effect that spreads the effect of a mortgage foreclosure from one property to surrounding properties. Through numerical analysis, we demonstrate the effect of subprime mortgage originations to the risk of prime mortgages. Finally, we offer empirical support for our model by examining the spatial variation in MSA prime mortgage default rates and the level of subprime mortgage activity.     

Potential Beneficiaries from Reverse Mortgage Products for Elderly Homeowners: An Analysis of American Housing Survey Data

A variety of reverse mortgage loan programs have been available to elderly households for over a decade. The number of unrestricted reverse mortgage loans issued by the private sector has been quite small. About 12,000 loans have been issued through mid-1992. Some researchers take this to mean that the size of the potential market for reverse mortgages is also quite small. Other researchers claim that current low levels of activity reflect supply and demand problems, but that the potential market is in fact quite large. This paper uses American Housing Survey (AHS) data to estimate the potential size of the market for unrestricted reverse mortgages. The 1989 national AHS shows that there are over twelve million elderly homeowners (age 62 and over) who own their homes free and clear. Depending on their income, age and the level of home equity, the group of households most likely to benefit from reverse annuity mortgages is considerably smaller. As one approach to defining a lower bound of the estimate of potential beneficiaries from reverse mortgages, we count the number of homeowners in a prime group consisting of the older elderly, aged 70 or above, with an annual income of $30,000 or less, with home equity between $100,000 and $200,000, who have lived in their homes for over ten years. We estimate that there are about 800,000 elderly households in this prime group. For such households, reverse mortgage payments could represent a substantial percentage increase in income; other definitions of target groups can also be explored using the tables provided. The paper uses the 1985 through 1988 AHS Standard Metropolitan Statistical Area (SMSA) surveys to identify areas that have a large number of elderly homeowners in the prime target group, and in which these homeowners represent a large fraction of the elderly homeowner population. These locations are likely targets for introduction of reverse mortgage products because any campaign can be targeted towards a high concentration of likely eligible beneficiaries.     

Are Investors the Bad Guys? Tenure and Neighborhood Stability in Chelsea,Massachusetts

In this article, we examine the role of investors and occupant‐owners in an urban context during the recent housing crisis. We focus on Chelsea, Massachusetts, because it is a dense city, dominated by multifamily housing structures with high rates of foreclosure for which we have particularly good data. We distinguish between occupant‐owners and investors using local data, and we find that many investors are misclassified as occupant‐owners in the Home Mortgage Disclosure Act data. Then, employing a competing risks framework to study ownerships during the period 1998 through mid‐2010, we find that local investors, who tend to invest more in relation to purchase prices and sell more quickly, experienced approximately 1.8 times the mortgage foreclosure risk of occupant‐owners, conditional on financing. Nonlocal investors have no statistically significant difference in foreclosure risk from occupant‐owners. Nonetheless, those owners with subprime purchase mortgages (most of whom are occupant‐owners) faced the highest foreclosure risk when house prices fell.     

Reverse Mortgages and the Liquidity of Housing Wealth

Housing wealth constitutes most of the non-pension wealth of the elderly population. This study analyzes the potential of reverse mortgages to increase the income and liquid wealth of the elderly by identifying households with relatively high levels of housing equity. Because this article looks at the whole distribution of elderly households and considers debt as well as income, it finds a larger potential market for reverse mortgages than previous studies.
Calculations from the 1990 Survey of Income and Program Participation and Census population estimates show that over six million homeowners in the United States could increase their effective monthly income by at least 20% by using a reverse mortgage. Of these, more than 1.3 million have no children. Furthermore, a reverse mortgage would allow over 1.4 million poor elderly persons to raise their incomes above the poverty line.     

Choice of Mortgage Contracts: Evidence from the Survey of Consumer Finances

This study revisits the empirical question of the determinants of the choice between fixed‐ and adjustable‐rate mortgages using data from the Survey of Consumer Finances that overcome some of the data limitations in previous studies. The results from a logit model of mortgage choice indicate that pricing variables and affordability are important considerations. We also find that factors, such as mobility expectations, income volatility and attitudes toward financial risk largely influence mortgage choice, with more risk‐averse borrowers preferring fixed‐rate mortgages. For households that are less risk averse, the mortgage type choice decision is less sensitive to pricing variables and income volatility, and affordability factors are not significant. These findings provide empirical support that underscores the importance of attitudes toward risks in mortgage choice.     

The HAMP NPV Model: Development and Early Performance

The foreclosure crisis that began in 2008 triggered the need for new approaches to treat distressed mortgages. A key component of the Obama Administration's Home Affordable Modification Program (HAMP) was the development of a standardized Net Present Value (NPV) Model to identify troubled loans that were value‐enhancing candidates for payment‐reducing modifications. This article discusses the development of the HAMP NPV Model, 1 its purpose and some important constraints that dictated its structure and limitations. We describe the structure and the estimation of the model in detail. We also describe the responsiveness of the model to key characteristics, such as loan‐to‐value and credit score, as well as provide new evidence on the relationship between HAMP modification performance and key borrower and modification characteristics. The article concludes with a discussion of model limitations and the future role of systematic loan modification using NPV analysis.     

Immigrants and Mortgage Delinquency

This article studies the effect of immigrant status on mortgage delinquency. Due to their different social and economic background, immigrant households may not integrate well into the host society, and therefore are more likely to be delinquent on mortgages than otherwise identical native‐born households. We test this hypothesis by comparing the mortgage delinquency rate between immigrant and native‐born households in the 2009 PSID (Panel Study of Income Dynamics) data, in which all the immigrant households have been in the United States for more than 10 years. We find that, after controlling for observables, those relatively recent immigrants who have been in the United States for 10 to 20 years have a higher mortgage delinquency rate than native‐born, while immigrants who have resided in the United States for more than 20 years are no different from native‐borns. In addition, there is no evidence that the second generation of immigrants is more likely to be delinquent than the third‐or‐higher generations. Our results are robust to potential sample‐selection bias and functional misspecifications.     

Estimating the House Foreclosure Discount Corrected for Spatial Price Interdependence and Endogeneity of Marketing Time

Most previous empirical research estimates a greater than 20% discount associated with the sale of foreclosed properties. Under the assumption that the real estate market is somewhat efficient, such a large discount would be counterintuitive. We argue, and empirically show, that the estimated foreclosure coefficients in most of the previous research are upward biased because they do not control for variables such as the physical condition of the property and the relationship between marketing time and price. Accounting for these factors and correcting for two types of spatial price interdependence, our results show that estimates of foreclosure discount reported by previous studies are about one-third higher than the true discount caused by foreclosure per se .     

FHA Multifamily Financial Failure: A Review of Empirical Studies*

The FHA addresses the rental housing needs of low- and middle-income households through multifamily project mortgage insurance programs. These programs have been hindered, however, by substantial financial losses due to project default, assignments, and foreclosure. A review of existing empirical studies suggests that characteristics of project owners, the quality of project management, the adequacy of HUD screening, project construction, and project location all have an impact on financial viability. The results do not support claims that tenant characteristics are associated with failure. Although financial variables are closely related to failure, they are little used in the studies reviewed.     

The Impact of Interstate Foreclosure Cost Differences and the Value of Mortgages on Default Rates

Previous research on mortgage default has focused on the costs, benefits, and characteristics of the mortgagor. In such studies default rates have been taken as a measure of mortgage risk. In this paper we present a model where the position of the lender affects the default-foreclosure process. Important to the lender's decision to foreclose rather than renegotiate an existing loan are the value of mortgage and the legal costs associated with foreclosure.
The empirical evidence supports the hypothesis that both the value of the mortgage and legal foreclosure costs affect the foreclosure rate. In those states where legal foreclosure costs are high rates are significantly less than where costs are low. This suggests that previous models which include only the costs and benefits of default to the borrower are incomplete and that foreclosure rates can not be taken as a strict measure of mortgage risk. That is, low foreclosure rates may indicate that losses occur in other forms of loan negotiation rather than in expensive legal costs.     

Who benefits the most? Risk pooling in mortgage loan insurance: Evidence from the Canadian mortgage market

This article evaluates the effect of mortgage loan insurance (MLI), an essential macroprudential tool available to policy makers, on housing affordability, household leverage, and the overall welfare of the economy. A dynamic model of the housing market with heterogeneous households and competitive housing and mortgage markets is constructed and is calibrated to Canadian data. We find that relaxing the mandatory nature of MLI required for mortgages with a loan-to-value ratio of 80% or more, in favor of a counterfactual system where MLI reflects credit risks, dampens demand for housing to purchase and puts downward pressure on house prices. Some of the households with low income and low asset holdings can no longer afford a house; therefore, the aggregate homeownership rate drops. In contrast, demand for rental units increases and rents go up.     

A note on vertical market foreclosure

The judicial fear of vertical market foreclosure has been criticized severely in the academic literature. The focus of this criticism isnot that foreclosure is impossible; rather, it is that foreclosure is not a profitable business strategy. In this note, we show that this criticism is not valid under conditions of partial ownership. If effective vertical control can be achieved with partial ownership, vertical market foreclosure can be used to increase the partial owner's profits. We use theduPont (GM) litigation as a vehicle to explore this point.     

The Performance of Low-Income and Minority Mortgages

This article analyzes the performance of low-income and minority mortgages (LIMMs) from a large sample of fixed-rate conventional conforming mortgages. We find that low-income borrowers are less likely to prepay when it is optimal, whereas black and Hispanic borrowers prepay more slowly than other borrowers, regardless of the option's value. After controlling for equity, credit history and some other variables, LIMMs default slightly more frequently and have about the same loss severity as other loans. Our results suggest that, for most yield curve situations, differences in LIMM prepayment behavior have little effect on pricing.     

Loan Loss Severity and Optimal Mortgage Default

This paper tests the contingent claims model of mortgage default in its ruthless or frictionless form. The principal tests of the model are based on an unconventional source of data, namely, loan loss severities on defaulted mortgages. The frictionless model has well-defined predictions about loss severities which we test in detail. The data analyzed include a random sample of all mortgages originated during the period 1975–90 and purchased by Freddie Mac, as well as the loss severities on all mortgages purchased by Freddie Mac which defaulted during the period. The frictionless model does not do well in these tests.     

Foreclosure Discount: Definition and Dynamic Patterns

The lack of a consistent definition of foreclosure discount gives rise to discount rates that vary from nonexistent to sizeable across locations and time. We define the foreclosure discount as the discount of the real estate owned (REO) sale price relative to a normal‐sale estimated market value. With a dataset of 1.34 million REO sale transactions, across 16 CBSAs between 2000 and 2012, we find three noteworthy empirical findings. First, a high REO sale concentration in a market increases the foreclosure discount. Second, foreclosure discount is negatively related to recent house‐price appreciation. Third, the often reported high foreclosure discount for lower value properties is likely due to property condition.