hn Clapp
Vol. 4 Issue 9
January 2011
John Clapp, Monday 03 January 2011 - 00:00:00
Although many researchers have concluded that delinquency and foreclosure rates are disproportionately high among minority borrowers, do racial or ethnic disparities exist in terms of who receives a loan modification? According to a newly published report from researchers at the Federal Reserve Bank of San Francisco, only very narrow differences are discernable, and they may run counter to popular belief.
In a report titled "Who Receives a Mortgage Modification? Race and Income Differentials in Loan Workouts," authors J. Michael Collins, an assistant professor at the University of Wisconsin-Madison's department of consumer science, and Caroline Reid, a manager at the San Francisco Fed's research group, found that black, Hispanic and Asian American borrowers are marginally more likely to receive a modification and that the modifications have slightly larger interest-rate reductions than those for similarly situated white borrowers.
Collins and Reid's study focused on subprime loans originated in 2005 in three primarily nonjudicial foreclosure states: Washington, Oregon and California. The researchers matched loan-level Home Mortgage Disclosure Act data, which contain information on borrower race and ethnicity, with loan information from Corporate Trust Services (CTS) of Wells Fargo, a large trustee covering 94 servicers. Of the borrowers whose loans were at least 60 days delinquent, 11% of black borrowers, 9% of Hispanic borrowers and 6% of Asian American borrowers received a modification. By comparison, 5% of white borrowers' loans were modified.
"This provides preliminary evidence that minorities are no less likely to receive a loan modification than other borrowers," the report says of the figures, which control for delinquency status but not necessarily other variables. Even once the other variables were considered, Collins and Reid found no significant racial or ethnic disparities, adding, "In fact, blacks/African Americans are slightly more likely to receive a loan modification than whites."
The authors add an important caveat to their conclusions: Their research contains data on permanent modifications only, failing to factor in borrowers who applied for modifications but were rejected. "If black or Hispanic borrowers applied for a loan modification at higher rates than white borrowers, and were either denied a permanent modification or were thwarted by the lengthy and confusing application process, racial and ethnic disparities in the loan modification process could still exist," the authors write.
The researchers observed several noteworthy patterns in the way servicers prioritize modifications. For example, borrowers whose original loans were "high cost" are more likely than other borrowers to receive modifications. Meanwhile, servicers' loan modification decisions appear to ignore local economic factors that may contribute to foreclosure rates, leading the authors to comment that "neither the current house price index nor the local unemployment rate has any significant effect on the likelihood of receiving a loan modification." This trend persists despite research that indicates declining home values are strong predictors of default, Collins and Reid explain.
Although minority borrowers are generally at a higher risk of foreclosure than white borrowers prior to modification, the risk level evens out after modification, the researchers add, calling modifications "an effective way of preventing foreclosures for this population." Furthermore, Collins and Reid found that minority borrowers received slightly more generous terms post-modification. Black borrowers - whose interest rates were 11 basis points higher, on average, than white borrowers' rates prior to a loan modification - pay a slightly lower rate than white borrowers following modification. Hispanic and Asian American borrowers also receive slightly deeper rate reductions, the authors write, adding that the differences are not statistically significant.
Collins and Reid say their research should encourage future studies on how and why servicers' modification efforts have avoided the racial disparities that have historically plagued loan origination.
"Are there lessons from the loan modification process that could help us to design more sustainable paths to homeownership going forward?" the authors ask, noting that housing counselors have served an important role as trusted third parties in many modification cases, helping borrowers to understand the process and terms involved.
Collins and Reid further say that while their conclusions appear to reflect positively upon the loan modification process, "the scale of loan modification is still facing well short of impending foreclosures." The authors also caution that servicers' unwillingness to reduce principal balances will limit the effect of loan modification campaigns.
(Please address all comments regarding this article to John Clapp, editor of Servicing Management, at clappj@sm-online.com.)
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