Interventions in Mortgage Default: Policies and Practices to Prevent Home Loss and Lower Costs

Freddie Mac

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Date Published 2008
Version Freddie Mac Working Paper
Primary Author Amy Crews Cutts, William A. Merrill
Other Authors
Country United States


The implosion of the subprime market in early 2007 caused by the rapid rise in mortgage defaults resulted in significant media and political attention focused on saving homeowners from foreclosure and the possible loss of their home. While the default problem in the prime segment of the market is much less severe, the issues around how to keep borrowers in their homes affect all market segments, not just subprime loans. In particular, what do we know about defaults and what causes them? Is there an ideal cost-benefit timeframe for the foreclosure process? What are the costs associated with foreclosure? Where will the next gains in default servicing come from to maximize the potential for borrowers to keep their homes? We find that a large number of borrowers never speak with servicers when they are unable to make their mortgage payments, and that the longer they wait to do so, the less likely they are to recover from their problems and keep their home. Default counseling for delinquent borrowers is a cost-effective strategy for increasing borrower contact rates, and thus for increasing the share of borrowers who are underwritten for a successful home-retention workout with lower recidivism rates once a workout is in place. We find that the foreclosure process varies widely across states and that the costs associated with foreclosure rise significantly with the length of the foreclosure timeline. Most importantly, we find that the likelihood a borrower will reinstate her loan out of foreclosure falls as the length of time in the foreclosure process increases – by our estimates, states with excessively long foreclosure timelines could increase the probability of successful reinstatement by 3 to 9 percentage points by shortening their statutory timelines to match the national median timeline. Timelines that give the borrowers too much time in the legal foreclosure process tip the balance from the threat of imminent home loss from foreclosure towards the benefit of “free” rent for the duration of the process, providing an incentive for borrowers to forego reinstatement of the loan even if they have the means to do so. By the same reasoning, some very short timeline states may find that lengthening their legal foreclosure timelines may improve cure rates out of foreclosure.

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