Preventive servicing is good for businessandaffordable homeownership policy

Abstract

This article documents the growing importance of preventive servicing-business practices that emphasize early intervention in delinquency and default management practices that also help financially troubled borrowers avoid foreclosure. We suggest that the loan servicing side of the affordable housing delivery system may be underappreciated and undercapitalized.We use a database of more than 28,000 affordable housing loans to test several preventive servicing-related propositions and find that after we control for loan and borrower characteristics, the likelihood that a delinquent mortgagor within this universe will ultimately default varies significantly across servicers. This suggests that loan servicing is an important factor in determining whether low-and moderate-income borrowers who fall behind in their mortgage payments will end up losing their homes through foreclosure. It also suggests a need for policy makers to incorporate preventive servicing into affordable homeownership programs.

Originating lender localness and mortgage sustainability: an evaluation of delinquency and foreclosure in Indiana's mortgage revenue bond program

“…23 Information on changes in single family home prices over time (quarterly) for counties located within MSAs is available through the Federal Housing Finance Agency's House Price Index. Similar to Stegman et al (2007), an alternative modeling specification limits the sample to those borrowers purchasing homes within MSA counties (n ¼ 4,463) and incorporates the change in home price information.…”

“…Affordable lending strategies include affordable mortgage loans targeted to LMI borrowers with prime (or near prime) interest rates, flexible underwriting, and/or financial assistance (Quercia et al 2002). Findings on the ability of affordable loans to provide for sustainable homeownership are mixed, with some studies finding that such loans have substantially higher delinquency and/or foreclosure rates, and others finding comparable or lower delinquency and/or foreclosure rates among LMI borrowers (Ding et al 2008;Stegman et al 2007;Firestone, Van Order, and Zorn 2007;Quercia 1999;Quercia et al 2002;Avery et al 1996;Deng and Gabriel 2006;Calem and Wachter 1999;Mills and Lubuele 1994).…”

“…One of the primary weaknesses of existing analyses, and a likely contributor to the diversity of findings, is the lack of systematic consideration of institutional differences between lenders providing affordable loans (Quercia 1999;Baku and Smith 1998;Stegman et al 2007;Ergungor 2007b). There is increasing diversity in the mortgage market not only from variations in pricing and terms of mortgages, but also in the channels through which borrowers receive mortgages (the origination channel).…”

“…In an analysis of Self Help mortgages, an affordable loan program for LMI borrowers, they find that the participating lender is a significant predictor of the amount of time it takes a borrower to recover from a spell of delinquency (cure rates). While Stegman et al (2007) credit such differences to variation in servicing strategies between lenders, in all but one of the observed cases the lender servicing the mortgage was the same entity that originated the mortgage, opening the possibility that some of the observed lending institution effect on mortgage sustainability may also be due to differences in origination channel and/or strategies.…”

“…Little-known research systematically evaluates the relationship between the localness of the origination channel and mortgage delinquency and foreclosure. Recent research by Stegman et al (2007) calls attention to the relationship between lenders in general and mortgage sustainability. In an analysis of Self Help mortgages, an affordable loan program for LMI borrowers, they find that the participating lender is a significant predictor of the amount of time it takes a borrower to recover from a spell of delinquency (cure rates).…”