Panel Paper: Mortgage Moratoria: Buying Time or Delaying the Inevitable?

Thursday, November 8, 2012 : 3:00 PM
Salon D (Radisson Plaza Lord Baltimore Hotel)

*Names in bold indicate Presenter

Carly Urban, Montana State University and J. Michael Collins, University of Wisconsin

With courts backlogged by record numbers of foreclosure filings, policymakers are increasingly interested in finding solutions to the ongoing housing crisis. One potential mechanism for curbing foreclosure filings and facilitating conversations between borrowers and lenders, while also helping courts catch up on their backlogged caseloads, is moratoria on foreclosures. In the past, policymakers have enacted moratoria during periods of dire need, including the Great Depression and the aftermaths of Hurricanes Katrina and Rita. In recent years, moratoria of varying durations (between one month and five years) have been proposed at the local, state, and federal levels.

Before suggesting that policymakers implement foreclosure moratoria, this paper takes a step back and examines what a foreclosure moratorium does. The first part of the paper examines the lender's incentives associated with the policy change, where we ask if conditional on delinquency, lenders speed up the sending of the initial foreclosure decision. Lenders may be particularly interested in doing so if they think that the moratorium could be extended for an uncertain period of time. We document the bunching of foreclosure filings just before the start of the moratorium period, as well as a bunching of filings just after the moratorium concludes. Second, we determine (1) if there is less delay in the time to the foreclosure decision in the treatment areas, (2) if the added time gives delinquent loans an increased probability of obtaining a formal renegotiation of mortgage contracts, and (3) if conditional on receiving a modification, the terms are more generous than they would have been absent the policy.

To test these hypotheses empirically, we examine two moratoria programs: one statewide program in Florida in 2008, and another in the City of Philadelphia also in 2008. Using data from the Corporate Trust Services (CTS) database, which provides monthly information on all loans where Wells Fargo is the trustee, we obtain the current delinquency status of the loan, whether or not it received a modification, and when the initial filing was sent, along with many other variables. For Philadelphia, we implement a difference-in-differences specification where we compare modifications within the city of Philadelphia, where borrowers were exposed to the moratorium, to those in counties just outside the city limits, where we hold MSA constant. In Florida, we examine the same questions using a regression discontinuity design, where we compare loans in Northern Florida to those just over the border in Georgia and Alabama, again holding MSA constant in order to control for local housing market attributes. This natural experiment is unique to the mortgage literature, as there is no selection into a moratorium policy.