One of the critical questions emerging out of the foreclosure crisis is how servicing practices can help to prevent foreclosure among delinquent borrowers.   It is clear that sustainable homeownership is not just about getting families into homeownership, but also providing adequate levels of support post-purchase.  Loan servicers, who are at the front lines of the loan renegotiation process, play a key role in determining whether or not a delinquent loan ends in default or cure. However, not much is known about the ways in which specific servicer-related factors affect the likelihood of a delinquent loan being cured.  What types of modifications and servicing practices are the most effective in preventing foreclosure for low-income and minority borrowers?

In this paper, we investigate whether servicing practices improve loan cure rates among delinquent borrowers, especially lower-income and minority borrowers, as well as which practices are the most effective at preventing foreclosure.  Using a national dataset of loans in private label securities merged with origination data on the Home Mortgage Disclosure Act, we first examine the relationship between specific servicing practices (e.g. extending a second modification, reaching borrowers earlier in the delinquency process, and the type and depth of relief) and loan cure rates.  We then take advantage of a shift in state policy to isolate the importance of these practices for homeownership sustainability.  Specifically, we use the California Attorney General Mortgage Settlement as a way to compare servicer practices and loan cure rates for delinquent borrowers.   The California settlement only covered 3 servicers, and had clearer start/end dates and more specific servicer guidelines than the federal settlement.  We can therefore use the California case to compare loan outcomes with servicers subject to and not subject to the settlement, as well as before and after the policy, for both minorities and non-minorities.

Initial findings confirm earlier studies that have shown significant servicer heterogeneity in the propensity to modify a loan (even after controlling for borrower, loan, and housing market characteristics), as well as the terms of the modification.  Importantly, we find that servicing practices (including rate and balance changes, time to modification, and willingness to undertake a second modification) are tied directly to different cure rates (but not foreclosure sale rates) for low-income and minority borrowers.   This suggests that servicing practices can greatly influence homeownership sustainability for historically disadvantaged groups, a critical public policy concern given the widening racial wealth gap.  In addition, the findings in this paper can help to inform contemporary policy debates on how to develop national servicing standards that can promote effective and consistent servicing practices and thereby ensure better loan outcomes for both borrowers and investors.