State Foreclosure Laws and Default Counseling

With rising levels of home mortgage foreclosure filings, policymakers are increasingly exploring how public programs and processes can be designed to prevent families from losing their homes.

In a recent paper with Chris Herbert and Ken Lam of Abt Associates, we explore the extent to which consumers may benefit from three types of state foreclosure polices: (1) judicial foreclosure proceedings, (2) rights of redemption, and (3) statewide foreclosure prevention initiatives. We also test how voluntary efforts of lenders to promote third party default counseling may also benefit consumers, as well as how these efforts may be more powerful in states with each state policy.

We used data on 32,000 borrowers in default from one national lender during the 15 month period of January 2007 through March 2008.

In general judicial proceedings, rights of redemption and state foreclosure interventions have little effect on the cure rate or foreclosure avoidance in the period we examined. Although we found weak effects of state policies in general, the direction was inconclusive. Loans in states with judicial proceedings may benefit consumers by allowing more opportunities for borrower-lender contact, but may also be associated with worsening loan outcomes such as foreclosure filings. No state policy was associated with either an increase or a decrease in borrowers losing their homes to foreclosure.

Lender voluntary offers of telephone-based default counseling are associated with about a 12% reduction in days delinquent. This is a promising finding suggesting promoting consumers to call a hotline might actually help consumers (we created a control group using a group of borrowers not offered counseling --so technically we can report on the offer of counseling not the actual receipt of it).

The more interesting finding is that when offers of counseling are implemented in states with foreclosure prevention policies or programs, borrower-lender contact rates are about 12% higher and rates of foreclosure filings 30% lower than when implemented in states without such policies.

The implications of these findings suggest state policy efforts at preventing foreclosure may be enhanced by coordination with financial institutions and counseling providers. So states with high foreclosure rates which offer media campaigns, refinance pools, grants and other initiatives combined with lender offers of default counseling may prove most successful.

The paper will be presented at a couple of conferences in the coming weeks, and likely improved with the comments of discussants. In the meantime a draft version is online.