Determinants of the incidence of U.S. Mortgage Loan Modifications

- We model the outcomes of seriously delinquent mortgage loans.
- We examine the effects of the loan, borrower, property, servicer and neighborhood.
- Current LTV is one of the strongest predictors of curing or modifying a loan.
- High risk loan characteristics make it less likely that a loan will be modified.
- Servicers vary considerably in their granting of modifications.

This paper combines data on the performance of mortgage loans with detailed borrower, neighborhood, and property characteristics to examine the factors that determine the outcomes of seriously delinquent loans. We employ multinomial logit models in a hazard framework to explain how loan, borrower, property, servicer and neighborhood characteristics affect which of the following four outcomes results from a seriously delinquent loan: (1) the borrower cures the delinquency; (2) the borrower and lender agree to modify the loan; (3) the borrower suffers a liquidation (short sale, deed in lieu, foreclosure auction sale or REO); or (4) the loan remains delinquent. In particular, we focus on mortgage modification. We find that the outcomes of delinquent loans are significantly related to: current LTV, FICO scores, especially risky loan characteristics, the servicer of the loan, neighborhood housing price appreciation, and whether the borrower received foreclosure counseling.