Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2010-06
Estimating the Effects of Foreclosure
Counseling for Troubled Borrowers
June 2010
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2010-06
Estimating the Effects of Foreclosure
Counseling for Troubled Borrowers
June 2010
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Estimating the Effects of Foreclosure Counseling for Troubled Borrowers
J. Michael Collins*
Assistant Professor
Department of Consumer Science
University of Wisconsin-Madison
Maximilian D. Schmeiser
Assistant Professor
Department of Consumer Science
University of Wisconsin-Madison
August 5, 2010
Abstract
Starting in 2008, the number of homeowners losing their homes to foreclosure began increasing
dramatically. Given that troubled borrowers may not fully understand their options for modifying
their mortgage, lenders and policymakers have reacted to rising foreclosure filings by increasing
the use of third-party default counseling programs. However, the existing literature on mortgage
default counseling provides little convincing evidence on the effectiveness of counseling on
borrower outcomes. This study employs multiple identification strategies to assess the impacts of
counseling on receipt of loan modifications and keeping one’s home. We find evidence of
negative selection into counseling; however, once this negative selection is controlled for,
counseling is consistently found to increase the probability that borrowers will receive a
modification. We also find some evidence that counseling reduces the probability that a borrower
will lose his or her home to foreclosure. Moreover, among borrowers who received a loan
modification, those who were counseled were less likely to subsequently default. Lastly, we
consistently find that when a homeowner receives counseling is an important determinant of his
or her final outcome: those who receive counseling when current or in the early stages of default
are much more likely to receive a modification or keep their homes than those who receive
counseling when seriously delinquent.
This research was funded by a grant from the Federal Deposit Insurance Corporation’s Center
for Financial Research. The views expressed herein are those of the authors and do not
necessarily reflect the views of the FDIC. This project was also supported by the National
Poverty Center using funds received from the U.S. Department of Health and Human Services,
Office of the Assistant Secretary for Planning and Evaluation, grant number 1 U01 AE000002-
03. The opinions and conclusions expressed herein are solely those of the authors and should not
be construed as representing the opinions or policy of any agency of the Federal government.
* Corresponding author contact information: J. Michael Collins, 1305 Linden Drive, Department of Consumer
Science University of Wisconsin-Madison, Madison, WI 53706. Email: jmcollins@wisc.edu Phone: 608-262-0369
J. Michael Collins*
Assistant Professor
Department of Consumer Science
University of Wisconsin-Madison
Maximilian D. Schmeiser
Assistant Professor
Department of Consumer Science
University of Wisconsin-Madison
August 5, 2010
Abstract
Starting in 2008, the number of homeowners losing their homes to foreclosure began increasing
dramatically. Given that troubled borrowers may not fully understand their options for modifying
their mortgage, lenders and policymakers have reacted to rising foreclosure filings by increasing
the use of third-party default counseling programs. However, the existing literature on mortgage
default counseling provides little convincing evidence on the effectiveness of counseling on
borrower outcomes. This study employs multiple identification strategies to assess the impacts of
counseling on receipt of loan modifications and keeping one’s home. We find evidence of
negative selection into counseling; however, once this negative selection is controlled for,
counseling is consistently found to increase the probability that borrowers will receive a
modification. We also find some evidence that counseling reduces the probability that a borrower
will lose his or her home to foreclosure. Moreover, among borrowers who received a loan
modification, those who were counseled were less likely to subsequently default. Lastly, we
consistently find that when a homeowner receives counseling is an important determinant of his
or her final outcome: those who receive counseling when current or in the early stages of default
are much more likely to receive a modification or keep their homes than those who receive
counseling when seriously delinquent.
This research was funded by a grant from the Federal Deposit Insurance Corporation’s Center
for Financial Research. The views expressed herein are those of the authors and do not
necessarily reflect the views of the FDIC. This project was also supported by the National
Poverty Center using funds received from the U.S. Department of Health and Human Services,
Office of the Assistant Secretary for Planning and Evaluation, grant number 1 U01 AE000002-
03. The opinions and conclusions expressed herein are solely those of the authors and should not
be construed as representing the opinions or policy of any agency of the Federal government.
* Corresponding author contact information: J. Michael Collins, 1305 Linden Drive, Department of Consumer
Science University of Wisconsin-Madison, Madison, WI 53706. Email: jmcollins@wisc.edu Phone: 608-262-0369