Volume 18, Issue 2

2007

 

Michael A. Stegman, Roberto G. Quercia, Janneke Ratcliffe, Lei Ding, and Walter R. Davis

This article documents the growing importance of preventative servicing--business practices that emphasize early intervention in delinquency and default management practices that also help financially troubled borrowers avoid foreclosure. We suggest that the loan servicing side of the affordable housing delivery system may be underappreciated and undercapitalized.

We use a database of more than 28,000 affordable housing loans to test several preventative servicing-related propositions and find that after we control for loan and borrower characteristics, the likelihood that a delinquent mortgagor within this universe will ultimately default varies significantly across servicers. This suggests that loan servicing is an important factor in determining whether low- and moderate-income borrowers who fall behind in their mortgage payments will end up losing their homes through foreclosure. It also suggests a need for policy makers to incorporate preventive servicing into affordable homeownership programs.