Tuesday, November 29, 2011

More Mortgage Borrower Rights Delay But Do Not Decrease Foreclosures

Increasing mortgage borrowers' foreclosure protection rights neither increase renegotiations of the defaulting mortgages nor decrease the number of foreclosures. The extra consumer rights just delay the inevitable foreclosure. They are an unnecessary and useless added process and expense.

From Federal Reserve Bank Of Atlanta, Working Paper Series, "Do Borrower Rights Improve Borrower Outcomes? Evidence from the Foreclosure Process" by Kristopher Gerardi, Lauren Lambie-Hanson, and Paul S. Willen, Working Paper 2011-16, November 2011:
In other words, in the long run, a given number of defaults is expected to yield the same number of foreclosures regardless of the laws. These borrower-protection laws do not prevent foreclosure, they merely delay it.

The third metric for the effectiveness of lengthening the foreclosure timeline involves looking at the likelihood of renegotiation between borrowers and lenders. One powerful argument for increased borrower protection is that it facilitates renegotiation, both directly by allowing borrowers more time to make the case to their lender and indirectly by increasing borrower bargaining power. We find no effect of longer foreclosure timelines on the likelihood that a borrower receives a mortgage modification or, in the case of the right-to-cure law, on the difference in modification rates across states.

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