Loan Modifications and Foreclosure Sales during the Financial Crisis: Consequences for Health and Stress

Abstract

Loan modifications and foreclosure sales are two ways mortgage servicers can respond when homeowners fall behind on house payments. We investigate the consequences of these events for health and stress by linking longitudinal survey data with administrative mortgage performance data that identify those survey participants who experienced a foreclosure sale, a loan modification, or neither. We find that between 2008 and 2013, loan modifications and foreclosure sales were both associated with a reduction in the stress of house payments, while foreclosure sales alone were associated with a reduction in the stress of home maintenance. Beyond these property-related stressors, the changes in survey participants' self-reported sense-of-control and mental, physical, and general health are most associated with transitions in employment, income, marital status, and residential quality rather than with loan modifications or foreclosure sales. These findings run counter to prevailing research, yet they inform the debate over how to address problems that arise when homeowners become delinquent on mortgages.

Keywords:

• Home ownership
• residential mobility
• housing policy
• mortgage delinquency
• housing strain
• low to moderate income (LMI) households

Acknowledgments

Funding for this project was provided by the Ford Foundation. Census data were provided by Geolytics, Inc. We thank the journal editor, three anonymous reviewers, Ali Browning, Yutuan Gao, and other researchers at the UNC Center for Community Capital for helpful suggestions.

Disclosure

The authors have no conflict of interest to disclose.

Notes

¹ CAP homeowners correspond to “underserved populations” targeted by various government housing policies.

² At CAPS' baseline, participant loans in Self-Help's portfolio had been originated between 1999–2003; these were the only loans available from which to construct a survey panel.

³ Compared to low-income and minority homeowners nationally, CAPS contains 3% more coverage in the Midwest, 16% more coverage in the South, 13% less coverage in the Northeast, and 6% less coverage in the West.

⁴ These authors estimate a Cronbach's alpha of 0.84. In CAPS, we find a Cronbach's alpha of 0.67 for all 2008 respondents and 0.66 for our study sample.

⁵ Attrition in CAPS is higher among male and Hispanic respondents (Riley et al., 2014).

⁶ The redemption period ended well before the second set of outcome measures was collected in 2013.

⁷ All loans originated between 1999–2003. As the housing market appreciated rapidly prior to 2007, most households experienced enough equity growth prior to the market downturn to avoid negative equity.

⁸ The foreclosure process tends to be simpler and faster in non-judicial-foreclosure states. Thus, the regulatory environment may influence the relative likelihoods of foreclosure sale and loan modification.

⁹ Financially constrained households may be less likely to increase their family size. Alternatively, an increase in family size could also indicate an increase in the number of income earners.

¹⁰ On average, those participants initially located in low-income or minority census tracts experienced similar decreases in CAP property value as those initially located in non-low-income or non-minority tracts. Residents of initially low-income or minority tracts reported similar improvements in self-reported neighborhood quality.

¹¹ This result is consistent with recent work suggesting the effects of marriage dissolution are heterogeneous and can be positive or negative for different individuals (Kohn & Averett, 2014; Monden & Uunk, 2013; Stevenson & Wolfers, 2006).