Estimating the Effects of Foreclosure Counseling for Troubled Borrowers

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