Who Defaults? Who Goes into Foreclosure?

Eryk Wdowiak
Sean MacDonald

Since February 2010, detailed information on every home mortgage default and foreclosure in New York State must be filed with the New York State Banking Department (NYSBD).

Pairing the NYSBD's data with data on originations from the Home Mortgage Disclosure Act (HMDA) enables us to compare borrowers who defaulted to those who did not. The NYSBD's pre-foreclosure filing data itself enables us to compare loans that progressed from default to a lis pendens filing (i.e. the first step in the foreclosure process).

Combined, the two datasets enable us to track the universe of home mortgages (in New York State) from origination to default to foreclosure.

Like many previous studies, we find strong racial and ethnic disparities in lending practices and our analysis shows that the same disparities reappear in the pre-foreclosure filing data. This finding suggests that lending disparities contributed to the higher default rates that we observe among black and Latino borrowers.

Unfortunately, there are no easy solutions. Employment growth appears to have the strongest effect on the home mortgage default rate, while large principal balance reductions would only have a minimal effect on the rate of mortgage default.

For example, the coefficient estimates in our "Who Defaults?" paper imply that for a borrower with a 20 percent probability of default, having taken out a loan 10 percent smaller (i.e. the equivalent of a 10 percent principal balance reduction) would only reduce the default probability to 19.3 percent. Consequently, the losses that principal balance reductions would impose on lenders would not be outweighed by their gains from lower default rates.