Several years since a collapse in house prices triggered the deepest financial and economic crisis in post-war American history, almost one in eight mortgage borrowers in the US are now either delinquent or in foreclosure proceedings. However, despite the considerable resources invested in various loan modification programs, the benefits have not reached the majority of distressed homeowners. As of September 2011, 1.7 million borrowers had received trial modifications under the Obama administration’s HAMP (Home Affordable Modification Program), which was supposed to have reached 3-4 million borrowers.
Behavioral economics suggests that even financially attractive loan modification programs like HAMP may struggle to attract participants. This is because of features of borrower psychology that deter many potential beneficiaries from signing up. For example, program complexity may induce procrastination, a plethora of choices may lead to a failure to choose, and an absence of trust may cause people to stop communicating with their bank to work out a loan modification.
To succeed, such programs must explicitly address all of these psychological “trap doors”. Even a single failure can cause enormous numbers of people to drop out. This has motivated ideas42 to design a behaviorally-informed loss mitigation program which explicitly tries to build borrowers’ trust, reduce confusion, and proactively direct borrower behavior. We are working with a large mortgage servicer to test the effectiveness of our process in the field. If successful, the process could benefit the millions of borrowers our partner serves as well as millions more as other servicers adopt the improved process.