Government Foreclosures Program Must Solve Jobless Problem

by Peter Vernon on Foreclosure Help

Several economists working for federal reserve banks argued that unemployment is triggering more private lender and government foreclosure than high mortgage rates. They argue that the continued focus of the hud foreclosures program on loan modifications and loan refinancing may not be able to solve the foreclosure problem.

Economists Christopher Foote and Paul Willen (Boston Federal Reserve), Professor Lorenz Goette (University of Geneva)and Kristopher Gerardi (Atlanta Federal Reserve) said their study of private lender and government foreclosures showed most mortgage borrowers defaulted because they lost their jobs. They could not sell their homes to pay their mortgage loans because home prices were falling.

Labor officials reported that the nationwide unemployment rate jumped to 8.5 percent in March, its highest rate since 1983. Due to the economic downturn, an additional 663,000 non-farm jobs were cut in March, bringing the total job cuts in the first quarter of 2009 to over 2 million. Since December 2007, the country has lost over 5 million jobs, about 67 percent of them in the last 5 months.

JP Morgan Chase economist Michael Feroli said average hourly earnings increased, but total hours worked dropped significantly, cutting down the amount consumers can spend for their needs.

The economists argued that government foreclosures policies focused on helping homeowners to earn income or replace their lost income would be more effective. They are recommending President Obama’s administration to solve the key causes of private lender and government foreclosures rather than focusing on schemes that face so many hurdles.

The release of their report was aimed to challenge President Obama’s focus on loan modifications and mortgage refinancing in his government foreclosures program. They said they want to correct the popular notion that loan modifications and loan refinancing will solve the foreclosure crisis.

Two schemes the economists recommended are the provision of grants and loans to replace part of homeowners’ lost income and the creation of a way for chronically financially troubled homeowners to become renters rather than homeowners.

In addition, the economists cited what they claim as the small number of lenders participating in the loan modification initiatives. They said the low participation rate is an indication that mortgage lenders and investors lose more in loan modifications than in foreclosures for sale.