Homeowners are more likely to lose their homes to foreclosure because they‚Äôve lost their jobs than because their loan payments have become unmanageably high, according to a new study by the Boston Federal Reserve that is raising doubts about the effectiveness of the government‚Äôs new loan modification program (‚ÄúUnemployment: Big Factor in Home Defaults,‚ÄĚ Reuters, April 13, 2009).
The study revealed that consumers are also more likely to default on their home loans if their home values plummet than if their mortgage terms are unfavorable. That finding led Boston Federal Reserve economists to conclude that policies directly aimed at providing aid to unemployed homeowners may be more effective at helping homeowners avoid foreclosure than the loan modification and refinance policies outlined in President Obama‚Äôs home rescue plan.
Under the government plan, certain homeowners who are underwater on their mortgages would be able to get a government-subsidized mortgage loan modification through their lender, while other homeowners who have little or no equity would be able to refinance their home loans.
‚ÄúForeclosure-prevention policy should focus on the most important source of defaults‚ÄĚ including unemployment, the economists wrote in the study.
They said that homeowners would be better served by a government plan that supplements an unemployed homeowner‚Äôs lost income with loans and grants, though the report didn‚Äôt outline details for this type of strategy.
Government Program Questioned
Although government officials believe that the housing crisis can be attenuated, ‚Äúby changing the terms of ‚Äėunaffordable‚Äô mortgages,‚ÄĚ Boston Federal Reserve economists point out that policies targeting the modification of home loans ‚Äúface important hurdles in addressing the current foreclosure crisis.‚ÄĚ
Chief among those hurdles is how effective Obama‚Äôs loan modification program will be at preventing foreclosures and how many homeowners will actually be able to refinance their homes at today‚Äôs record-low interest rates in one of the most stringent credit markets in years.
While the Obama administration estimates that the loan modification plan will help around 9 million homeowners stay in their homes and that some 7 to 9 million homeowners may be eligible to refinance, both options may end up helping far fewer homeowners than expected.
In order to refinance, homeowners must owe no more on their mortgage than 5 percent more than what their home is worth and those homeowners trying to modify their mortgages must still have enough income to make a reduced loan payment to qualify.
Hundreds of thousands of homeowners who reside in Nevada, Florida, Michigan, and Arizona ‚ÄĒ where property values have plummeted by as much as 45 percent ‚ÄĒ won‚Äôt qualify for the government loan modification program. They may, however, benefit from the unemployed homeowner plan highlighted in the Boston Federal Reserve report, if it ever becomes reality.
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