Boston Fed: Foreclosures Fueled By Unemployment, Not Interest Rates

Although the Obama Administration contends that high interest rates and inflated monthly payments are to blame for the current U.S. foreclosure epidemic, a study released recently from the Boston Federal Reserve suggests that rising unemployment rates may be the bigger cause/

The study named “Reducing Foreclosures,” conducted and authored by Boston Fed economists Christopher Foote and Paul Willen, Atlanta Fed economist Kristopher Gerardi and former Boston Fed economist Lorenz Goette, found that homeowners are more likely to miss mortgage payments because of job loss than because their loan terms are too steep.

While Obama’s mortgage relief plans center on modifying loans for as many as 9 million homeowners, the new study suggests that the government could more effectively stem foreclosures by focusing on solutions for homeowners now out of work.

“An important implication of our analysis is that policies designed to reduce foreclosures should focus on ameliorating the immediate effects of job loss and other adverse life events,” the economists wrote in the study synopsis on the Boston Fed’s website, “rather than modifying loans to make them more ‘affordable’ on a long-term basis.”

Mortgage investors and lenders may suffer more loss from mortgage modifications than from foreclosures as well, the study said.

“It is true that lenders may lose a great deal of money with each individual foreclosure, but the loan modifications might have negative [financial effects] if they are sometimes extended to people who are likely to pay on time anyway,” the study concluded. “And the benefits of modifications are uncertain if borrowers have lost their jobs.” Such homeowners may end up in default again anyway.

Instead of loan modifications, the Fed paper recommends that the government implement programs like  loans and grants to homeowners who have lost their jobs, as well as assisting those who truly cannot afford their mortgages anymore in the transition from homeowning to renting again.

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2 Responses to “Boston Fed: Foreclosures Fueled By Unemployment, Not Interest Rates”

  1. Sell House Foreclosure responded on 19 Jun 2009 at 6:32 am #

    Extending unemployment benefits has helped stave off many more potential foreclosures. The banks have actually started modifying mortgages while including unemployment benefits as income. This is important because if they were not to there would most likely be many more delinquencies and potential foreclosures.

  2. Dorothea Harrison responded on 14 Jun 2010 at 7:54 am #

    If only I had a quarter for every time I came to Incredible article!

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