Tuesday, June 2, 2009

Foreclosures and Unemployment

How much will Obama's housing plan change? With property values continuing to decline and lenders reluctant to make any substantial write-downs to existing owners how much will the program really help. The number of underwaters seems to be increasing at record rates. Underwaters combined with rising unemployment levels are a fast track to rising foreclosures. While no income did not seem to matter during the bubble, now it is vital. When jobs are harder to come by they are more necessary then ever. Recently we profiled the one requirement for a modification - employment. An opinion piece in the New York Times titled Foreclosures: No End in Sight discusses the impact of high unemployment rates have on foreclosures. Let's take a look -

A continuing steep drop in home prices combined with rising unemployment is powering a new wave of foreclosures. Unfortunately, there’s little evidence, so far, that the Obama administration’s anti-foreclosure plan will be able to stop it.

The plan offers up to $75 billion in incentives to lenders to reduce loan payments for troubled borrowers. Since it went into effect in March, some 100,000 homeowners have been offered a modification, according to the Treasury Department, though a tally is not yet available on how many offers have been accepted.

That’s a slow start given the administration’s goal of preventing up to four million foreclosures. It is even more worrisome when one considers the size of the problem and the speed at which it is spreading. The Mortgage Bankers Association reported last week that in the first three months of the year, about 5.4 million mortgages were delinquent or in some stage of foreclosure.


One of the biggest problems is that the plan focuses almost entirely on lowering monthly payments. But overly onerous payments are only part of the problem. For 15.4 million “underwater” borrowers — those who owe more on their mortgages than their homes are worth — a lack of home equity puts them at risk of default, even if their monthly payments have been reduced. They have no cushion to fall back on in the event of a setback, like job loss or illness.


There will be no recovery until there is a halt in the relentless rise in foreclosures. Foreclosures threaten millions of families with financial ruin. By driving prices down, they sap the wealth of all homeowners. They exacerbate bank losses, putting pressure on the still fragile financial system. Lower monthly payments are a balm, but they are no substitute for home equity. And until more Americans can find a good job and a steady paycheck, the number of foreclosures will continue to rise.

There are a couple of incredibly important points - that foreclosures affect more than just the property owners. Foreclosures affect the entire neighborhood. Your neighbors foreclosure brings down your property value.

Advocating to reduce the principal on underwater properties will be a big fight. There are many people who are underwater due to putting no money down or utilizing any equity they had. Also, some of the biggest bubbles - and highest underwaters levels are concentrated in a few states. There is a big moral writing down the debt for people who made bad decisions while those who were prudent get little more than a stabilized property value.

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