Increasing Unemployment Creating New Wave of Housing Problems

Today the Obama administration releases details on how they plan to spend $50 billion, from the remaining TARP funds, to help borrowers in trouble. Most expect another round of loan modification proposals, maybe even some standardization in how to renegotiate these troubled mortgages. Unfortunately, the housing crisis of 2009 may have more to do with jobs than payment.

After multiple months of 500,000+ people losing jobs, millions of homeowners may have trouble making any mortgage payment. This rapidly growing loss income is opening another front in the war to recover the US housing market.

Neither the Obama administration or Congress has considered this issue for immediate action. Although the economic stimulus is positioned to create long-term jobs, the immediate impact on mortgages may require more immediate action.

This is precisely what the Federal Reserve Bank of Boston has been considering. Under this plan, $50 billion would be used to subsidize between a quarter and a half of mortgages for those who lose their jobs. This form of national unemployment insurance would provide assistance for up to two years or until new employment was found. Assumptions in the plan forecast up to 3.5 million homeowners using the government mortgage assistance.

The Boston Fed plan would not require any modification to mortgage terms. This fact overcomes one of the major stumbling blocks to widespread loan modifications--gettingservicers and lenders to participate. Other advantages are the limits to long-term taxpayer liability and borrowers having to cede potential long-term home appreciation to the government.

One of the main concerns of mortgage payment subsidies or loan modifications are the moral hazards they may create. Will homeowners have incentive to not seek work or those considered rich seeking assistance? According to the proposal these hazards would be controlled by caps on income and total payment contribution.

Early statistical data is indicating that loss of home equity and income are the top drivers of foreclosures. This is in contrast to many assumptions that adjustable-rate mortgages and payment adjustments are large contributors to default. CreditSuisse is currently estimating that 8.1 million, or 16 percent of all mortgages will end in foreclosure in the next four years.

National foreclosure policy is quickly rising to the top of the stack as the latest crisis that needs immediate attention from the new Presidential administration.