Expanded unemployment benefits were one of the most effective federal programs in preventing foreclosure in the wake of the Great Recession, according to a recent study, outperforming other efforts specifically designed to address the foreclosure crisis.

The expanded benefits program prevented as many as 1.4 million foreclosures from 2008 to 2012, according to researchers from the Federal Reserve and Northwestern University's Kellogg School of Management. That far exceeds the 800,000 foreclosures officially estimated to have been prevented through the highly publicized Home Affordable Modification Program (HAMP), which was established to promote mortgage loan modifications for at-risk borrowers.

The authors noted that an enhanced unemployment benefits program had the advantage of putting money directly into consumers' pockets where they could choose to use it to avoid foreclosure, rather than subjecting them to the often extensive bureaucratic requirements called for by HAMP.

The authors said these results suggested that direct cash assistance to unemployed mortgage borrowers could help stabilize the housing market during a future housing crisis.

$70 billion in social costs averted

Researchers calculate that expanded unemployment benefits prevented some $70 billion in social costs from foreclosure, including borrowers' own losses and the secondary impacts due to a lack of maintenance, theft and vandalism at vacant properties and the negative impacts that foreclosed properties have on neighboring property values.

The estimate that foreclosures prevented through these benefits prevented nearly $50 billion in losses at Fannie Mae and Freddie Mac, which would have been picked up by the federal government. With the benefits themselves estimated to have totaled $250 billion, that puts the net cost to the government at around $200 billion, the study authors said.

Other social benefits were reported as well. The study's authors' reported that unemployment insurance also reduced the likelihood that borrowers who were seriously underwater on their mortgages would walk away from their loans. Rather, those whose mortgage debt was 120 percent of their home value or greater were more likely to continue making payments when UI was available.

They also found that the availability of unemployment benefits, by reducing the likelihood of default, helped increase the availability of credit to lower-income borrowers. They were also found to exert a slight downward pressure on mortgage rates, estimated at a reduction of 0.1 percentage points for every $3,600 increases in unemployment benefits nationally.

Published on August 20, 2014