Unemployment Spike Compounds Foreclosure Crisis
Tuesday, August 18, 2009
The country's growing unemployment is overtaking subprime mortgages as the main driver of foreclosures, according to bankers and economists, threatening to send even higher the number of borrowers who will lose their homes and making the foreclosure crisis far more complicated to unwind.
Economists estimate that 1.8 million borrowers will lose their homes this year, up from 1.4 million last year, according to Moody's Economy.com. And the government, which has already committed billions of dollars to foreclosure-prevention efforts, has found it far more difficult to help people who have lost their paychecks than those whose mortgage payments became unaffordable because of an interest-rate increase.
"It's a much harder nut to crack, unemployment," said Mark A. Calabria, director of financial regulation studies at the Cato Institute. "It's much easier to bash lenders than to create jobs."
During the first three months of this year, the largest share of foreclosures shifted from subprime loans to prime loans, according to the Mortgage Bankers Association. The change to prime loans -- traditionally considered safer -- reflects the growing numbers of unemployed who are being caught up in the foreclosure process, economists say.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, has proposed using $2 billion in government rescue funding to provide emergency loans to these borrowers. "We are going to be seeing more foreclosures because of prolonged unemployment," he said. "These are people who weren't in trouble and wouldn't be in trouble if they hadn't lost their job."
Unlike the borrowers with subprime mortgages who helped ignite the housing downturn more than two years ago, Deepak Malla, 42, fell behind on his payments when his information technology job was shipped overseas late last year. He does not have a subprime loan, and he made a 20 percent down payment when he bought his five-bedroom house in Ashburn in 2005. The payments were affordable -- until he lost his job.
Last year, about 40 percent of borrowers who sought help at NeighborWorks, a large housing counseling group, cited unemployment or a pay cut as a primary reason for their delinquency. Now it is about 65 percent. The number citing a subprime loan fell significantly.
"Rising unemployment, for the sake of this downturn, has magnified things considerably," said John Snyder, manager of foreclosure programs for NeighborWorks. "It's less about the payment adjustment."
When a subprime borrower becomes delinquent because of a hefty payment increase, the fix often involves lowering the interest rate to its original level. Unemployment poses a more difficult challenge, industry officials and consumer advocates said. During extended periods of joblessness, the borrower accrues large late fees that drive up monthly payments. And a new job often comes with lower pay, making it more difficult to catch up.
When Malla landed another job earlier this year, he took a pay cut of more than 25 percent. He launched a six-month campaign to get Wells Fargo to lower his mortgage payments from $3,500 to reflect his new financial reality, but he was rebuffed repeatedly. "I wanted to work out with them based on my current scenario," Malla said.
He considered refinancing his mortgage, which had a 5.8 percent interest rate, but his home's value had fallen significantly since the market peak, making that impossible. Instead, the lender recommended that he sell the house in a short sale. That would mean selling for less than he owed and walking away with nothing.
"They didn't say why -- just that [a loan modification] is outside the investor guidelines," Malla said. "I was very, very frustrated." (After being contacted by The Washington Post, a Wells Fargo spokesman said Malla does qualify for a loan modification after all.)