Interest Rate Roundup

Friday, June 26, 2009

What happens when drivers of foreclosures are different

Today, the Wall Street Journal elucidated a point I have made repeatedly in many venues. Heading off a potential foreclosure tied to the STRUCTURE of a mortgage is a lot easier than avoiding a foreclosure related to broader ECONOMIC trends (falling house prices, rising unemployment, etc.). This is one reason the foreclosure problem cannot be easily fixed, despite all the PR about modifications coming from the administration and the industry.

"Rising unemployment is complicating the Obama administration's effort to reduce foreclosures and stabilize the housing market.

"The first wave of mortgage delinquencies was sparked by borrowers who took out subprime mortgages and other risky loans that became unaffordable, causing them to fall behind on their monthly payments. But the current wave is increasingly driven by unemployment or underemployment, economists and housing counselors say.

"The Obama foreclosure-prevention plan was "built around the subprime crisis model, not the unemployment crisis model," said Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago.

"The Obama program provides financial incentives to mortgage-servicing companies and investors to reduce mortgage-related payments to 31% of monthly income.

"But many borrowers don't have sufficient income to qualify for a loan modification under the plan. Mr. van Zalingen said roughly 45% of the more than 900 borrowers who sought help at two recent counseling events would fall into that category even if their interest rate were dropped to 2% and their loan term were extended to 40 years."


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