Wednesday, December 2, 2009

What costs more: foreclosures or loan modifications?

Yesterday, NPR reported on increased government pressure on the mortgage industry to speed up permanent loan modifications for homeowners under the Obama Administration's 10-month old $75 billion foreclosure prevention effort. UW's Morris Davis responds:

We don’t need mortgage modifications to stop foreclosures. According to a recent Freddie Mac survey, 57% of foreclosures are related to unemployment – only 20% are related to “excessive obligation”, which could also be unemployment related.

What the unemployed need is temporary assistance. The right kind of temporary assistance for the unemployed – either the WI-FUR plan or the Boston Fed plan – will stop foreclosures.

The most costly thing we can do right now is to offer permanent mortgage modifications to the unemployed. On average, modifications to the unemployed cost U.S. taxpayers about $18,000. If we do nothing, each unemployed person with a mortgage costs U.S. taxpayers about $7,000 (because some unemployed households go into foreclosure, and foreclosures are costly when the mortgage is backed by the U.S. government). The total cost of WI-FUR or the Boston Fed plan is less than $6,000 per unemployed person with a mortgage – these plans prevent foreclosures and foreclosures are costly!

Morris A. Davis is Assistant Professor, Real Estate and Urban Land Economics at Wisconsin. Often cited in the national media for his expertise in current housing and macroeconomic issues, he is a fellow at the Lincoln Institute of Land Policy, is on the academic advisory council of the Federal Reserve Bank of Chicago, and worked at the Federal Reserve Board before coming to the Wisconsin School of Business in 2007.

The Wisconsin Foreclosure and Unemployment Relief Plan (WI-FUR) is a proposal by Wisconsin Real Estate faculty to address unemployed homeowners' risk of foreclosure by supplementing unemployment benefits with an additional housing "voucher" payment. Learn more about the WI-FUR plan.

1 comment:

  1. Clever article. We could only hope for a brighter real estate world in the coming year. Happy Holidays!