Mortgage modifications may not stem foreclosures, Fed economists say

April 13th, 2009 • Related • Filed Under
feature photo

By: Bloomberg News

They say the government should consider more direct aid to homeowners, such as loans to bridge the loss of income.

Policies aimed at easing home loan terms for troubled borrowers may not be as effective in preventing foreclosures as more direct aid to homeowners, Federal Reserve economists have found.

Job losses and falling home prices have a bigger effect on delinquencies than mortgage terms, and modifications aren’t necessarily a better deal for investors than foreclosures, two current and one former economist at the Boston Fed Bank and one Atlanta Fed researcher say in a paper posted Friday on the Boston Fed’s website.

The conclusion poses a challenge to housing advocates and to some extent the prevailing views of President Obama’s administration, Fed officials and other U.S. regulators. Obama announced a $75-billion plan in February that concentrates on refinancing or modifying loans for as many as 9 million homeowners.

“One of the most influential strands of thought contends that the crisis can be attenuated by changing the terms of ‘unaffordable’ mortgages,” the economists said. Yet policies aimed at reducing a borrower’s debt-to-income ratio “face important hurdles in addressing the housing crisis.”

Instead, the government should consider alternatives such as loans to homeowners to bridge the loss of income for one or two years caused by unemployment, the economists said.

The federal government has used policies to encourage loan modifications as a principal tool of attacking the surge in foreclosures over the last year. Fed Chairman Ben S. Bernanke, in a December speech, called for “greater standardization and efficiency” in programs to ease loan terms, and Sheila Bair, head of the Federal Deposit Insurance Corp., has pressed the Treasury and mortgage companies to step up the pace of modifications.

There Are 2 Responses So Far. »

  1. Comment by Ditech Home Loans on 15 April 2009:

    It seems logical that with a loss of income, you would sell the house if there is enough equity, and probably default on the loan if you can’t sell, or replace the income.

  2. Comment by admin on 20 April 2009:

    Thanks for the comment, keep coming back for more informative information.

Post a Response