Unemployment Compounds Foreclosure Crisis

Growing unemployment in the US is now the main driver of foreclosures, overtaking subprime mortgages, according to bankers and economists. This is now putting borrowers in growing danger of losing their homes and making the foreclosure crisis a lot more complicated to unravel.

Economists estimate that 1.8 million borrowers will lose their homes in 2009, up from 1.4 million last year, according to Moody's Economy.com. The US government has already invested billions of dollars in trying to prevent this, but is finding it increasingly difficult to help people who have lost their income and those whose mortgage payments became unaffordable because of an interest-rate increase. Mark A. Calabria, director of financial regulation studies at the Cato Institute said, "Unemployment is a much harder nut to crack...it's much easier to bash lenders than to create jobs."

During the first quarter of 2009, 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. 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.

Many housing experts say it will take more than the $75 billion the Obama administration has already said will be spent on foreclosure prevention. Several economists at the Federal Reserve Bank of Boston have proposed creating a government lending or grant program for unemployed borrowers, lowering their payments for up to two years while they look for work. Such a program could cost $25 billion annually and help 3 million homeowners, lowering their payments by 50 percent on average, according to the economists' proposal.

"Unemployment is the root cause of many delinquencies," said Sanjiv Das, chief executive of CitiMortgage. He added that the idea should be to give borrowers enough assistance to keep them motivated to find a job quickly so they can resume making full mortgage payments.

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