Unemployed and Housing: Keeping the Unemployed in Their Home. What about Renters? Subsidizing Housing Causes Further Pain.

As the housing crisis deepens, there seems to be at least some sense of growing stability in the financial markets.  How real and sustainable this is will be a question answered in the next few months.  Yet on the ground the unemployment situation is now having dire consequences on people who took out traditional prime mortgages.  That is, the bulk of the entire homeownership market.

An interesting article the in the Washington Post examines this relationship but a few issues stand out:

“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.”

It should be clear that without a paycheck, any kind of loan modification is not going to help.  If the income stream dries up, it is hard to buy groceries never mind pay the mortgage.  And this is now being seen with the falling cure rate on prime mortgages; that is, mortgages that go into distress normally do not come out as they once did in the previous few years when the housing bubble was expanding.  And those that do find work may find that their pay is lower than their previous job:

“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.”

$3,500 is no light weight mortgage.  That is a hefty size.  His current rate of 5.8 percent is fantastic which brings into question the price of the home.  Did this person simply buy more home than he can afford?  Sadly this is a question that we seem to talk about but when it comes to policy action, most roads of support try to do everything to keep homeowners in their home regardless of their ability to pay.  And the system for loan modifications is so convoluted that scams have popped up capitalizing in this gap of information:

“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.)”

Interesting that after being contacted by  a media outlet, Wells Fargo decided to modify the loan.  This has occurred a few times with other lenders.  Yet is this really a way to fix the crisis?  Whoever can yell the loudest or by sheer luck have access to support?  The problem with the current assistance programs is that there is no clear outline.  Should you miss payments so they can consider you seriously but risk your credit score?  Should you call corporate or your local branch?  It is a maze for people in financial distress:

“Many housing experts say it will take more than the $75 billion the 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.

“Who knows what’s going to happen at the end of the [forbearance], even if they can get it?” said Paul S. Willen, senior economist for the Federal Reserve Bank of Boston.”

I have an issue with this approach.  What about the unemployed renters?  Is there any program to provide those with leases a 50 percent payment cut?  Our country heavily subsidizes homeownership and this has also contributed to the housing bubble.  Let us be honest.  There needs to be a balance between owners and renters.  That is okay.  Not everyone wants to own or has the means to own a home.  But here, you can see more of the same.  Some of these people will be better suited in rentals.  Is that so bad?  The tax credit for buying a home is simply another subsidy (on top of mortgage interest deductions).

“Citigroup established a test program for unemployed workers in March, offering to lower their payments to $500 a month for three months.

But few of the 600 or so borrowers who have qualified for the plan have reported that they were able to find new jobs, and Citigroup is considering lengthening the period, company officials said. The test has shown that borrowers are at their most motivated shortly after losing their job, so the company may also lift a requirement that homeowners miss at least two payments to qualify for assistance. No decision on the changes has been made, company officials said.”

That is the root of the issue.  The payment doesn’t matter if people don’t have the income.  It is a simple and painful equation.  Trying to throw money at this problem is keeping the structure in place that made the housing bubble possible.  People buying homes they could not afford with risky debt.  Offering additional gimmicks will not help.

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