Federal Economists Despair that the Mortgage Modifications Would not Contain Rising Foreclosures

Many federal economists are of the opinion that the problem of foreclosures would not ease by mortgage modifications. What is required is direct aid to the foreclosure victims.

It is unemployment and declining value of houses that are the direct causes of more defaults and delinquencies. Modifications are not always for the better according to the findings of two current and one retired economist of Boston Federal Bank. Another member of this fact finding team is a Federal researcher from Atlanta.

Their findings are posing a challenge to the housing advocates and to some extent to the current views of the Obama administration – especially the federal officials and the regulators. In February Obama had declared a plan amounting to $75 billion that would focus on refinancing and modifying of loans for nearly 9 million foreclosure victims.

In their paper the economists said, “One of the most influential strands of thought contends that the crisis can be attenuated by changing the terms of ‘unaffordable’ mortgages. Yet policies aimed at reducing a borrower’s debt-to-income ratio “face important hurdles in addressing the housing crisis.” The website of the Boston Fed posted the paper.  The scholars opined that the government should think of other alternatives like loans to the borrowers that would bridge the income loss for at least one to two years resulting from high unemployment rates. Otherwise the borrowers could be encouraged to become tenants.

The senior economists involved in the work are Christopher Foote and Paul Willen. They advise the Boston Fed on policy matters. Among the others are Kristopher Gerardi who is a research economics and assistant policy advisor to Atlanta Fed ad Lorenz Goette of University of Geneva who was formerly attached to Boston Fed.

The paper does not specifically focus on the merits and demerits of the White House measure that has made loan modifications its main tool to bring about changes. It has been doing so since the last one year. Fed Chairman Ben Bernanke in a speech in December made a call for “greater standardization and efficiency” in various steps being taken to make loan terms easy. FDIC chairperson Sheila Bair pressed upon the Treasury and the lenders to increase speed of modifications.

The president of Boston Fed, Eric Rosengren said in January that the servicers of loans should be now able to increase the number of modifications since the interest rates have declined.

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