Helping the unemployed is key to fixing foreclosure mess

As various economic statistics and surveys point to better days ahead, the growing mortgage foreclosure rate reminds us that some problems get worse before they get better.

In fact, economists and analysts who track the housing sector say defaults and foreclosures may only be getting started.

How can this be with two successive administrations and Congress pushing lenders to modify the terms of mortgages taken by borrowers who are headed for foreclosure?

While mortgages with ludicrous terms were created and peddled to borrowers who were not creditworthy enough to handle homeownership, it’s the twin collapse of housing prices and the job market that’s pulling more into default and foreclosure, according to research done by Federal Reserve economists.

Paul S. Willen, a senior economist with the Federal Reserve Bank of Boston, told lawmakers yesterday that mortgage modification programs are unlikely to have much effect, given the layoffs and salary reductions that have marked the recession.

Instead, Willen and his Fed colleagues suggest the federal government provide grants or loans to the unemployed to cover their housing expenses.

What’s wrong with simply modifying the loans? Willen testified that any program that offers monetary incentives to do as many loan modifications as possible and to minimize the chance that the modified loans go into default winds up rewarding lenders who make millions of small changes to the mortgages of those best able to repay.

Unemployed borrowers can’t benefit from loan modifications that bring down monthly payments, he said during a hearing of the House Financial Service Committee, because “31 percent of an unemployed person’s income - nothing - is still nothing.”

Given that the unemployment rate is expected to continue to rise for the rest of 2009 and through the first half of 2010, we can expect to hear more calls for extended unemployment benefits, including possible mortgage and rent relief.

But Congress is not about to give up on loan modification programs. Bankers and mortgage brokers remain the object of ire by voters and, thus, their elected officials.