Reflections on the Foreclosure Crisis (Land Lines Article)

Author(s): Davis, Morris A.
Publication Date: July 2010

7 pages; Inventory ID LLA100702; English

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Article

Will We Have More Foreclosures?
Both foreclosure triggers are still in place. Unemployment rates are high, and the Congressional Budget Office (2010) is forecasting the national unemployment rate will remain above 9.0 percent in both 2010 and 2011. And, many homeowners are still under water. Assuming that house prices and housing rents will increase at the same rate over the next few years—not an unreasonable assumption given the behavior of historical rent and price data prior to 1996 (Davis, Lehnert, and Martin 2008)—then house prices should be expected to rise in nominal terms by somewhere between 1 and 2.5 percent per year for the next two years. Given the slow expected pace of house-price growth, many homes now under water will continue to be under water in two years.

Against this gloomy backdrop, Congress and the Obama administration have taken steps recently to prevent more foreclosures. First, on March 26, the administration revised the HAMP program so that the recently unemployed will be offered between three and six months of payment reductions (forbearance). This adjustment to HAMP is in line with the recommendations of a well-known plan to reduce foreclosures, written by economists at the Federal Reserve Board and the Federal Reserve Bank of Boston, commonly called the Boston Fed plan (Foote et al. 2009). It is also similar to an existing plan in the State of Pennsylvania that makes loans to unemployed homeowners to enable them to pay their mortgage, called HEMAP. In addition, mortgage investors will be subsidized by the HAMP program for writing down principal when borrowers are under water.

Second, the Obama administration has set up a “Hardest-Hit” fund distributing $2.1 billion to state housing finance agencies in ten states with severe house price decline and high unemployment rates. The state agencies are free to design programs to reduce foreclosures, subject to some guidelines (Housing Finance Agency 2010).

My colleagues and I have worked on foreclosure relief policy and are hopeful these new initiatives—the modification to HAMP and the Hardest-Hit fund—might significantly reduce foreclosure activity over the next few years.

About the Author
Morris A. Davis is an associate professor in the department of real estate and urban land economics at the University of Wisconsin School of Business, and a fellow at the Lincoln Institute of Land Policy. He was one of the authors of the Wisconsin Unemployment and Foreclosure Relief Plan, which was designed to reduce foreclosure activity of the unemployed. He also maintains and updates the Lincoln Institute Web site database on Land and Property Values in the U.S. (http://www.lincolninst.edu/subcenters/land-values). Contact: mdavis@bus.wisc.edu

Acknowledgments
I have benefited greatly from conversations, help, and advice from Chris Foote, Jeff Fuhrer, Kris Gerardi, Eileen Mauskopf, François Ortalo-Magné, Erwan Quintin, Steve Malpezzi, and Paul Willen. All mistakes and errors are my own.

References
Arnold, Chris. 2009. Investors support overhauling homeowner program. NPR broadcast, April 16. www.npr.org/templates/story/story.php?storyId=103148855
Congressional Budget Office. 2010. Current Budget Projections: Selected Tables from CBO’s Budget and Economic Outlook, Table E-1 (January). www.cbo.gov/ftpdocs/108xx/doc10871/economicprojections.pdf
Cordell, Larry, Karen Dynan, Andreas Lehnert, Eileen Mauskopf, and Nellie Liang. 2009. The incentives of mortgage servicers: Myths and realities. Uniform Commerical Code Law Journal 41: 347–374.
Davis, Morris A., Andreas Lehnert, and Robert F. Martin. 2008. The rent-price ratio for the aggregate stock of owner-occupied housing. Review of Income and Wealth 54(2): 279–284.
Foote, Christopher, Jeff Fuhrer, Eileen Mauskopf, and Paul Willen. 2009. A proposal to help distressed homeowners: A government payment-sharing plan. Public Policy Brief No. 09-1. Boston: Federal Reserve Bank of Boston. www.bos.frb.org/economic/ppb/2009/ppb091.htm.
Foote, Christopher, Kristopher Gerardi, Lorenz Goette, and Paul Willen. 2010. Reducing foreclosures: No easy answers. NBER Macroeconomics Annual 24(1): 89–138.
Foote, Christopher, Kristopher Gerardi, and Paul Willen. 2010. Should modifications 're-equify' borrowers? A look at the data. Real Estate Research Blog, March 2. http://realestateresearch.frbatlanta.org/rer/2010/03/should-modifications-reequify-borrowers-a-look-at-the-data.html#more
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Housing Finance Agency. 2010. Innovation Fund for the Hardest-Hit Housing Markets (HFA Hardest-Hit Fund): Frequently asked questions, March 5. http://makinghomeaffordable.gov/docs/HFA%20FAQ%20--%20030510%20FINAL%20%28Clean%29.pdf
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