No job, bad mortgage - out of luck
More homeowners are falling behind on their mortgages because they've lost their jobs. And there's little help coming their way.
NEW YORK (CNNMoney.com) -- All the foreclosure prevention plans announced to date will do little to help the next wave of delinquent homeowners, who can't make their monthly payments because they've lost their jobs.
But something needs to be done for them, experts said, or the country will sink deeper into an economic recession.
"Because of the financial crisis, they can't afford their mortgages on any terms," said Kathleen Engel, associate professor at Cleveland-Marshall College of Law. "None of the federal or bank programs will provide them any relief at all."
Loan modification plans have focused on assisting borrowers facing interest rate resets or other mortgage terms that have rendered the monthly payments unaffordable. Most proposals have attacked the problem by adjusting the interest rate or length of the loan so that the monthly payments drop to what is considered an affordable level, or between 31% and 38% of a borrower's gross income.
This, however, does little for people whose monthly income is virtually nothing. Representatives from lenders and firms that service loans say the unemployed have to be assessed on a case-by-case basis and can't be part of the streamlined modifications underway.
"This is a different problem and a more challenging problem," said Tom Kelly, spokesman for JPMorgan Chase (JPM, Fortune 500), which last month unveiled a loan modification plan aimed at helping 400,000 delinquent homeowners. "If you are unemployed for a long time, there is no affordable range."
A record 1.2 million homes were in foreclosure during the second quarter of 2008, according to the Mortgage Bankers Association. Consumer advocates, as well as certain Democratic lawmakers and officials within the Bush administration, have pushed banks and government officials to do more to help struggling homeowners.
A new wave of empty homes on the market won't help anybody. In fact, it will just lead to further price declines, which in turn, will further weaken the economy. Until this cycle is broken, everyone suffers, experts say.
The problem of rising foreclosures due to unemployment is only expected to get worse. With companies announcing mass layoffs almost daily, more people will fall behind on their payments. Already the unemployment rate is at 6.5%, its highest level in more than 14 years.
The effects are already showing up in the housing market. In June, 45.5% of all delinquencies reported by Freddie Mac were due to unemployment or the loss of income, according to the company. That's an increase from 36.3% in 2006.
The problem won't go away anytime soon. Some estimates say another 2 million families could lose their homes to foreclosure in the next two years.