Wednesday, January 28, 2009

Fed Takes More Steps to Reduce Employment

I saw a report today that the Federal Reserve is taking still more steps to modify mortgages, and thereby reduce homeowners' incentive to work.


Milton Recht said...

Unemployment (underemployment) is only one cause of delinquencies in mortgage payments. Illness and other work disabilities, high medical expenses and other unplanned and unexpected expenses are significant causes of bankruptcies and mortgage delinquencies. Some of the unemployed will have positive equity and sell their homes and payoff the mortgage. Some of the unemployed and a significant number of the delinquent borrowers owned unoccupied or rental homes purchased as investors for a quick flip and have walked away from these homes and their mortgages due to negative equity and slow home sales and not due to their unemployment.

Some unemployed homeowners do not have mortgages (70% of homeowners have a mortgage) and some are two wage earners that can carry the mortgage on the remaining one wage earner income or have the funds to continue to pay or payoff the mortgage. Therefore, an unemployed homeowner is not a sufficient condition to cause a delinquency.

While the Fed mortgage renegotiation program is a disincentive to employment, the disincentive will only apply to mortgage delinquencies due to unemployment that want to renegotiate and that will only be a percentage of the renegotiations. It may even be an insignificant percentage.

The OCC reported a couple of months ago that 55% of renegotiated mortgages become delinquent again within 6 months. Citibank and other banks find it difficult to find and contact borrowers to renegotiate mortgages. If one includes the delinquent people not contacted that do not renegotiate their mortgages, the number of delinquencies 6 months after an attempt to renegotiate is greater than the reported 55%. Renegotiation should delay employment until after the closing of the new mortgage terms but not indefinitely. Obviously, other factors are at play in defaults besides a disincentive to work.

RPB said...

From a former student and current Bears fan,

Glad I found your blog. Interesting to hear a "Chicago" perspective now that our school has come under massive, coordinated and shameless attacks. Brad DeLong of Cal-Berkley, Krugman and a host of others have been at the throats of Chicago lately. And the gaggle of Neo-Keynesians and Chicago critics is growing.

Hope all is well.