Job losses lead next wave of foreclosures

WASHINGTON — The country's growing unemployment is overtaking subprime mortgages as the main driver of foreclosures, according to bankers and economists, threatening to send even higher the number of borrowers who will lose their homes and making the foreclosure crisis far more complicated to unwind.

Economists estimate that 1.8 million borrowers will lose their homes this year, up from 1.4 million last year, according to Moody's Economy.com. And the government, which has already committed billions of dollars to foreclosure-prevention efforts, has found it far more difficult to help people who have lost their paychecks than those who found their mortgage payments unaffordable because of an interest-rate increase.

"It's a much harder nut to crack, unemployment," said Mark Calabria, director of financial regulation studies at the Cato Institute. "It's much easier to bash lenders than to create jobs."

During the first three months of this year, the largest share of foreclosures shifted from subprime loans to prime loans, according to the Mortgage Bankers Association. The shift to prime loans — traditionally considered safer — reflects the growing numbers of unemployed who are being caught up in the foreclosure process, economists say.

Last year, about 40 percent of borrowers who sought help at NeighborWorks, a large housing counseling group, cited unemployment or a pay cut as a primary reason for their delinquency. Now it's about 65 percent. The number citing a subprime loan fell significantly.

"Rising unemployment, for the sake of this downturn, has magnified things considerably," said John Snyder, manager of foreclosure programs for NeighborWorks. "It's less about the payment adjustment."

When a subprime borrower becomes delinquent because of a hefty payment increase, the fix often involves lowering the interest rate to its original level. Unemployment poses a more difficult challenge, industry officials and consumer advocates said. During extended periods of unemployment, the borrower racks up expensive late fees that drive up monthly payments. And a new job often comes with lower pay, making it more difficult to catch up.

Banks and government regulators are now studying how to address the shifting nature of the crisis, which has been exacerbated by falling home prices. When the housing crisis began in 2007, the unemployment rate was about 4.6 percent. It hit 9.4 percent last month, and many economists expect it to reach 10 percent by the end of the year.

Hope Now, a government-backed group of mortgage lenders, has established a task force to look at how to best help unemployed borrowers; one strategy involves creating new types of loan modifications.

The Obama administration is also studying the issue as it considers how to make its foreclosure-prevention program, known as Making Home Affordable, more effective.

Many housing experts say it will take more than the $75 billion the Obama administration has already said will be spent on foreclosure prevention. Several economists at the Federal Reserve Bank of Boston have proposed creating a government lending or grant program for unemployed borrowers, lowering their payments for up to two years while they look for work. Such a program could cost $25 billion annually and help 3 million homeowners, lowering their payments by 50 percent on average, according to the economists' proposal.