Policies aimed at easing home loan terms for troubled borrowers may not be as effective in preventing foreclosures as more direct aid to homeowners, Federal Reserve economists have found.I haven't read the paper in full, but here are some bullet points from the introduction:
Job losses and falling home prices have a bigger effect on delinquencies than mortgage terms, and modifications aren't necessarily a better deal for investors than foreclosures, two current and one former economist at the Boston Fed Bank and one Atlanta Fed researcher say in a paper posted Friday on the Boston Fed's website.
- Debt-to-income (measure of affordability) at time of origination is not a good predictor of default. We estimate that a 10-percentage-point increase in the DTI (debt-to-income) ratio increases the probability of a 90-day-delinquency by 7 to 11 percent, depending on the borrower. By contrast, an 1-percentage-point increase in the unemployment rate raises this probability by 10-20 percent, while a 10-percentage-point fall in house prices raises it by more than half.
- Investors (mortgage investors that manage the owners of the loan, the mortgage-backed security) and/or lender prefer foreclosure over loan modification. The gains from loan modifications are in reality much smaller or even nonexistent from the investor’s point of view.
- We argue that foreclosure-prevention policy should focus on the most important source of defaults. In the data, this source appears to be the interaction of falling prices and adverse life events, not mortgages with high-DTI ratios or otherwise relaxed risk characteristics.
- The results of this paper suggest that policies that encourage moderate, long-term reductions in DTIs face important hurdles in addressing the current foreclosure crisis.