House Financial Services Chairman Barney Frank (D-MA) today indicated that he would like to see some funds be set aside to help prevent foreclosure for homeowners who have lost their jobs. He indicates that such a bailout would be different from the earlier homeowner bailout, which sought mostly to prevent homeowners with mortgages they could not afford from losing their homes. This time, the borrowers used to be able to pay their mortgage -- before they lost their job. Now facing prolonged unemployment, those Americans' homes are also in jeopardy.
Here's what Frank said, via Bloomberg:
"We have a new wave of foreclosures coming not from people who got loans that they shouldn't have gotten, but people who got loans that they clearly could afford but prolonged unemployment has put them in a tough situation," said Frank, a Massachusetts Democrat.
I've noted in the past that this effect will increasingly be responsible for foreclosures. Frank intends to introduce legislation next week for $2 billion in rescue funds. I have a few observations.
First, I know that Frank says he does not want there to be overlap between those who qualify for this funding and those who last spring's homeowner bailout was intended for. But I'm not sure how you draw a distinct line. After all, anyone unemployed is probably have trouble coping with a mortgage payment -- whether they could initially afford it or not. Ultimately, however, I'm not convinced a fuzzy line between those two groups matters much to Frank. A prevented foreclosure will be the same goal either way.
What I find most interesting is the exceedingly low amount of funding he expects this will take. $2 billion is a drop in the bucket. Compare that to the $75 billion allocated to the "Making Homes Affordable" program, intended to prevent 7 to 9 million foreclosures. How far will that $2 billion go? Let's crunch some numbers.
For starters, unemployment in September was up to 15.1 million Americans. Many predict that it will be prolonged; a month or two of relief won't help. I would assert that most of these Americans would need at least six months of assistance. Many will remain unemployed for more than a year.
So let's assume this assistance lasts six months, which I think is super-conservative. Using the median home price of $174,100 and fixed rate of 6%, the median monthly mortgage payment is around $1000. Let's say that those Americans only need one-third of that covered -- again highly conservative. The subsidy amounts to $2000 each for that period. That would allow one million Americans to participate in the program -- a small fraction of the 15.1 million who are unemployed as of September.
How much money would Frank need to spend to make this effective? Well, it depends on how long it takes unemployment to come down. I recently noted that some economists think it could take until 2017 before we approach 5% unemployment again. Let's be a bit more optimistic and say it only takes half that time -- until 2013. Assuming 35% unemployed have mortgages (half of the approximately 70% rate of home ownership), given that duration and a linear dissent starting next month (again, highly conservative) he would need more than $62 billion.
That's using all of the same assumptions above, where every unemployed homeowner needs $333 extra per month to keep up with their mortgage. And that's being kind.