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The Foreclosure Problem and the WI-FUR Plan Solution

The Foreclosure Problem and the WI-FUR Plan Solution. Prepared by Morris A. Davis November 18, 2009. Foreclosure problem is getting worse, not better. Foreclosure activity is increasing nationwide Percent of loans 90-days delinquent has more than doubled since mid-2008

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The Foreclosure Problem and the WI-FUR Plan Solution

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  1. The Foreclosure Problemand the WI-FUR Plan Solution Prepared by Morris A. DavisNovember 18, 2009

  2. Foreclosure problem is getting worse, not better • Foreclosure activity is increasing nationwide • Percent of loans 90-days delinquent has more than doubled since mid-2008 • Common explanation: Homeowners steered or tricked into a a bad mortgage • Above market interest rate and/or exploding payment • Idea: Unscrupulous originator captures underwriting fees, tricks homeowner into a bad mortgage, then eventually takes over the house • We think this is a problem. However, only 34% of 90-day delinquent loans are subprime. The rest are prime (52%) or VA/FHA (16%). So something else is going on. * From 2009:Q2 National Delinquency Survey. 90-day or more delinquent rate was 1.83 in 2008:Q2 and 3.88 in 2009:Q2.

  3. Why are there foreclosures for prime loans? • Historically, foreclosures caused by two “triggers” • Trigger #1: House worth less than the mortgage • Implies homeowner can not sell the house: (he/she has to write the bank a check at closing) • Trigger #2: Significant disruption to income • Divorce • Health shock • Unemployment • According to the “double trigger” theory, we are facing the perfect storm of foreclosures

  4. Trigger #1: Rapid Fall in House Prices

  5. Trigger #2: Rapid Increase in Unemployment

  6. How does WI-FUR help? • WI-FUR stops foreclosures by eliminating one trigger • Idea: Households receive a “housing voucher” • This is a check from the government that can only be used to pay a mortgage • The housing voucher acts like a supplement to unemployment benefits • Thus, the disruption to income is eliminated

  7. How would it work? • Size of the voucher would be designed such that, at the median, people spend 30% of their unemployment insurance on a mortgage payment • Wisconsin Example: • Unemployment benefits: $1,450 per month • Additional housing voucher: $765 per month • Required mortgage payment: $1,200 per month • Less housing voucher -$765 • Household payment to mortgage: $435 per month (=$1,200 less $765) • Money left over for everything else: $1,015 per month (=$1,450 less $435) • Notice -- after the voucher -- households spend 30% of their UI on the mortgage: $435 = 0.30 * $1,450

  8. Additional details • $765 is not be the right payment to all households • Housing costs vary by state and by county • Idea: • Use some basic facts from the American Community Survey and Unemployment Benefits to vary average voucher payments by state • Use HUD “Fair Market Rent” (FMR), which varies by county, to adjust payments across counties in every state • We have put together a spreadsheet of suggested voucher amounts, by county, for every county in the U.S. based on FMR and our own research on mortgage costs by state

  9. Is WI-FUR Good Policy? • WI-FUR will prevent at least 500,000 foreclosures per year in 2010 and 2011 • WI-FUR is not a pure “giveaway” • WI-FUR calls for people to spend out of their income to make their mortgage payments • WI-FUR allows the unemployed to stay in their home: • Households spend a reasonable amount of their income to keep their mortgage current • WI-FUR is temporary • WI-FUR can end with a defined sunset date, or once the unemployment rate falls to a more normal level • Money for HAMP can be spent on WI-FUR

  10. WI-FUR Might Save Taxpayers Money! • U.S. Taxpayers Responsible for GSE Losses • GSE, VA, FHA – account for more than 50 percent of all mortgages. • Each foreclosure implies a loss of about 50 cents to the dollar • On a GSE/VA/FHA mortgage with face value $100,000, taxpayers incur a loss ranging from $35,000 - $50,000. • Higher dollar value mortgages imply larger losses. • Typical duration of unemployment is 6 months. A voucher of $1,000 for 6 months only costs $6,000. • By preventing foreclosures through temporary income assistance, we may save taxpayers money.

  11. WI-FUR authors and contact info • Morris A. Davis, Ph.D. • Assistant Professor, Department of Real Estate and Urban Land Economics • Former advisor to Alan Greenspan • Email mdavis@bus.wisc.edu and Phone 608 262 8775 • Stephen Malpezzi • Lorin and Marjorie Tiefenthaler Professor • Academic Director, James A. Graaskamp Center for Real Estate • Former President of the American Real Estate and Urban Economics Association • Email smalpezzi@bus.wisc.edu and Phone 608 262 6007 • François Ortalo-Magné • Robert E. Wangard Professor • Chair, Department of Real Estate and Urban Land Economics • Economic advisor to the French government on land use and housing issues • Email fom@bus.wisc.edu and Phone 608 262 7867

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