Wednesday, October 7, 2009

A Wisconsin Plan to Fix Foreclosures

Writing at Econbrowser, Morris Davis, an assistant professor at UW Madison, details a plan he calls WI-FUR that he and his colleagues have developed to address the home foreclosure problem.

Davis argues that addressing the foreclosure situation is more important than ever. This is due to the fact that we are moving from a scenario where foreclosures were primarily on risky subprime loans that were largely speculative, to the case where foreclosures are happening on loans that would be paid except for the current, and quite possibly persisting, high rate of unemployment.

First, Davis explains why unemployment is a critical part of the foreclosure problem:
Why does unemployment lead to a foreclosure when a house is under water? Consider the case of Wisconsin. In Wisconsin, UI benefits are capped at $1,452 per month. According to the 2007 American Community Survey, the average mortgage payment including all mortgages and taxes in Wisconsin is approximately $1,200. If the unemployed make their mortgage payment, they have roughly $63 per week available for food, transportation, and other necessities. After spending down their assets, the unemployed have no choice but default. They cannot sell their house, because they would have to write the bank a check at closing. They cannot make their mortgage payment, because they would have no money left for food.
Then, he describes the WI-FUR plan:
The WI-FUR plan (here for details) specifies that all unemployed receiving UI benefits also receive a housing voucher that can be used to pay the mortgage. The housing voucher would be computed such that, on average in each state, homeowners pay 30% of their UI benefits on their mortgage -- the voucher would cover the balance. In Wisconsin, for example, we advocate for an average voucher of about $764. This would make up for the shortfall in a $1,200 mortgage payment if households pay 30% of their UI benefit ($436 = 0.30 × $1,452) towards their mortgage.
Davis himself was skeptical about foreclosure relief as the housing downturn became obvious due to the fact that bailing out people that were engaged in speculation and lost seems like a bad idea. Now, however, he is convinced now that the steep decline in housing prices combined with high unemployment due to the recession make addressing the foreclosure problem imperative.


Dad29 said...

There is no "steep decline" in WI housing prices. It's running about 5%/annum decline (although there are over/under areas.)

Running the State's credit card balance will ALSO depress the value of housing as taxes increase, making take-home income smaller--thus reducing cash available for making mortgage payments in the future.

Finally, is the good professor arguing that housing values SHOULD remain as high as they are? Does he think that the rent/buy ratio is correctly aligned?

Jeremy R. Shown said...


Even if the decline isn't steep and the rent/buy ratio is correct, can such a program ever be a good idea?

Is there any argument to be made that during times of persistent and relatively high unemployment, a safety net that keeps people in their homes is a good idea (especially if there is already a large stock of for sale homes)?

Or does this just introduce more distortion in the market, delaying any necessary adjustment and prolonging our agony?

I honestly don't know the answer.

Dad29 said...

To my mind, it is not a good idea, period.

I know people who were foreclosed, waited 2 years, and re-bought their old home at 30% less than the foreclosure price.

They were able to sustain the payments on the second go-round...