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Economists Say Unemployment Has Overtaken Subprime Loans as Chief Cause of Foreclosures

August 21, 2009

Bankers, economists and regulators studying the housing crisis believe unemployment is now the primary cause of foreclosure, the Washington Post reported Aug. 17. A housing counseling group, NeighborWorks, told the newspaper that 65% of borrowers they helped this year have cited unemployment or a pay cut as a reason for seeking help, up from 40% last year -- and fewer are citing subprime loans. Meanwhile, the Mortgage Bankers Association said prime loans became the primary source of foreclosures in the first three months of this year, eclipsing subprime loans. Meanwhile, unemployment is at 9.4%, the Post said, more than double the rate when the housing market began in 2007.

The shift to unemployment-driven foreclosures will make the housing crisis harder to address, the paper said. When borrowers get into trouble because of a subprime loan, they can often get out of trouble with a relatively simple loan modification that adjusts their interest rates back down. But with unemployment, that won't work because borrowers simply don't have the income. The problem is exacerbated by the bad job market, which makes it harder for workers to find new jobs and less likely that they will earn as much money when they do. Many banks offer a two- or three-month loan forbearance or lowered payments, the Post said, but that's frequently not long enough. And because banks add the missed payments to the total when payments resume, it can actually increase homeowners' bills.

The Post illustrated the problem with the story of Deepak Malla, a 42-year-old information technology worker who lost his job last year. He made a 20% down payment on a conventional loan when he bought his house, and had no trouble making payments until his layoff. He found a new job, but it came with a pay cut of more than 25%-- and his mortgage lender refused to modify his loan to reflect his new financial means, despite a six-month effort. Malla also tried refinancing but was unable because falling home prices took away his equity. Instead, his lender recommended a short sale. However, when the Post contacted it for comment, the lender said Malla does qualify for a loan modification, despite repeated previous rejections.

As San Clemente loan modification lawyers, we have seen the effects of rising unemployment in our own work with homeowners. In many cases, people who were laid off are able to get unemployment -- but unemployment benefits pay nowhere near enough to cover the high monthly payments common in the Southern California housing market. Without a source of income, many homeowners drain their savings and investments to give them time to fight for a loan modification -- only to encounter repeated rejections, like Malla. Our Redlands loan modification attorneys fight for homeowners in this position, filing lawsuits whenever necessary to make lenders live up to their own promises and stop unfair foreclosures.

Howard Law LLP has an active loan modification practice serving homeowners throughout California. Our Moreno Valley loan modification lawyers are often able to get through to banks even when borrowers have not, because we are attorneys and banks understand that we are serious about protecting our clients' rights. In fact, we will use any evidence we find of predatory lending as a bargaining tool to get clients the best possible loan modification. We have had good results fighting for meaningful changes to our clients' loans, including reduced interest rates; changes to the structures of subprime loans; and extensions of the life of the loan.

If you're facing a default or foreclosure due to unemployment, a bad loan or other financial stressors, and you know you need help, you should call Howard Law right away. To set up a confidential and completely free consultation, please contact us online or call 1-800-872-5925.