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Economists: Loan changes may not help

Bloomberg News / April 11, 2009
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WASHINGTON - 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 found.

Job losses and falling home prices have a bigger impact on delinquencies than mortgage terms, and modifications aren't necessarily a better deal for investors than foreclosures, according to a paper by two current and one former economist at the Federal Reserve Bank of Boston and one Atlanta Fed researcher.

The conclusion poses a challenge to housing advocates and to some extent the Obama administration, Fed officials, and other US regulators. President Obama disclosed a $75 billion plan in February that focuses on refinancing or modifying loans for up to 9 million homeowners.

"One of the most influential strands of thought contends that the crisis can be attenuated by changing the terms of unaffordable mortgages," the economists said in the paper posted on the Boston Fed's website yesterday. Yet policies aimed at reducing a borrower's debt-to-income ratio "face important hurdles in addressing the housing crisis," the authors said.

Instead, the government should consider alternatives such as loans to homeowners to bridge the loss of income for one or two years caused by unemployment, or helping borrowers become renters, the economists said.

The authors include Christopher Foote and Paul Willen, who are senior economists and policy advisers at the Boston Fed; Kristopher Gerardi, a research economist and assistant policy adviser at the Atlanta Fed; and Lorenz Goette, a professor at the University of Geneva and former economist at the Boston Fed.