Wisconsin School of Business professors produced a recommendation based on their recent study to the Obama administration regarding the grave condition of foreclosures across America.
Unemployed families are being forced to lose their homes because they cannot afford the mortgage payments all around the country. Experts in the housing industry predict by the end of 2009, Wisconsin could have experienced as many as 25,000 foreclosures, according to a statement released earlier this month by Assembly Speaker Mike Sheridan, D-Janesville.
From July 2008 to July 2009, there was a 32 percent increase in foreclosure filings, according to the study.
The Obama administration is attempting to deal with the worsening foreclosure situation by working with the problem at the bank level. This means dealing with refinancing mortgages through $75 billion included in the stimulus bill to protect homeowners from foreclosure.
However, several real estate professors at UW who published the study disagree with the administration’s new plan, called the Wisconsin Foreclosure and Unemployment Relief Plan.
According to the study, the plan seeks to try to find a solution so the “perfect storm” of unemployment and declining housing values does not strike the United States and cause even more damage.
School of Business professors Morris Davis, Stephen Malpezzi and Francois Ortalo-Magne believe the “double-trigger” theory of foreclosure is applicable to the current issue.
The “double-trigger” theory states homeowners are likely to foreclose when their house is simultaneously “underwater,” meaning the mortgage is more than what the house is worth, and when they are suddenly unemployed or lose their income.
“This is really a double whammy that makes [those homeowners] much more likely to default and foreclose, which ultimately affects more than just the lender and the homeowner,” Malpezzi said. “It leads to housing prices falling further … which leads to more foreclosures and hurts the market as well.”
The average unemployment check is about $1,400 per month, but the average mortgage payment is $1,000 per month. With only a small amount of money left to cover all other life expenses, many homeowners default on their mortgages to provide meals for their families.
The Wisconsin Plan proposes that along with every unemployment check, a voucher for $600 should be included and that could only be used to pay a home mortgage.
This plan, according to the study’s estimate, will prevent approximately 500,000 homes from being foreclosed over the next two years. The plan is projected to cost $25 billion, a third of what the president’s plan will cost.
The professors have sent their plan to Obama in hopes the administration will consider moving in this direction.
“There has been some movement in this type of direction since the administration and Congress has noticed the bad unemployment numbers and the worsening foreclosure rates. If a change is made it won’t be just because three economists wrote a paper, but because of these factors,” Malpezzi said.
