While the twin challenges of unemployment and foreclosure are nothing new, one of the key themes in the February 2011 Community Indicators Survey was a deep concern over unemployment as a driver of new foreclosures, which in turn is dampening recovery in the housing market. As Figure 3 shows, MSAs in the 12th District with high rates of mortgage delinquencies – including Las Vegas and cities in California’s Central Valley and Inland Empire – are also struggling with unemployment rates well over the national average.
Figure 3: The Link between Unemployment and Foreclosures in the 12th District
Source: FRBSF Calculations of foreclosure data from Lender Processing Services Applied Analytics and unemployment data from the Bureau of Labor Statistics, March 2011. Blue lines represent the national average.
Respondents in Utah, Washington, Arizona and California all noted an increase in families seeking foreclosure and housing counseling help, with many of them unable to make their mortgage payments due to a job loss and an inability to find work. They also reported that these issues are not confined to low-income or subprime borrowers. As one respondent from California reported, “We are noting an increase in prime as well as ARM (adjustable-rate mortgage) borrowers facing foreclosure in our region.” In Utah, another respondent raised concern over the structural nature of this unemployment cycle, writing that laid off workers are unable to find similar jobs and therefore face much longer spells of unemployment. “They need new job training and an extended modification of their loan, or our area will see rising numbers of foreclosures, vacant homes, and blight.”
Respondents also emphasized their frustration with existing efforts to prevent foreclosures, citing the failure of voluntary loan modification programs, the limited capacity and willingness of servicers to assist distressed borrowers, and the lack of political will to enforce HAMP (Home Affordable Modification Program) and ensure its effectiveness. The limited scope of funding for interventions such as the Neighborhood Stabilization Program—and the cuts to funding for housing counseling—were frequently cited in the survey as barriers to helping LMI communities recover from the crisis.
The February 2011 survey results also highlighted a growing concern about strategic defaults, especially in Arizona, California, and Nevada. In many markets in these states, over half of borrowers are underwater on their mortgages, and there was little optimism that prices will rebound any time soon. Respondents raised questions about how strategic defaults might further push down house prices in these areas and the implications for neighborhood stabilization and community cohesion over the long-term.
