Magazine article Economic Trends

Changes in Foreclosure and Unemployment across States

Magazine article Economic Trends

Changes in Foreclosure and Unemployment across States

Article excerpt

07.06.10

The most recent recession has left deep scars on both the housing and labor markets, with the unemployment rate more than doubling and the foreclosure start rate roughly tripling from prerecession levels. However, the timing of the movements of the two series differs somewhat over the cycle. The overall foreclosure start rate began to rise sharply before the unemployment rate rose and well before the onset of the recession in December of 2007. This likely reflects a number of forces that were at work preceding the recession, including the decline in home prices and the weakening of loan quality, which occurred earlier in the decade.

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For traditional prime, fixed-rate mortgages, the rise in the foreclosure start rate moved later in the cycle and more closely in step with the rise in the unemployment rate. These loans represent about 53 percent of first-lien mortgages prior to the start of the housing crisis. For this group of loans, loan quality is generally higher, and the subsequent rise in the foreclosure start rate is more closely linked to economic weakness and job loss. Indeed, recent statistics from the Making Home Affordable Program indicate that 60 percent of the program's permanent mortgage loan modifications are the result of the loss of income. The joint movement of foreclosure starts and unemployment rates is particularly evident in this cycle.

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The obvious corollary is that the foreclosure start rate for loans other than prime, fixed rate mortgages, including subprime loans, led the cycle. The foreclosure start rate in this all-other-mortgage category is much higher than that for prime, fixed-rate loans, and it began rising well before we saw a significant rise in the start rate on prime, fixed rate loans or the unemployment rate.

The positive relationship between unemployment and foreclosure can be seen across the 50 states. Looking at the change in unemployment rates and the change in foreclosure start rates in the threeyear period from 2007:Q1 to 2010:Q1, we see that states that experienced large increases in their unemployment rates tended to experience relatively large increases in foreclosure start rates. The pattern is largely similar for both all mortgage types and for prime, fixed-rate mortgages, though the correlation is a bit stronger for the latter. …

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