Professor Cole's Finance Blog

On Friday, Mar. 4, 2011, the Bureau of Labor Statistics (“BLS”) released the jobs report (more formally known as the Employment Situation) for February 2011. The headline numbers were a gain of 192,000 nonfarm payroll jobs and an unemployment rate of 8.9% (seasonally adjusted downward from an actual rate 9.5%). This was first month since April 2009 that the unemployment rate has been below 9.0%, but still represents 13.7 million workers who would like a job but can’t find one. Moreover, much of the decline from the 9.8% unemployment rate reported three months earlier is attributable to workers who have dropped out of the labor force after using up their unemployment benefits, which now provide 99 months of support. Since November, more than 900,000 workers have given up looking for work and exited the labor force. If we were to include them, the unemployment rate for February would have been 9.5% rather than the “green shoot” number of 8.9%. Indeed, the broadest measure of unemployment reported by the BLS—U6—was a seasonally adjusted 15.9% in February, and 16.7% on an unadjusted basis, representing 25.6 million workers.

This also highlights the importance of the BLS models used to adjust for seasonality and for “births and deaths” of new firms. Many economists and commentators have questioned whether these models have been used to overstate employment. Indeed, just last month, the BLS reported that it had overstated employment during 2010 by about one-half of a million workers. In January 2010, the BLS reported that it had overstated employment during 2009 by 1.4 million workers.

There is another source for employment data that casts further doubts on the accuracy of the BLS number. The highly respected Gallup organization surveys about 20,000 households each month. While less statistically reliable than the larger BLS household survey, a comparison of the unemployment rates reported by each is quite troubling. While BLS reports seasonal-adjusted unemployment falling from 9.8% in November 2010 to 8.9% in February 2011, Gallup reports unemployment as rising from 8.8% to 10.3% over the same period. On an unadjusted basis, BLS also reports a slight rise over this period, from 9.3% to 9.5%.

This job market continues to discriminate against men and minorities. Among men, the unemployment rate was 9.3% but, for women, it was only 8.5%. Among Blacks, it was 15.3%, but for Whites, it was only 8.0%. Among teenagers age 16-19, a group that is usually the first to lose their jobs during a recession, the unemployment rate fell was 23.9%. Clearly, education plays a major role in those who do and those who do not have jobs. The February unemployment rate for those with a college degree was only 4.3%; for those with some college or an associate degree was 7.8%; for those with a high school diploma but no college was 9.5%; and for those with less than a high school diploma was 13.9%.

During February, the average duration of unemployment increased to 37.1 weeks, up from 33.9 weeks in November 2010. The number of chronic unemployed—those out of work more than 26 weeks, declined to 5.99 million from 6.33 million in November 2010. However, the decline in the size of the labor force suggests that these workers simply gave up hope and exited the labor force. A total of 87,000 workers exited the labor force during February. This continues a bad signal because workers typically re-enter the labor force when labor-market conditions are improving.

Posted by m1rac01 at 03:06 PM | Permalink

Back in March of 2009, the Obama administration unveiled the Home Affordable Modification Program, or HAMP; a program for helping delinquent borrowers save their homes from foreclosure -- a problem that got worse again in reports released just last week. The goal of the HAMP was to “help 3 to 4 million homeowners by 2012.” This phrase should have read “help or hurt,” because hurt is exactly what has happened to hundreds of thousands of homeowners who have attempted to use HAMP to save their homes.

How is it possible that a program for providing mortgages modifications could actually “hurt” homeowners? To understand this, we need only look at how the HAMP has worked—in practice. As reported in its most recent report for December 2010, HAMP has led to 1.47 million “trial modifications” that have resulted in 580,000 “permanent modifications” but 735,000 “trial modifications (have been) cancelled.” Now, the half-million permanent modifications are noteworthy achievements, so long as they don’t result in a high percentage of re-defaults, as has been the case for past modifications.

But what about the almost three-quarter million borrowers whose trial modifications were cancelled? Are they better, or worse off, from participating in HAMP? In perhaps hundreds of thousands of cases, the answer is worse -- far worse. To understand how that happened, we must go back in time to see how and why these borrowers entered into the program. According to a survey by ProPublica, a non-profit journalism organization, almost half of respondents reported that “they were advised, incorrectly, to fall behind on their mortgage in order to qualify for a modification.” In other words, these homeowners were current on their mortgages and only defaulted in order to qualify for the HAMP -- because you had to be in default before you could get government help. Indeed, the survey respondents report, they only fell behind on their payments after being advised by their lender, loan servicer or other supposedly reliable third party told them it could help their situation. Extrapolating the survey results to the 1.4 million HAMP participants, this situation likely describes the experience of half a million homeowners: duped into delinquency.

As bad as this sounds, it gets much worse because these borrowers typically were not told all the potential consequences of “falling behind on their mortgages.” Consider the case of one borrower I know who followed the advice of his servicer to default in order to qualify for a trial modification as HAMP is only available to delinquent homeowners. This borrower successfully obtained a trial modification that reduced his monthly payment from $2,000 to only $1,200. These trials are supposed to last for only three months, but this borrower was told, after three months, to continue making the modified payments until a decision could be made on his application for a permanent modification. Eight months passed, with eight timely modified payments made to the servicer, and then the homeowner was notified that the application had been denied for failing to file required paperwork that had, in fact, been filed, but which the servicer repeatedly lost. ProPublica reports that “losing documents and giving false information” is an almost universal complaint of respondents to its survey.

Worse yet, this homeowner was told that he was now responsible, not only for the next month’s full mortgage payment of $2,000, but also for the cumulative difference in the trial and full payments for the previous eight months (a total of $6,400), for late fees ($800), for foreclosure fees ($1,900) and foreclosure attorney fees (1,400); a grand total of $10,500. This borrower, who was never advised of this possible outcome, did not have $10,500 saved up for such a contingency and could not comply. Instead, the servicer initiated foreclosure proceedings, where the situation now stands. Fortunately, this borrower lives in a judicial foreclosure state where the process can take longer -- in a statutory foreclosure state like Virginia, the house would already have likely been lost at a sheriff’s sale.

Was this homeowner helped, or hurt, by HAMP? She was in financial distress, but able to make her monthly payment by skimping on everything else. She reached out to HAMP for a lifeline; instead, she received a noose around her financial neck.

How could this situation have been avoided? Clearly, more disclosure would have helped. With the full set of facts regarding potential outcomes, this homeowner and the hundreds of thousands in similar situations would never would have defaulted in the first place. Better yet, why don’t regulators require servicers accept the modified payment as payment in full for the length of the trial-modification period, require servicers to make a binding decision after the three-month trial period, and require servicers forego late fees and other penalties when a trial modification fails?  Or perhaps, as Republican lawmakers have suggested, it is simply time to pull the plug on HAMP, and apply the $30 billion that remains allocated for HAMP to other purposes.

Of course, the servicers don’t want to give up these lucrative sources of income, which have turned foreclosure into a profit center at the expense, not only of borrowers, but also of the investor-lenders whom the servicers represent. Typically, fees get paid to servicers before principal and interest go to investors. In fact, investors want to change the terms of their contracts with servicers to put their own best interests ahead of the interests of the servicers. However, the trustees who represent most investors are . . . other Wall Street banks, who thus far have failed to take action against the servicers, who also are Wall Street banks.

Just last week, the December S&P/Case-Shiller Home Price Index confirmed that housing has entered into a double dip recession. December data from LPS Applied Analytics shows that 2.2 million mortgages are in the process of foreclosure; another 2.1 million are seriously delinquent and most likely headed into foreclosure. At the current rate of foreclosure sales, we are looking at three years or more before this inventory works its way through the legal system; as it does so, housing prices will continue to decline, dragged down by the sale of foreclosed properties. Until changes are made to the way delinquent mortgages are serviced in the U.S., the housing market will continue to decline, likely dragging our economy into a double-dip recession.

Note: This entry appeared as an Op-Ed in the March 2nd 2011 print edition of the Washington Times and online at: http://www.washingtontimes.com/news/2011/mar/1/obamas-helping-hand-hoodwinks-homeowners/ 

Posted by m1rac01 at 04:38 PM | Permalink