Unemployment and Foreclosure Connecting the Dots

News on the employment front is grim and getting grimmer. It's being widely reported that job losses are the highest they've been in 50 years.

Actually though, that's not quite the whole story. The whole story is worse and explains why we will continue to face growing foreclosure numbers.

Unemployment Numbers

Unemployment data is published monthly by the Bureau of Labor Statistics (BLS). The numbers released by the government are important because they're a measure of economic health, they can impact the stock market and they're also a reflection of the government and how well its economic policies are working. Not surprisingly, every administration works to tweak the unemployment numbers to put the economy in the best possible light.

The result is that whatever figures we get from the BLS are correctly estimated for whatever it is that we're estimating. The problem is that we're not estimating how many people are actually out of work.

How It's Done

When the media reports “unemployment numbers,” what they typically mean is the percentage of payroll employees who are not working. The March BLS figures show that we had 154 million people in the workforce, of whom 13.2 million were jobless — that's 8.57 percent.

However, not counted by the government are the 2.1 million people who wanted work but had not searched for a job during the month before the survey, individuals who are regarded as “marginally attached” to the labor force.

Add 13.2 million and 2.1 million and you get 15.3 million payroll employees without jobs, 9.93 percent of the workforce. Even this number is short because we're still not counting unemployment among the 10.4 million people who are self-employed or our 1.3 million farmers.

No Savings

Unemployment might be less of problem if more people saved. In recent years, however, saving has become as popular as disco, Bernie Madoff and the flu.

A just-released study by MetLife shows that “a disturbing 50 percent of Americans say they are only one month — or only two paychecks — or less away from not being able to meet their financial obligations if they were to lose their job, and more than half of these, a startling 28 percent of the total respondents, couldn’t survive financially for more than two weeks.”

Now you might think, aha, but what about the middle class? Nope, not much better there.

“Even the ‘mass affluent’ — those making $100,000+ in income per year — aren’t immune, with more than one-quarter (29 percent) saying that they couldn’t meet their financial obligations for more than one month following a job loss,” according to the MetLife study.

“Combine rising unemployment levels with invisible savings rates and you have a sure formula for financial disaster,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the nation's leading source of foreclosure listings and data. “Just think how many homes could be saved if people had the equivalent of six mortgage payments in a savings account. Combine savings with unemployment and many households might avoid foreclosure for months. In fact, if they can find new jobs, savers in many cases are able to avoid delinquencies and foreclosure altogether.”

Re-default Impact

A new study by the Comptroller of the Currency (OCC) shows that even when borrowers are able to negotiate new loan terms many are still foreclosed.

Loan “workouts” generally fall into two categories, modifications and payment plans. With payment plans monthly, costs generally are reduced as loan terms are made longer or interest rates are dropped. Sometimes both strategies are employed to make loans even more affordable.

With payment plans, however, monthly costs can actually rise. This happens because a payment plan typically allows a borrower to make up lost payments over time. For instance, Smith misses a $1,000 mortgage payment and the lender allows him to pay back the money over the coming 12 months. Now Smith's next 12 payments are $1083.33 ($1,000 divided by 12 = $83.33 plus $1,000). Suddenly Smith's new costs are higher than the payment he missed.

According to the OCC, borrowers who got mortgage modifications routinely re-defaulted -- 55.14 percent were at least 30 days late six months after the loan modification and 59.74 percent were behind after eight months.

The OCC's figures, however, only concern mortgage modifications, loans where costs have often been lowered. The OCC does not provide re-default figures for payment plans, and payment plans — not loan modifications — make up the bulk of workout programs.

“The OCC figures show that large numbers of loan modifications have not worked,” says Saccacio. “Even when lenders make good faith efforts to change loan terms the probability of re-default is enormous and growing for reasons which lenders cannot control: the loss of jobs and the lack of savings.”

State Numbers

It follows that if foreclosures are related to unemployment then you would expect to see above-average unemployment levels in states with high foreclosure levels. In fact, such numbers break out in two ways, first as evidence of where steep foreclosure levels are today and, second, where we might expect rising foreclosure levels in the next few months to a year.

“In February,” says the BLS, “Michigan again reported the highest jobless rate, 12.0 percent. The states with the next highest rates were South Carolina, 11.0 percent; Oregon, 10.8 percent; North Carolina, 10.7 percent; California and Rhode Island, 10.5 percent each; and Nevada, 10.1 percent.”

More Foreclosures

Government figures show that unemployment levels in 2008 rose from less than 5 percent to nearly 8 percent, a pattern which is continuing in 2009. Unemployment levels, in turn, can be seen as a leading indicator for foreclosures.

As unemployment levels increase — whether we're talking about official numbers or not — foreclosure rates also rise because too many homeowners have little or no savings to help them in tough times. No less important, foreclosure levels tend to rise unevenly; that is, areas with a strong job base can expect to see fewer foreclosures over time than areas with steeper unemployment levels.

While extended unemployment benefits and new federal efforts to modify several million loans will help, such programs are no substitute for job creation, steady wages and regular paychecks. Unfortunately, for too many borrowers a missed paycheck or two can lead directly to the loss of a home.