Unemployment is a bigger reason for missed mortgage payments than

high interest rates, according to a study from the Boston Federal

Reserve that raises questions about President Barack Obama's plan to stem foreclosures by modifying loans.

Borrowers are more likely to default on their payments because they

have lost their jobs or because the price of their homes has plummeted

than because of tough terms on their mortgages, the study found.

Loan modifications are not necessarily a better deal for investors

either, wrote Boston Fed economists Christopher Foote and Paul Willen,

Atlanta Fed economist Kristopher Gerardi and Lorenz Goette, a professor

at the University of Geneva.

Their research found that policies that directly help homeowners

overcome setbacks such as losing their jobs may be more effective in

combating foreclosures.

Foreclosure-prevention policy should focus on the most important

source of defaults, the economists wrote in a study released on the

Boston Fed's website late last week.

The findings challenge the thinking behind a White House plan

announced in February that would give up to 9 million families the

chance to refinance their mortgages. President Obama's administration

has made loan modifications a central plank of its efforts to tackle

the housing crisis.

One of the most influential strands of thought contends that the

crisis can be attenuated by changing the terms of 'unaffordable'

mortgages, the economists wrote. But policies that focus on loan

modification face important hurdles in addressing the current

foreclosure crisis, they wrote.

The economists suggest that the government could instead replace

part of an individual homeowner's lost income from a job loss through

loans and grants and help those whose predicament is more permanent

become renters.

In addition, investors do not necessarily stand to gain if

foreclosure is avoided, they said, and that could help explain the

relatively small number of loan modifications to date. Estimates that

total gains for investors from modifying rather than foreclosing can

run to $180 billion may not take into account a number of key factors.

Investors can lose money when they modify mortgages for borrowers

who would have repaid anyway. Borrowers with modified loans may default

again later, especially if the reason they were driven to default

remains, the economists said.

(Reporting by Kristina Cooke; Editing by Dan Grebler)