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 Housing help for unemployed, underwaterborrowers
By Tami Luhby, senior writerFebruary 19, 2010: 6:25 PM ETNEW YORK (CNNMoney.com) -- Under pressure to do more for troubled homeowners, President Obamaannounced Friday a $1.5 billion program to help borrowers in the five states hit hardest by the housing crisis.The initiative calls for pumping money into state housing agencies in California, Arizona, Nevada, Florida andMichigan to fund programs to prevent foreclosure for people who are unemployed or who owe more than theirhomes are worth.Also, the agencies can assist homeowners having trouble securing loan modifications because of second liens,as well as promote affordable housing opportunities.Obama unveiled the initiative, which will be funded with money from the TARP bank bailout, at events inNevada, which has the highest number of underwater homeowners at 65% and the nation's second-highestunemployment rate at 13%.How the effort will help people, however, remains to be seen. The administration did not provide many detailson the agencies' programs, saying it was leaving it to them to come up with the solutions. At least three of theagencies, in Florida, Arizona and Michigan, were surprised by the announcement and are still assessing howthey will utilize the money.The move is the administration's latest attempt to fix its signature foreclosure-prevention effort, the HomeAffordable Modification Program, which has been widely panned for not doing enough.The year-old initiative, which lowers qualified borrowers' monthly payments to no more than 31% of pre-taxincome, has placed more than one million people in trial modifications. But it has given lasting help to only116,000 homeowners, mainly by lowering their interest rates.
Denied! No long-term mortgage help
Consumer advocates and housing experts for months have called on Obama to expand the program to help the jobless and those suffering steep declines in their home value, two sectors that have received relatively littleassistance from the modification effort.Also, many homeowners with second liens have had difficulty getting into the loan modification program. InApril the administration had announced a program that provided incentives for these lenders to work withborrowers, but only Bank of America signed up -- and it did so only last month.A senior Obama official cautioned that the new program is just another tool in the White House arsenal, not afull solution to the housing woes facing the unemployed and underwater.
 
"As important as $1.5 billion will be to these five states, it's not going to solve what is a catastrophically largeproblem," said the official, speaking to reporters on a conference call. "It's going to help, as many of the otherprograms do."Reaction to the announcement was mixed, with some housing experts praising the administration for addressingthese issues and others saying it's still not enough.
State housing agencies
Traditionally, state housing agencies -- which are state chartered but mostly operate independently -- focus onaffordable housing, providing assistance to first-time homebuyers and those with low incomes.Several, however, also administer programs that cater to those facing foreclosure. For instance, Pennsylvania'shousing agency lends money to the jobless and those suffering temporary financial hardships to help them covertheir mortgage payments. Created in 1983, it currently provides loans of up to $60,000 for as long as 36 months.The program, which sends money directly to the lenders, can cover both arrears and monthly payments.Since its inception, it has distributed a total of $450 million and helped more than 43,000 people. Last year, itreceived about 14,000 applications -- about twice the average -- and assisted 3,250 people. The average loan is$10,500 and is paid back with 5.25% interest once the homeowner gets reestablished.Close to 80% of those helped by the program have avoided foreclosure, said Mark Schwartz, a board member of the finance agency."The program shows that giving short-term temporary assistance can be successful in helping people retain theirhomes," he said.The senior administration official was vague about how these agencies would help the target audiences, sayingmainly that these groups are intimately involved in their local housing markets.They could develop programs that assist the unemployed until they find jobs, help the underwater negotiateprincipal reductions with their loan servicers and pay incentives to second-lien holders to get them to agree toloan modifications, according to the White House. The official pointed to the Pennsylvania program, as well asthose in Connecticut and Massachusetts, as examples of promising initiatives."We want this to be a fund that amplifies the things that are working well and gives license for moreinnovation," the official said.
Walking away
Some housing experts say that homeowners who owe more than their homes are worth are more likely to walk away from the properties. Still, loan servicers have been reluctant to reduce borrowers' principal balances,preferring to lower interest rates or lengthen the term of the loan.The head of Citigroup's mortgage division recently told CNNMoney.com that principal reductions were notunder consideration because it raises the risk of moral hazard, meaning those who don't deserve it would try totake advantage of the program.The majority of underwater mortgages are heavily concentrated in five states being targeted by the president:Nevada, at 65%; Arizona, at 48%; Florida, at 45%; Michigan, at 37%; and California, at 35%, according to theresearch firm First American CoreLogic.
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