$1.5 Billion Program to Troubled Homeowners

Under pressure to do more for troubled homeowners, President Obama is expected to announce on 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 and Michigan to fund programs to prevent foreclosure for people who are unemployed or who owe more than their homes are worth.

{loadposition in-article}

Also, the agencies can assist homeowners having trouble securing loan modifications because of second liens, as well as promote affordable housing opportunities.

Obama is scheduled to unveil the initiative, which will be funded with money from the TARP bank bailout, at events in Nevada, which has the highest number of underwater homeowners at 65% and the nation’s second-highest unemployment rate at 13%.

The president will be joined by Senate Majority Leader Harry Reid, D-Nev., who is facing a tough relection campaign.

The funds will be allocated based on a formula that takes into account home price declines and unemployment. The agencies’ programs must be approved by the Treasury Department.

The move is the administration’s latest attempt to fix its signature foreclosure-prevention effort, the Home Affordable 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-tax income, has placed more than one million people in trial modifications. But it has given lasting help to only 116,000 homeowners, mainly by lowering their interest rates.

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 little assistance from the modification effort. Administration officials repeated as recently as Wednesday that they were working on the problem, but that it was a complex issue.

Also, many homeowners with second liens have had difficulty getting into the loan modification program. In April the administration had announced a program that provided incentives for these lenders to work with borrowers, but only Bank of America has signed up so far 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 a full 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 large problem,” said the official, speaking to reporters on a conference call. “It’s going to help as many of the other programs do.”

State housing agencies

Friday’s announcement shifts the burden of coming up with solutions to the housing agencies — organizations that are state-chartered but mostly operate independently.

Traditionally, these groups focus on affordable housing, providing assistance to first-time homebuyers and those with low incomes. Nationwide, they have provided mortgages to more than 2.6 million first-time purchasers and have financed 2.9 million low- and moderate-income apartments, according to the National Council of State Housing Agencies.

Several, however, also administer programs that cater to those facing foreclosure. For instance, Pennsylvania’s housing agency lends money to the jobless to help them cover their loan payments. Created in 1983, it provides loans of up to $60,000 for as long as 36 months. It has distributed $236 million and helped nearly 43,000 people, according to Rep. Chaka Fattah, D-Pa., who introduced legislation to establish a $3 billion emergency mortgage-assistance program nationwide.

The senior administration official was vague about how these agencies would help the target audiences, saying mainly 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 negotiate principal reductions with their loan servicers and pay incentives to second-lien holders to get them to agree to loan modifications, according to the White House. The official pointed to the Pennsylvania program, as well as those 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 more innovation,” 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 not under consideration.

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 the research firm First American CoreLogic.

These states also have among the highest unemployment levels as well, with Michigan at 14.6%, Nevada at 13%, California at 12.4%, Florida at 11.8%. Arizona has a jobless rate of 9.1%, which is better than the national 9.7% rate for January, according to the Bureau of Labor Statistics

You may also like...