By Ronald D. Orol
RISMEDIA, February 23, 2010—(MCT)—Facing millions of foreclosures and high unemployment, President Barack Obama recently announced a $1.5 billion fund to help unemployed homeowners and other struggling borrowers in a handful of states.
“What we can do is help families that have done everything right to stay in their homes, and we can stabilize the housing market so that home values can begin rising again,” Obama said at a town hall meeting in a Las Vegas suburb.
As part of the program, five states—Arizona, California, Florida, Michigan and Nevada—have home prices that have fallen enough to qualify for the additional assistance. Obama said that price declines in homes and high unemployment in these regions have created major challenges for families.
He argued that too many lenders were too focused on “making a quick buck than acting responsible,” that “too many borrowers acted irresponsibly by taking on mortgages they couldn’t afford” and government regulators turned a blind eye to the problem.”
State and local housing-finance agencies in states seeking assistance must submit program proposals to the Treasury Department, which will evaluate and decide if they qualify. The funds are allocated from capital set aside for housing from the $700 billion Troubled Asset Relief Program.
States where the average price for all homeowners in the state have fallen more than 20% from their peak are eligible to participate. The average price for all homeowners in Nevada, for example, has fallen by more than 40% from its peak.
According to Obama, three sorts of problems may be addressed with funding: unemployed borrowers, underwater borrowers and those with second mortgages on properties. “This fund is going to help out-of-work homeowners avoid preventable foreclosures. It will help homeowners who owe more than their homes are worth find a way to pay their mortgages that works for both borrowers and lenders alike.”
Herb Allison, assistant secretary of the Treasury for Financial Stability, told reporters that the allocations are a modest step to stem the housing crisis. However, he added that the program is intended to encourage these states to foster innovative approaches to limit further foreclosures. “Local housing-finance agencies understand the local markets,” he said. “While the housing crisis is national, it takes on local characteristics, and these groups understand the situation on the ground. We want to put to work their creativity and their knowledge to come up with new ideas to test those ideas in their communities.”
Allison added that he hoped the successful programs could help the Treasury Department come up with additional ideas for national programs to help troubled homeowners. “We can learn a great deal from this and see what works in local situations and how we can leverage that.”
Obama announced the program in Nevada, one of the hardest-hit states, along with Senate Majority Leader Harry Reid and other lawmakers. Reid, a Nevada Democrat, is in a battle for re-election in his state, in part due to frustration over high unemployment. The program’s announcement comes two days after the Treasury Department reported that a one-year-old $75 billion program to help 3 million to 4 million homeowners modify their mortgages to avoid foreclosure has only aided a small fraction of those at need.
The program, known as the Home Affordable Modification Program (HAMP), seeks to aid borrowers by allowing them to modify their mortgages and lower monthly interest rates through any participating lender. Under this plan, the lender voluntarily lowers the interest rate, and the government provides subsidies to the lender and borrower. The Obama program has so far only helped 116,000 troubled borrowers modify their mortgages from three-month temporary plans into more affordable permanent loans. The HAMP program, which is set to run through 2012, was announced on Feb, 18, 2009. Allison pointed out that about roughly a million homeowners have had their payments reduced, mostly as part of the trial three-month plans. He added that roughly half of those are eligible for permanent modifications. “We are on pace to help 3 million to 4 million homeowners by the conclusion of the program in 2012,” according to Allison.
Henry Sommer, director at the National Association of Consumer Bankruptcy Attorneys in Philadelphia said he supported the idea of targeted taxpayer assistance to states that need it most. However, he was skeptical whether the vast majority of the $1.5 billion would ever be used. Sommer pointed out that the largest part of the $75 billion HAMP program so far hasn’t been allocated—in large part because only a small number of households have received permanent modifications, which is when the majority of incentive payments go out. “They are supposed to spend $75 billion, but aren’t using it,” he said. “I am concerned that even though they announced this program, that the funds in it won’t be used.”
Sommer added that he was interested in seeing what kind of programs the Treasury would approve to be eligible for access to funds.
A program to help troubled homeowners who have taken out second mortgages on their homes could be helpful, if it provides high-enough incentive payments to convince lenders to drop the second mortgages. Sommer recommends a regional program that gives banks “a few thousand dollars” to drop second mortgages. “Banks don’t want to give up the second mortgages because it is a big hit on their balance sheets,” he said. “However, they’re not worth anything if the homes are sold in foreclosure.”
Federal funds for other state programs to help the unemployed stay in their homes and programs to help borrowers whose homes are worth less than their mortgages would also be helpful, according to Sommer.
Sommer also expressed concern that some other states with high unemployment and massive foreclosure rates may not qualify for the additional assistance, because the average price for all homeowners there hasn’t fallen 20% or more from their peak. Rhode Island, for example, recorded a 12.9% unemployment rate in December 2009, according to the Bureau of Labor Statistics data as of Jan. 22.
Sommer is hopeful that the Obama administration will focus additional attention and funds to a national program that could help struggling unemployed homeowners—a growing segment of borrowers that are facing foreclosure.
Jaret Seiberg, an analyst at Concept Capital in Washington, said the White House is considering a program that would suspend mortgage payments for jobless homeowners for three months and give the borrower three opportunities to extend the payment deference for up to a year.
The new targeted assistance comes after the Special Inspector General for the Troubled Asset Relief Program on Jan. 21 released a report warning that the Obama administration’s and the Federal Reserve’s policies to support the mortgage market could in fact be creating another dangerous housing bubble in some markets, while at the same time failing to do a good enough job to stabilize other markets.
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