The White House on Wednesday said it would spend an additional $3 billion to help distressed homeowners in the states with the highest jobless rates to pay their mortgages.
The latest round of funding pushes the total federal commitment up to $4.1 billion. The government already runs two other programs to help homeowners modify existing mortgages or make their monthly payments. The White House is authorized to spend up to $50 billion to help homeowners under the Troubled Asset Relief Program originally created by the Bush administration to bail out Wall Street.
So far, existing government programs designed to help people to stay in their homes have met with little success. The rate of property foreclosures climbed 8% to 1.65 million in the first six months of 2010 compared to the prior year, according to RealtyTrac.
The new program is meant to prevent further home foreclosures in 17 states plus the District of Columbia. Most of those states have experienced a rash of foreclosures that have depressed the housing market and local economy.
Eligible homeowners could receive no-interest loans up to $50,000 for as long as 24 months. They would have to show a good record of mortgage payment before their employment or medical condition changed. They would also have to demonstrate a “reasonable likelihood” of resuming mortgage payments within two years.
The states with the highest foreclosure rates are Nevada, Florida and Arizona. Nevada and Florida would quality for fresh government assistance but not Arizona, which has slightly lower unemployment rate compared to the national average.
Other states eligible for assistance are: Alabama, California, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South Carolina and Tennessee.
The federal Housing Finance Agency would distribute $2 billion through the so-called Hardest Hit Fund set up earlier this year. The Housing and Urban Development Department would also make $1 billion available via a new emergency program authorized by the recently signed Dodd-Frank law regulating the finance industry.
The money would be given to homeowners who lost their jobs or cannot find enough work and are in danger of losing their homes. People whose medical conditions have also reduced their ability to work would also qualify under guidelines set by the Dodd-Frank law.
Homeowners would apply for relief through their state housing agencies.
Herb Allison, a senior Treasury official, said the goal of the program is to “stabilize a fragile housing market and allows responsible homeowners the chance to reduce their monthly mortgage payments to affordable levels.”
Critics say the relief programs are unfair to homeowners who are current on their mortgage payments. They also argue that much of the money is wasted because distressed homeowners usually default even after getting government help.
The latest Treasury report shows that about 10% of distressed homeowners who received modified loans in the fourth quarter of 2009 are delinquent in their payments.
“The default rates are far better than most experts predicted,” Allison said.
The modification program, known as HAMP, helps homeowners to renegotiate with banks to reduce the size of their original mortgages, most of which are much higher than the current value of their homes.
But only 39,000 homeowners were able to qualify for permanent modifications in June and just 400,000 have benefited since the program was enacted, according to government data. And a report by Fitch Ratings Ltd. suggests as many as three-quarters of the modified loans could end up in default once again.
Bartash writes for MarketWatch.com/McClatchy.