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Housing help for unemployed, underwater

By Tami Luhby, senior writerFebruary 19, 2010: 6:25 PM ET

NEW YORK (CNNMoney.com) -- Under pressure to do more for troubled homeowners, President Obama
announced 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.

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 in
Nevada, which has the highest number of underwater homeowners at 65% and the nation's second-highest
unemployment rate at 13%.

How the effort will help people, however, remains to be seen. The administration did not provide many details
on the agencies' programs, saying it was leaving it to them to come up with the solutions. At least three of the
agencies, in Florida, Arizona and Michigan, were surprised by the announcement and are still assessing how
they will utilize the money.

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.

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 little
assistance from the modification effort.

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 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 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."

Reaction to the announcement was mixed, with some housing experts praising the administration for addressing
these 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 on
affordable 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's
housing agency lends money to the jobless and those suffering temporary financial hardships to help them cover
their 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, it
received 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 their
homes," he said.

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 because it raises the risk of moral hazard, meaning those who don't deserve it would try to
take 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 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.

Housing experts were divided in their view as to whether the president's new initiative would make a significant
dent in these troubled sectors.

Brent White, an associate law professor at University of Arizona, does not think it will. "$1.5 billion is just not
going to address the problem," said White, an expert in underwater mortgages who advocates forcing banks to
write down principal.

But others were more hopeful. Paul Willen, a senior economist with the Federal Reserve Bank of Boston who
has studied the impact of unemployment on foreclosures, said the state agencies can do more to help.

He was not troubled by the fact it may take time for the efforts to get off the ground since he said the
foreclosure crisis will continue for a while. "The HFAs have the flexibility to construct a program that will help
the people who really need it," Willen said.