The foreclosure prevention program that works

By Ronald D. Orol

WASHINGTON (MarketWatch) — As Republicans try to kill an Obama administration foreclosure prevention program that even Democrats agree hasn’t lived up to expectations, a program in Pennsylvania is being lauded for being simpler, cheaper and more effective.

It’s called the Pennsylvania Homeowners Emergency Mortgage Assistance Program and was established in 1984, long before the recent mortgage crisis. The program gives bridge loans to people who have recently lost their jobs. Loans do not accrue interest until the participant’s income is restored.

And a recent study from the New York Fed says the Pennsylvania law works far better than the $30 billion national program set up in 2009 called the Home Affordable Modification Program, which so far has led to 630,000 loan modifications, against a target of 3 to 4 million.

Last year, Pennsylvania had the 26th-highest unemployment rate, of 8.7%, but the 37th-highest foreclosure rate, of 0.93%, according to Labor Department and RealtyTrac data.

The New York Fed study says the HEMAP program can be cheaper for taxpayers and help a large number of troubled homeowners. It compares the two approaches by evaluating costs on assistance for two hypothetical mortgages valued at $210,000 at the time of unemployment. The HAMP modification program, the report argues, costs the federal government $13,600 while the HEMAP program cost Pennsylvania $1,620.

The report said the HEMAP program can be cheaper, in part, because when the homeowner finds a job again, the loan ends and he or she begins to repay it.

Alternatively, the HAMP program provides taxpayer funded assistance to bank servicers, who, in turn, modify the borrower’s current mortgage payments, and those adjustments stay in effect for five years regardless of whether the borrower returns to employment.

(HAMP makes initial taxpayer-funded payouts to the servicers of $1,000 for each permanent modification, followed by an additional $1,000 a year for three years as long as the borrower remains current in paying their mortgages).

Besides being cheaper at the outset, the New York Fed report says that roughly 80% of HEMAP loan recipients have retained ownership of their homes, and that the program has largely become self-funded because most borrowers find jobs and have paid back their loans.

“Loan repayments are an important source of the program’s continued funding, and the high loan repayment rate attests to the program administrators’ ability to screen applicants on their reemployment prospects,” the report said.

Backers, including banks, also say that it is much simpler to operate than HAMP because it does not require the participation of bank loan servicers, which are often understaffed and have been, in many cases, unable to handle the volume of modification requests.

Michael McKeever, an attorney who represents lenders and servicers in Pennsylvania, said that banks prefer the HEMAP program because it imposes fewer delays on the foreclosure process than HAMP does.

“Banks support it because they recognize they can bring that account current, and there are minimal delays on the foreclosure process if the borrower is denied,” said McKeever. “The HAMP program and all the borrower applications is overwhelming mortgage servicers.”

With HEMAP, borrowers can receive a maximum of 120 days to apply for assistance, after which, if they aren’t approved for a loan, the foreclosure process can resume or begin.

The HEMAP loans can also go to help unemployed homeowners catch up on missed mortgage payments.

Marcia Wells, a housing counselor at the Carroll Park Community Council Inc., said HEMAP helped Frances Brinson keep her home in Philadelphia after she lost her job due to a broken hip. Wells said Brinson was approved for a HEMAP loan on April 4 because her son moved back home, increasing the household income to a level sufficient for approval.

The loan covers $10,000 in missed mortgage payments, late fees and due back-taxes.

Starting in September, Brinson and her son will pay the regular mortgage payments plus $100 a month to cover the HEMAP loan.

“We would have lost the house and gone into foreclosure without the loan,” said Brinson’s daughter Marlo.

The program has been such a success that some believe the Obama administration may have been better advised to allocate greater funds for it than HAMP, which so far has spent only $1 billion of the $30 billion allocated for it with expectations that it will only use $4 billion of the funds.

“Since we had so many resources for HAMP, it would have made more sense to put a lot of those funds for the HEMAP program,” said Philadelphia Unemployment Project Director John Dodds.

Henry Sommer, director at the National Association of Consumer Bankruptcy Attorneys, agrees that more money for HEMAP would have been a good remedy for the large number of people who can’t pay because they are unemployed.

The point hasn’t gone unrecognized. Four states — Connecticut, Delaware, Idaho and Maryland — are operating programs similar to HEMAP.

Roughly $7.5 billion from the Troubled Asset Relief Program has been allocated to 18 of the hardest-hit states (not Pennsylvania), to create programs for housing rehabilitation and help for unemployed homeowners.

The Dodd-Frank Act, approved last year, put another $1 billion in taxpayer funds to a program known as the Emergency Homeowner Loan Program, which is seeking to provide funds to the other 32 states to set up HEMAP-type programs. However, the Department of Housing and Urban Development, which is administering the program, hasn’t yet provided funds to 28 states that don’t have existing HEMAP-like programs.

HUD doesn’t have long to act — if the funds aren’t allocated to specific homeowners in those states by Sept. 30, it is required by law to be returned to the Treasury.

Lew Finfer, an organizer at the Massachusetts Communities Action Network, said HUD first promised to provide the funds to the states, including Massachusetts, by January, then March, then mid-May and now late July. Massachusetts is scheduled to receive $61 million from the program. Finfer said he and other advocates are setting up a meeting with HUD officials to discuss the delays.

“There are people right now who need it and because HUD hasn’t put the money out they are losing their homes,” said Finfer.

HUD spokeswoman Tiffany Smith said the EHLP program is a very big undertaking, and officials are making sure that the states have systems in place to handle the capital before funds are allocated. 

“HUD is working with state groups to make sure that homeowners can access the funds by the Sept. 30 deadline,” said Smith. “We are trying to roll this out as quickly as possible. It’s a unique program and it has been an implementation challenge.”

HEMAP, for all its success, has its own limitations.

About 183,000 borrowers have applied for a loan and only 43,000, or about 23%, have been approved.

A program that approves a larger percentage of applicants, such as the three to four million borrowers the Obama administration is seeking to help avoid foreclosure, is also one that would likely result in lower repayment rates and require more taxpayer expenditures, McKeever said