NY Fed economists urge coordinated mortgage,
unemployment aid

By JON PRIOR

Two economists at the Federal Reserve Bank of New York said states can design successful programs to help unemployed borrowers with monthly mortgage payments only if they are tailored to specific state needs.

The New York Fed economists James Orr and Joseph Tracy highlighted Pennsylvania Homeowner's Emergency Mortgage Assistance Program, which began in 1983. At the time roughly 4% of the state's labor force spent more than 26 weeks without a job, twice the national average. Delinquencies and foreclosures began to spike.

Through July 2011, the state received more than 183,000 HEMAP applications for bridge loans, designed specifically to provide up to two years of mortgage assistance at a total cap of $60,000. The success of the program, Orr and Tracy found is that program administrators carefully sifted through who should get funding.

Slightly more than 43,000 applicants received a loan. To date, 80% of them were able to stay in the homes and repay the loan in full.

"Lending to a carefully screened group of unemployed borrowers could be a successful strategy for states to assist distressed homeowners, reduce economically inefficient foreclosures, and help stabilize house prices for the benefit of the public at large. This approach avoids the complexity of working with servicers to change mortgage terms," Orr and Tracy said in a note about their research Tuesday.

Several problems face states looking to install similar programs today. The first is funding. State budgets simply can't afford it, and they are forced to lean on the federal government for the money.

Earlier this year, the Department of Housing and Urban Development provided up to $1 billion in funding for the Emergency Homeowner's Loan Program. The money went to 27 states and five others with similar programs, including Pennsylvania. EHLP complimented the Treasury Department's Hardest Hit Fund, which has provided nearly $7 billion to those states most affected by the foreclosure crisis.

HUD extended the application deadline for EHLP in August. HUD said it would take applications through Sept. 15 as resources remain available. The deadline remains Sept. 30 for the five states operating their similar programs with EHLP funding, which are Pennsylvania, Connecticut, Delaware, Idaho, and Maryland.

But the national debt has already reached a crisis. Congress is set on slashing the federal budget. When EHLP dries up, there may be no funding for these programs until the states sure up their own budgets.

A larger problem affecting many states is negative equity. In Florida, more than 46% of all mortgages are worth more than the underlying home is worth, according to recent data from CoreLogic (CLGX: 11.65 +2.10%). If the state designed a similar program – though it wasn't one of the EHLP recipients – it would face the possibility of providing essentially an unsecured loan to an unemployed borrower.

"The program design would have to balance the expected benefits to the homeowner, and the wider community, of providing assistance against the expected costs to taxpayers from default on the loan," Orr and Tracy said.

One option would be for the state administrators to go the mortgage servicer in the hopes of achieving a lower monthly payment to go with the bridge loan. Because the borrower is an extremely high risk of default, the servicer would more than likely agree, Orr and Tracy said.

Pennsylvania's HEMAP doesn't do this. Roughly 7.5% of mortgages are underwater. Getting a modified monthly payment loan-by-loan is anything but an expedited process and would slow the program down, as the market saw with the Home Affordable Modification Program.

Instead, Orr and Tracy said states could get concessions by large lenders to adopt a broader set of servicing standards in their areas, similar to those in recent consent orders, providing some backup for the high-risk borrower of a state bridge loan.

"The logic here is simple: If the problem is the mortgage, fix the mortgage; but if the problem is temporary unemployment, fix the cash flow. Of course, if the problem is both, then tackle each in a coordinated manner," Orr and Tracy said.