Arizonans receiving little help from mortgage program

Even as Arizona's share of federal money for a program designed to help homeowners avoid foreclosure has more than doubled, the program has been a failure, officials said.

The program was meant to trigger many loan modifications, reducing the amount of money distressed homeowners owe.

But so far, only one Arizona homeowner has obtained a loan modification under the year-old plan because banks have been reluctant to participate, officials said.


Starting last February, the so-called Hardest Hit Housing program doled out hundreds of millions of dollars from the Treasury Department to the states facing the biggest foreclosure problems. Then, in December, the Arizona Housing Department received an additional $143 million, bringing the state's total to almost $268 million.

The one loan modification so far saved the homeowner a total of $40,000.

Arizona has always planned to spend much of the funds two ways.

Most of the money is allotted for loan modifications that would reduce the amount some homeowners owed on their mortgages - as long as their banks also agreed to write off an equal amount. Also, the state would assist some homeowners who lost jobs or income, providing cash to help them make mortgage payments.

But working out deals with lenders to spend the money has proven tougher than expected.

Other states have also struggled. No homeowners have yet received loan modifications with principal reductions through similar federally backed programs in California and Nevada. The Housing Department began taking applications for the loan-modification program in September.

It is about to begin taking applications for the second part of the program, which will cover mortgage payments for unemployed or underemployed residents for as long as two years. The funds help homeowners who can't qualify for loan modifications because they aren't working or aren't earning enough.

"We have failed with this program so far, but we are going to make it work," said Michael Trailor, director of the Arizona Housing Department. "It's been difficult to convince the big lenders to get on board, but we are making progress."

Loan modifications

In Arizona, many people who couldn't afford their mortgage payments also couldn't refinance or sell because their homes were worth less than what they owe.

Loan modifications are supposed to help. If lenders agree to lower a payment by changing the interest rate, changing other terms or simply forgiving part of the mortgages, owners can hang on to their homes.

But although lenders are sometimes willing to cut interest rates - a separate federal program known as HAMP launched in April 2009 rewards them for doing so - many haven't been as willing to forgive principal.

Most of the Hardest Hit money is supposed to entice lenders.

Borrowers who qualify can get as much as $50,000 in federal funds to pay down their mortgage balances. Their lenders must agree to write off a matching amount.

Arizona housing counselors are prepared to organize the paperwork to make the deals less time-consuming for lenders.

But banks have been reluctant.

"If banks aren't willing to eat $50,000 to do a loan modification and keep a family in their home paying their mortgage, then they need to tell us what the major number is for making this program work," said John Smith, president of the Mesa-based non-profit Housing Our Communities. "Until then, this program is going to disappoint a lot of homeowners and the people trying to make it work."

More than 1,055 Arizona homeowners have completed an online form to see if they are eligible for the state's loan-modification program. Almost 250 of those people then filed applications. So far 30 of homeowners have been approved by the state agency for the program.

But those borrowers are waiting on decisions from their lenders.

Only one borrower has succeeded so far. National Bank of Arizona approved the loan modification in January. The Phoenix-area homeowner declined to discuss his modification, but his mortgage principal was reduced by nearly $40,000 and his monthly payment by $240.

His lender, National Bank, forgave $20,000 of his mortgage balance. Another $20,000 came from Arizona's $268 million in federal funds.

Officials said they are hoping for a breakthrough in the program. For the past several months, housing agencies in Arizona, California and Nevada have been negotiating with one of the nation's biggest lenders to accept the principal-reduction loan-modification program.

Trailor, of the housing department, said an agreement with that unidentified lender could happen in the next 30 days.

Mortgage assistance

Like the loan-modification program, the rules for the unemployment mortgage assistance are stringent to qualify. The program will have the same requirements as the loan-modification plan when it launches later this month:

- Anyone who took out a second mortgage that wasn't used to buy the home isn't eligible.

- Borrowers must be able to show their income was cut through unemployment, underemployment, illness, death or divorce but must still have some income.

- Borrowers must owe at least 20 percent more than their home is worth.

- A homeowner must already have sought help through the federal Home Affordable Modification Program and been rejected.

- Borrowers must live in the home for which they are trying to obtain a modification or receive payment assistance.

- Monthly payments after a loan modification can't exceed 31 percent of homeowners' after-tax income.

Trailor said the program has been slow to come into effect. It has taken nearly eight months to work out agreements with the big lenders for the Unemployment Mortgage Assistance program, though the program costs lenders very little and instead ensures they receive payments from borrowers who would otherwise be in foreclosure.

The Hardest Hit Housing money came from the $700 billion Troubled Asset Relief Program that expired in October of last year. Arizona, California, Nevada, Florida and Michigan received funds from the Hardest Hit Housing fund.

States may use the funds to cover administrative costs and mortgage-counseling fees and do not face specific rules or a deadline for spending the money because the Treasury Department wanted to seed innovative solutions. So far, innovation is taking time.

"The Hardest Hit program has been a challenge," said Sheila Harris, an affordable-housing expert and former director of the state's Housing Department. "The Housing Department is really trying to work with lenders, but the banks have been reticent."

by Catherine Reagor The Arizona Republic Feb. 16, 2011 12:00 AM




Arizonans receiving little help from mortgage program