Struggling Arizona homeowners can apply for federal aid next week

The standards to qualify for a new round of government foreclosure aid are high, and most homeowners probably won't meet them. But state officials hope the program will spur changes that help more people in the long run.

Starting next week, struggling Arizona homeowners will be able to apply for a piece of the $125 million in federal funds that the state Housing Department is administering. Most of the money is intended to help borrowers reduce their mortgage principal and stave off foreclosure.

With stringent rules on who gets aid and a small pot of money to spend, officials don't expect the program to fix the state's foreclosure crisis. The Housing Department plans to help 3,500 to 4,000 homeowners.

"We can't help everyone with this funding. Actually, we will only be able to help a small percentage, considering there are more than 4,000 foreclosures in the Valley alone each month," said Michael Trailor, director of the Housing Department.

But housing advocates hope the plan will have a broader effect, persuading lenders to change the way they're handling loan modifications, which currently don't help enough eligible homeowners in need.

Economic factors have driven many Arizona borrowers to seek loan modifications. Some were overextended to begin with, with expensive houses bought during the boom and large monthly payments. The downturn brought other problems as home values plummeted 50 percent and people lost jobs.

The result: Many people who couldn't afford their mortgage payments and couldn't refinance or sell because their homes were worth less than what they owed.

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 launched in April 2009 rewards them for doing so - many haven't been as willing to forgive principal.

That's where the new federal program comes in. Arizona officials plan to use the money from the "Help for the Hardest Hit Housing Markets" program to entice lenders to forgive portions of borrowers' loans. Borrowers who qualify will get money to pay off as much as $50,000 of their mortgage balance - so long as the lender agrees to write off a matching amount. Housing counselors will organize all the paperwork to cut through the red tape and make the deals less time-consuming for lenders.

"By reducing the principal and not just the interest rate on borrowers' loans, we are making their payments affordable for the long term and incentivizing them to keep paying," Trailor said. "This is a pilot program that could be expanded if we can show it works."

Eligibility

Tens of thousands of homeowners are expected to seek aid when the Housing Department starts taking applications Thursday. But the state program comes with set guidelines that many borrowers won't meet:

• Anyone who took out a second mortgage that wasn't used to buy their 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.

• A homeowner's income must be enough to support a mortgage for the current market value of the house.

• 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.

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

A smaller portion of Arizona's money will go to as many as 1,000 underemployed homeowners who apply for help in paying their mortgage for up to 24 months until they can find higher-paying jobs.

Trailor said the guidelines for Arizona's loan-modification program are strict because they want to ensure that people who receive one stay in their homes for the long term. Recent numbers show that about 50 percent of all U.S. homeowners who received permanent loan modifications during the past 18 months still lost their homes to foreclosure. Government officials say Arizona's loan-modification retention rate - the number of people who keep making their mortgage payments for at least six months after it is lowered - is even worse, although exact figures aren't available yet.

Since the new Hardest Hit aid was announced in February, Trailor has made it clear that his priority would be to help "responsible" Arizona homeowners and that the funding would not be used to help people facing foreclosure because of "self-inflicted wounds," such as taking large sums of cash out through refinancing, home-equity lines of credit or risky loans.

Maria Purcell was denied a loan modification by her lender early this year but was hopeful after hearing about Arizona's funding for loan modifications. Now, after hearing about the tougher guidelines, she is less hopeful. "I am going to apply, but I don't think I'll get it," said Purcell, who refinanced and tapped some of her Scottsdale home's equity during the boom to help her daughter with college tuition and pay off some credit-card bills.

The "personal responsibility" limitation on the aid has raised the most concern from Arizona housing counselors. Many are working with homeowners who took out subprime and second loans without fully understanding the repercussions.

Karen Scates, a former deputy director of the Housing Department, is concerned that homeowners who were taken advantage of and placed in high-risk or subprime loans, when they qualified for safer, less-expensive mortgages, are being unfairly excluded from the state's loan-modification program.

Trailor explained his reasoning. "We could have said, 'OK, first come, first served' and helped the first 4,000 people who applied," he said. "That would have been easy but unsuccessful. We want to help the people who have a chance of successful modification that keeps them in their home for years."

He said loan modifications, even with principal reductions, aren't enough to save some homeowners from foreclosure.

Difficulties

The federal government created the Hardest Hit program because it was clear by February that the first modification program, known as HAMP, wasn't helping enough homeowners in the states with the biggest declines in home values.

When Arizona along with California, Nevada, Florida and Michigan were awarded a combined $1.5 billion from the Hardest Hit fund, the states' housing agencies were told to find "innovative ways" to spend it to help homeowners. All agreed a matching principal-reduction program that encouraged lenders to forgive principal would provide aid that HAMP couldn't.

Lenders say the record number of foreclosures and complex rules in the federal-aid programs have made it difficult for them to modify loans quickly.

Earlier this summer, Arizona began working with California and Nevada on one principal-reduction plan they could sell to lenders with sizable foreclosure portfolios in the West. The states' strategy is to pay half of the principal reduction and do all the legwork, including checking applications and documentation, so more lenders will agree to the loan modifications.

The states will pre-screen all loan-modification applications for eligibility and work with housing counselors to compile all the needed documentation. "Our goal is to do all the up-front work, put money in the deal and submit a loan-modification file to the banks that makes sense and is easy for them to agree to," said Reginald Givens, Hardest Hit coordinator for the Arizona Housing Department.

The three states have been working closely with Bank of America and hope it will participate in their principal-reduction loan modifications. Trailor flies to Washington, D.C., on Monday to meet with the Treasury Department, BofA and the other states' housing directors to finalize a deal. National Bank of Arizona has already committed itself to the program.

The Treasury Department recently agreed to compensate lenders for loan modifications made through the Hardest Hit program, just as they are for HAMP. Lenders typically receive $1,000 to $5,000 for each loan modification.

"Convincing lenders to reduce homeowners' mortgage balances has been a challenge," Trailor said. "Homeowners must know that, ultimately, it's up to their lender whether they receive a loan modification."

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The loan-modification program

On Monday, Arizona homeowners 60 days behind on their mortgages can start applying for a loan modification under a plan funded by the federal "Help for the Hardest Hit Housing Markets" program.

1. Homeowners need to go to azhousing.gov and answer 13 questions. Anyone without Internet access can call 877-448-1211 to work with a housing counselor. Borrowers need all documentation, including mortgage bills, tax returns and W-2 income statements.

2. The Housing Department will examine applications and mortgage information to see if homeowners are eligible.

3. If it appears a homeowner is eligible, the department will hand the application over to a housing counselor who will check the documentation and work with the homeowner.

4. If a homeowner's loan, income and debt documentation meet the program's guidelines, the department will begin working on a plan to back a loan modification based on the current value of the home and what the borrower owes. The agency will determine how much principal needs to be paid off on the loan to make the payment affordable and send it to the lender.

5. The lender must decide whether to match the amount of principal the Housing Department is willing to pay off and then sign off on the loan modification. The borrower doesn't qualify for the modification until the lender agrees to the terms.

by Catherine Reagor The Arizona Republic September 18, 2010




Struggling Arizona homeowners can apply for federal aid next week