Here is an interesting article about a program in Pennsylvania that loans up to $60,000 to homeowners who can’t pay their mortgage due to a layoff or other financial strain.
The program, which has distributed $450 million on behalf of 43,000 homeowners since its inception, has an 80% success rate in helping borrowers avoid foreclosure. And the recent housing crisis has prompted thousands to seek assistance. A record 14,000 homeowners applied for help in 2009, up from 10,000 in most years.
“If you allow people some time to find a job, they can keep their home, which saves their family, their neighborhood and their communities,” said Brian Hudson, the agency’s executive director.
The program started in 1983 assisting 43,000 homeowners as mentioned. Last year, it provided help to 3,250 residents. As you read the article, it sounds like a solid program, and I think under normal circumstances it probably is. However, the problem with this is this housing turn is due to a couple issues. One, negative equity in homes is a large contributor to the overall default rate. This program won’t help these folks. Second, many folks bought houses that they simply could not afford or that strapped them too much. Even with help, these folks are destined to lose the home.
I don’t know if the state program does a good job of pre-qualifying folks. The director of the program claims it does, which is good. My fear is the program ends up like most government program and is extended to those who cannot afford their homes. If the Feds adopted this program, we would see this money given to any homeowner facing default, whether it was a temporary job loss, negative equity, or too expensive of a home. This would temporarily slow the default rate, but it would essentially be throwing good money after bad since most of the people would end up defaulting once the money ran out. Proof already exists that the Feds can’t manage a program like this:
Such loan programs are not that easy to administer, however. Fannie Mae unveiled a similar program, HomeSaver Advance, in 2008 to help those suffering temporary financial hardships. It provided unsecured loans of up to $15,000 that borrowers could use to clear their arrears.
But the program was effectively discontinued within a year after redefault rates soared to nearly 70%. By August 2009, HomeSaver Advance accounted for only 3% of Fannie Mae’s foreclosure prevention actions, down from 42% a year earlier.
So I applaud Pennsylvania for creating this program and properly administering it (by diligently qualifying borrowers), but I don’t want the Feds to read this article and think they can apply it nationwide. It would be another total waste of money.