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Another Failed Housing Program: Hardest Hit Fund Pays Out Just 2% in 16 Months

One of the responses you often get from official sources about the failed HAMP program is that it was but one of a string of programs implemented using TARP funds to help homeowners. So just because HAMP has used barely $3 billion of the $50 billion in available funds, that’s not a full picture, because some of that money was cleaved off to other programs. Among the biggest was the Hardest Hit Fund, a $7.6 billion program from Treasury designed to help unemployed borrowers in the hardest-hit states. The states would have some discretion into how the program money would be used, but by and large they would either use forbearance or principal reductions to save the homes of the suddenly unemployed until they got back on their feet.

Only thing is, the Hardest Hit Fund apparently has the same kind of miserable success rate as HAMP.

A $7.6-billion federal program to help unemployed homeowners stave off foreclosure has provided little relief two years after being unveiled, with less than $218 million of the money paid out to needy borrowers as of Jan. 1.

California, which was allocated nearly $2 billion from the Hardest Hit Fund, provided less than $38.6 million in assistance for 4,357 borrowers by the end of last year, according to the state’s latest report to the Treasury Department.

That amounted to less than 2% of the federal funds available to the state’s Keep Your Home California program.

“It’s about helping the homeowner, and that’s not happening,” said Bruce Marks, head of the foreclosure counseling group Neighborhood Assistance Corp of America. “As we speak, there are thousands of people losing their homes.”

The Hardest Hit Fund launched in August 2010. So that’s a 2% payout rate in 16 months.

As this is a state-run program, I can hear the alibis from Treasury now, that they cannot be blamed for state bureaucracies and bottlenecks. First of all, if they had an inkling that would be a problem they could have commandeered the program. Second, the fact that even states where the program has been aggressively promoted can’t spend the money points to a serious design flaw:

…State and federal officials said California’s Employment Development Department declined to mail information about the program to laid-off workers applying for unemployment benefits, citing legal constraints.

In Oregon, state labor officials aggressively promoted the program to residents on unemployment. It led to 16.4% of the available federal funds being distributed as of Dec. 31 — the most of any state.

When your star pupil is getting 16%, the test is the problem, not the students.

One part of this is the low priority placed on savings homes, at least when compared to the priority placed on saving banks. Government would not fail to make banks aware of any opportunities. But in addition, once again, the program put a lot of discretion in the hands of the lenders. California, Nevada and Arizona teamed up to create a plan to match any principal reductions from lenders dollar-for-dollar, doubling the benefit to the borrower. And the banks, along with the GSEs, simply rejected the plan. Only now has California hit on the idea to give the money directly to the homeowners without needing sign-off from the lenders. But so far they’re only “considering” the idea.

The banks chime in with the claim that the homeowners are declining participation in the Hardest Hit Fund program. Mm-hm. This is more of the “wave of strategic default” propaganda we’ve been seeing. To be clear, homeowners should look rationally at their situations and, if it makes sense, leave their mortgages behind. But statistics show that almost nobody does that, even during the foreclosure crisis. It just hasn’t happened, for whatever reason (I think there’s been a deeply ingrained moralism surrounding this, partially because of the bank PR).

And then there’s this curious paragraph:

A recent $25-billion settlement struck by state attorneys general and the Justice Department requires the five largest mortgage servicers to reduce billions of dollars in principal. That deal raised hopes of higher participation in the California, Arizona and Nevada programs by servicers who could help borrowers further with the additional matching funds at no cost.

We still haven’t seen settlement terms. But this makes it sound like banks could use the Hardest Hit Fund to get credit under the settlement as well. The programs vary from state to state, and I don’t know all the ins and outs. But the possibility exists that some of the programs give taxpayer money to banks as an incentive to forbear or reduce principal. In which case, once again, banks could get a payout for meeting their obligations under the settlement. At any rate, just by doing the loan modifications per their obligations, they would make failed programs like this Hardest Hit Fund look better.

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David Dayen

David Dayen