Loan Modification

The Obama Administration Has a Brainstorming Session with the Hardest Hit States; What Should the TARP Fund Be Spent On?

By Andrew

When everybody was saying HAMP’s loan modification was dead as a dodo the Obama Administration has revamped the program under a new Hardest Hit Fund enhancement. This enhancement promises to allocate $600 million from the TARP fund to finance innovative ways of keeping people in their homes or avoid outright foreclosures. This help has been focused on specific states that have been particularly hard hit by the financial crisis. Throwing more money at an idea is not really a novel concept. What is kind of novel is that the Administration is asking for suggestions on how to spend it best.

The first HFA initiative targeted five states based on the rate of decline in house prices (over 20%). The idea was to help people with underwater and subprime mortgages. However, the situation has changed, the fastest demographic joining the list of troubled homeowners are unemployed homeowners with prime mortgages but with not enough income to pay for them. That is why the Administration is now targeting states with a high rate of unemployment (over 12%). There are five states that comply with this criterion: North Carolina, South Carolina, Rhode Island, Ohio, and Oregon. The key though, is that each state can use the fund as they see fit, well, within reason.

These states can now apply for this enhancement of the existing HFA fund. What gives this new enhancement an actual chance of being useful is that each state has some freedom in deciding how to use the money. The program does qualify the allowable uses of the money, but it gives officials in each state the freedom to decide the particulars. The guidelines are rather broad: 1) Protect home values, 2) Preserve homeownership and promote jobs and economic growth, and 3) Provide public accountability.

This gives states a chance to find creative ways to use the money in the most effective way. Relying on the creative thinking of government officials might or might not be a stroke of genius; time will tell. The administration has encouraged eligible states to submit proposals on how the cash should be spent in their counties. The schemes the TARP fund could be used for includes:

1)      Unemployment Programs. This is actually already in place. Troubled homeowners that are currently unemployed will be provided with a temporary loan modification, or forbearance period, where the mortgage payments will be reduced to 31% of their current income.

2)      Loan Modifications. This is a rather boring alternative, which will simply give financial institutions and lenders more money for accepting loan modifications.

3)      Principal balance reduction. This is a more interesting option; reducing the balance of a loan to offset underwater mortgages and allow for further modifications.

4)      Second Lien Reductions. This is also something now done by the HAFA program. It basically means junior lien holders of mortgages are paid off / compensated for allowing a short sale to go ahead even though they know too well they will not get a dime from it.

These are some of the ideas already on the table; the hope is that new and wonderful suggestions will crop up like some kind of multi-state brainstorm. What would you do with the cash? Obama seems to be open to suggestions.

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Related posts:

1. Loan Modifications In California May Get A Brand New Bill
2. Loan Modifications, Alternative Solutions to the Foreclosure Problem
3. SunTrust to close several wholesale branches around the country

1. Loan Modifications In California May Get A Brand New Bill
2. Loan Modifications, Alternative Solutions to the Foreclosure Problem
3. SunTrust to close several wholesale branches around the country

Full post as published by Blown Mortgage on April 13, 2010 (boomark / email).