Part of the Obama administration’s efforts to combat foreclosures, the money was aimed at helping troubled homeowners in states that were hit the hardest by the housing slump.
In putting together a plan to help struggling homeowners, housing officials here had to consider two factors that they said exacerbated Arizona’s foreclosure problem: the sharp decline in property values and high unemployment.
They decided to offer a more permanent solution by reducing the principal owed, which, in turn, would lower owners’ monthly payment.
The idea was to identify homeowners who were struggling but could afford to keep up with their mortgage payment if what they owed reflect their home’s current market value rather than an artificially inflated price that helped to create the housing bubble in the first place.
But since the program’s inception last year, it has helped only four homeowners and reduced their principles by a combined $62,000. On average, it lowered their monthly payments by $420.
The department has until December 2017 to allocate the funds.
Many who applied were ineligible, largely because the terms of the program designed by Arizona officials and approved by the U.S. Department of the Treasury require the lender to match the amount that the state agency was offering to bring down the principal mortgage.
Only two banks are participating in the program — the National Bank of Arizona and Bank of America.
Other large banks and mortgage giants, like the government-backed Fannie Mae and Freddie Mac, have so far resisted the idea.
Reginald Givens, a foreclosure assistance administrator with Arizona’s housing agency, insists that principal reduction makes sense.
Consider, he said, a home that was bought for $300,000 at the height of the housing bubble but is now worth $180,000. With a one-to-one match from the lender, the state program could slash the principal loan by $100,000.
Since the homeowner must be able to pay the monthly liability for the reduced loan in order to be eligible, the foreclosure is staved off, and along with that all the negative ramifications of a vacated home.
If the house ended up in foreclosure, Givens said it’s unlikely that the lender could sell the house at more than $200,000 anyway; the loss, therefore, is quite real, he said.
His point is a simple one: If you take into account the ripple effects of a foreclosure — to the lender, who would have to maintain the property at a cost; to the homeowner, who is forced out of the home; to the community, which would have to deal with all the problems that an empty house brings; and to the state, whose economy is dragged down by the high number of foreclosures — then giving the homeowner the principal reduction is a better alternative.
Givens said the housing department also designed the program to have a miniscule administrative burden on lenders. For example, the agency will prepare all the paperwork and make the evaluation before submitting the case to the lender.
“Personally, I feel they’re unjustified in their position,” Givens said, referring to banks’ and mortgage holders’ refusal to participate in the state-designed program.
Big banks in no hurry to participate
The hesitation by banks and mortgage lenders to participate in the state-run principal reduction program is drawing sharp criticisms from Arizona’s legislators, some of whom are pushing for a public hearing on the state’s foreclosure situation, which continues to be among the worst in the nation.
Rightly or wrongly, they lament that banks — which they note were bailed out by the government at the peak of the financial crisis — could have done more to stabilize the foreclosure situation and to help out the little guy, the homeowner who took out a loan to buy a house at a bubble price.
“The banks that are refusing to participate are acting pretty irresponsibly,” said Rep. Bruce Wheeler, a Democrat from Tucson. “This is something that would help, in my opinion, the banks and it would certainly help those families that are struggling to keep their homes and not go into foreclosure. It just doesn’t make any sense to me why they would not want to participate in this.”
Some of that sentiment is shared across the political aisle.
Told that only two banks have so far decided to join the state program, Sen. Michele Reagan, chair of the Senate Economic Development and Jobs Creation Committee, said there are financial advantages to banks to “not help people.”
“Don’t ever feel sorry for a bank,” Reagan said. “They collect money on their default insurance and they get made whole or close to it.”
Reagan offered another theory why banks might be hesitant: They no longer own the home mortgages. The loans have been bundled and sold, and reducing the principal mortgage essentially means asking investors to agree to a cut in their investment.
Arizona Capitol Times tried but failed to get an explanation from the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, why it’s not participating in Arizona’s principal reduction program.
But in a letter to U.S. Rep. Brad Miller (D-NC), FHFA director Edward DeMarco said only a small portion of loans backed by Fannie Mae and Freddie Mac are underwater — he estimated less than 10 percent — and would be candidates for principal reduction, and half of those are still paying their loans.
Essentially, DeMarco said the benefits from principal reductions to the government-sponsored entities are limited, and at this point, such a move is unwarranted.
Miller, along with several other representatives, had told FHFA that its opposition to principal modifications program like the federal Home Affordable Modification Program’s principal reduction component doesn’t make economic sense.
But Chase, another national bank, said talks with Arizona about finding the “best solutions” to the foreclosure situation are continuing.
“We are working with each state to find the program that we believe will offer the best solutions to help homeowners get more affordable payments, which is most important for a family to stay in their home,” said Mary Jane Rogers, a spokeswoman for Chase.
Housing officials and people familiar with banks’ loan operations point to the “moral dilemma” of offering principal reductions to homeowners as a likely reason why lenders aren’t eager to take part in efforts like “Save our Home AZ.”
It boils down to fairness, they said.
The question is this: Is it equitable to reduce the principal loan of a homeowner who hasn’t kept up with the payments, while a neighbor who is experiencing a similar financial hardship is paying his or her mortgage on time?
Rick Simon, a spokesman for Bank of America Home Loans, said this is why his bank is employing principal reduction selectively — not broadly.
Bank of America is the first and so far only major bank to participate in Arizona’s program. The bank is doing the same in Nevada, California and, soon, Rhode Island.
“Certainly, all homeownership retention initiatives recognize the high and rising costs of foreclosure to many parties — customer, servicer, investor and community,” Simon said.
“However, we can accomplish the same amount of monthly payment reduction for the homeowner by using more widely accepted steps — modifying the interest rate and term of the loan and forbearing principal — as we can through principal reduction,” he said.
Paul Hickman, president and CEO of the Arizona Bankers Association, sought to dispel the notion that banks are standing by while the foreclosure situation is wreaking havoc in neighborhoods.
“They’d much rather have performing loans, even at a lower interest and principal, than owning the home,” he said.
Banks are not in the business of home ownership, and maintaining empty houses costs money, he said
Hickman also emphasized the complexity of the housing problem. There are regulatory pressures at play that might make it more difficult for banks to agree to principal reductions.
Reducing mortgages might mean re-categorizing them as “troubled.”
“(And) that has all kinds of implications, most probably significantly on capital requirements for the bank,” he said.
Is it worth the effort?
Aware that the problem isn’t going to fade away anytime soon, Arizona’s policymakers are closely watching the foreclosure situation here and they are also eager to learn if efforts to combat high foreclosure rates elsewhere are working.
Hawaii and Arkansas both passed laws this year seeking to help homeowners save their homes from foreclosure.
The Arkansas law requires lenders to provide basic information, such as payment history showing the date of the default, before a foreclosure.
Under its law, a lender is also required to certify that a homeowner who has applied for assistance isn’t eligible for any loan modification program offered either by the lender or by any government agency.
Hawaii, meanwhile, approved legislation that establishes a mediation program and requires lenders to meet in person with a troubled homeowner to try and reach an agreement to save the home from foreclosure.
Reagan said she’s monitoring how these new laws impact the housing situation in those two states. In particular, she’s interested to learn if they negatively affect the interest rates there.
“It might be a disaster in those states,” she said. “(But) if it’s working there, I think all of us should take a look at states that have come up with ways (to address the foreclosure problem).”
There are similar legislative efforts in Arizona to help troubled property owners, and if the foreclosure situation doesn’t improve, a renewed drive to do something about the foreclosure problem next session is likely.
Reagan, for one, wants a mechanism in place to help not just low-income folks and others who are behind on their mortgage payments, but also middle- to high-income homeowners who may be considering “strategic default” because the values of their homes have been dramatically slashed.
Other legislators, like Phoenix Democratic Sen. Debbie McCune Davis, are thinking of ways to bring the housing department’s challenges into the public’s attention.
The obvious intention is to try and put pressure on stakeholders to get a better handle on the problem.
“I believe it is underutilized and I believe it needs to be discussed in a public forum so that it can be reviewed to see if this can be used more effectively,” McCune Davis said, referring to Arizona’s federally-funded principal reduction program.
The fine print
The program isn’t for everybody. There are strict requirements for homeowners to qualify for up to $50,000 in “soft loan,” which will be forgiven if they stayed in the home for 10 years.
Foreclosure must be imminent, and homeowners have to demonstrate they have exhausted all options to remain current on their payment. Also, the property must be their primary residence.
Applicants must also show financial hardship, such as a decreased income because of underemployment or some aggravating medical condition.
Additionally, the federal money can’t be used to assist folks who are facing foreclosure because of “self-inflicted wounds.” Homeowners who are upside down because they refinanced their loan in order to buy an expensive boat or RV need not apply.
Housing Agency offers aid to unemployed arizonans
Unable to persuade most lenders to participate in a program aimed at reducing principal loans, the Arizona Department of Housing recalibrated its efforts to combat foreclosure and began offering housing assistance to unemployed Arizonans this year.
Reducing mortgage principal remains the agency’s primary focus, but under the new program, unemployed homeowners could get up to $50,000 in mortgage payment assistance.
That’s essentially $2,000 a month in aid for up to two years. The department set aside $36 million for this initiative.
The idea is to provide an immediate bridge to homeowners who lost their jobs in the down economy, giving them hopefully enough time to find work or retrain without having to worry about a foreclosure.
Like the principal reduction program, there are strict requirements to be eligible.
But at least lenders, including government-sponsored entities, are participating in the unemployment assistance program.
“They don’t accomplish a modification, but they do prevent a foreclosure,” said Reginald Givens, a foreclosure assistance administrator at the state housing agency.
Since March, about 70 homeowners successfully applied for the aid, and housing officials are doing everything they can to get the word out that there is help for unemployed Arizonans.
Officials here are also looking for ways to get the word out that there’s help available to struggling residents.
Arizona’s housing market is improving but the state’s foreclosure rate remains among the highest in the nation, and this uncertainty has tempered any good news from elsewhere in the state’s economy.
Arizona’s foreclosure rate is second highest in the nation, with Nevada taking the top spot. One in every 210 housing units in Arizona received a foreclosure filing last May, according to RealtyTrac, a company that monitors home foreclosures across the country.