Five years into a historic downturn in the U.S. housing market, federal and state policy makers have not yet succeeded in turning the tide. The Obama administration's flagship Home Affordable Modification Program (HAMP) has assisted far fewer homeowners than expected. Additional efforts, such as the federal Hardest Hit Fund for 18 states suffering from high unemployment and/or plummeting home prices, have gotten off the ground slowly.
But for frustrated state policy makers looking to take action on their own, one state effort offers some hope. It's nothing new; in fact, it's been around since 1983. It's Pennsylvania's Homeowners' Emergency Mortgage Assistance Program (HEMAP). In 28 years, it is estimated to have saved more than 40,000 families from foreclosure. In 2007, it was a finalist
for Harvard University's Innovations in American Government Award.
What's different about HEMAP is that it assists only those borrowers who are in fundamentally affordable mortgages, but who are having trouble meeting them because of temporary financial hardship, such as unemployment. It's especially timely now because the initial phase of the foreclosure crisis — driven in 2007 and 2008 largely by subprime mortgages — has given way to a second phase in which homes are more frequently being lost because of joblessness.
But there's a huge irony to HEMAP's success: Despite its impressive record, Pennsylvania lawmakers appropriated insufficient funds to keep the program running in 2012. The legislature ended up giving HEMAP $2 million — roughly an 80 percent cut from recent-year funding levels. In June, the Pennsylvania Housing Finance Agency suspended
the program, saying the funding was too low to continue its operation.
Democrats in the legislature were appalled at this decision. "I do not understand how such a valuable program could be so blatantly disregarded in this budget," said
Senator Vincent Hughes, of suburban Philadelphia. "Why mess with success?" asked Elizabeth Hersh, Executive Director of the Housing Alliance of Pennsylvania. "We have a really good system, and there is no reason why people should be out there on their own."
Republican Governor Tom Corbett's office responds simply that the decision was a product of the state fiscal predicament. "We had to make some difficult decisions," says Eric Shirk, a Corbett spokesperson. According to the National Conference of State Legislatures, Pennsylvania faced a $4.2 billion budget gap in fiscal year 2012, which comprised 15 percent of its general fund.
Lessons for other states
Whatever the ultimate fate of HEMAP, though, it's worth studying by other states looking to find a way to fight foreclosure that might actually succeed.
To be eligible, participants must have a hardship beyond their control; a probable chance of reassuming full responsibility for mortgage payments within two years; and a good credit history prior to the delinquency. Those who are accepted receive up to $60,000 in aid through two types of loans: one that pays off arrearages and associated costs, and a second that subsidizes monthly mortgage payments on an ongoing basis.
An April 2011 analysis
by the Federal Reserve Bank of New York found that the program had succeeded in keeping 80 percent of participants in their homes. Moreover, it's much cheaper to operate than the federal efforts. A projection by the New York Fed of the costs involved with each program found that HEMAP performed similar functions for 88 percent less money.
One reason the federal HAMP program is so expensive is that it provides financial incentives to mortgage lenders and servicers to participate in loan modifications, as well as funds for borrowers to stay current on their payments. Pennsylvania's HEMAP provides no such incentives. No active participation is required of a lender or mortgage servicer once it refers a delinquent borrower to HEMAP. The Pennsylvania Housing Finance Agency (PHFA) simply sends them loan proceeds.
A second factor is that HEMAP loans are required to be repaid with interest. The interest rate for loans closed in 2011 was 5.25 percent. This has enabled the program to recover a relatively large share of its costs. For fiscal years 2007-2010, for example, loan repayments represented roughly half of the program's funding.
Pennsylvania, in part because of HEMAP, has not suffered as severely as many other states from the housing crisis. Unlike Nevada, Arizona or Florida, it has relatively few homeowners who are " underwater
" — saddled with a mortgage debt larger than the value of their house. The authors of the New York Fed study believe that if programs similar to HEMAP were to be ramped up in these hard-hit states, the loans would likely need to be made contingent on lenders' and servicers' willingness to reduce loan principals. But they also believe that given the current level of delinquency, there would be strong motivation for these parties to participate.
Built-in grace period
Even though HEMAP has had trouble getting funded in the teeth of a huge state budget deficit, it is having its impact on policy at the federal level. The 2010 financial regulatory reform law passed by Congress created an Emergency Homeowners' Loan Program (EHLP), patterned after the one in Pennsylvania. In fact, the funding for EHLP was secured
by Congressman Chaka Fattah of Pennsylvania, who helped create HEMAP when he was a Pennsylvania state legislator in the 1980s. The federal program set aside $1 billion for 32 states that were not provided money through the earlier Hardest Hit Fund. Pennsylvania got $105 million. All funds from EHLP must be obligated by Sept. 30.
One major difference remains, however: EHLP is committed to providing interest-free loans. It will be more difficult for the federal program to recoup a large share of its costs in the future.
The impact of HEMAP's suspension will be temporarily blunted by the infusion of EHLP money. But in addition to the lack of funding after September 30, lenders in Pennsylvania will no longer be required to notify borrowers of their eligibility to apply for a HEMAP loan when they become 60 days delinquent on a mortgage. Under HEMAP in past years, borrowers have been notified of their eligibility, then given 33 days to meet with a consumer credit counseling agency, after which the agency has 30 days to forward the application to state Housing Finance officials. Lenders must then wait for the Housing Finance Agency's decision, which is typically made within 60 days. This effectively has served as a potential 123-day stay on foreclosure proceedings, even for denied applicants.
But there will be no such stays in Pennsylvania this year. Housing activists are furious about it. "In Pennsylvania," says John Dodds, director of the Philadelphia Unemployment Project, "we've got a little piece of the answer. And we're just throwing it away."