The $7.5 billion allocated by the feds to 18 states and the District of Columbia for mortgage assistance programs is looking like more of a circus than a godsend.

In February of 2010, President Obama established the Hardest Hit Fund to provide aid to families in states most affected by the economic and housing market recession. The states chosen were ones that were struggling with unemployment rates at or above the national average or home price declines of greater than 20% since the housing market slump.

The program was designed to help unemployed or otherwise troubled homeowners to pay their mortgage bills and avoid foreclosure.

Some argue that these programs simply delay the unavoidable foreclosure of homes, or simply provide another payday for the banks, especially if the homeowners eventually foreclose. Still, with the economy on the upswing, there are many who can benefit from the programs and actually escape foreclosure.

The current areas that have programs include: Alabama, Arizona, California, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South Carolina, Tennessee, and the District of Columbia.

As of now, the 19 programs were designed to meet the specific challenges facing each individual state's housing market. According to the treasury, each state makes different use of the funding at their discretion. The programs include sub-programs that assist homeowners struggling to pay for homes that are underwater (worth less than their loan), to help the unemployed or underemployed to make mortgage payments, to help settle second liens, to assist in the payment of arrearages, and more. In some states like California, the state is also encouraging lenders to match a $50,000 mortgage buy down.

To give you an idea of what the programs are like, check out the California program, called Keep Your Home California (KYHC). With almost $2 billion in funding it is one of the better-supported programs. KYHC actually has four sub-programs to address different situations. There is the Unemployment Mortgage Assistance Program (UMA) for unemployed homeowners who want to stay in their homes. This program can provide up to six months of mortgage payments of up to $3,000 or 100% of the total monthly mortgage payment-whatever is less. Second, there is the Mortgage Reinstatement Assistance Program (MRAP), which provides up to $15,000 to reinstate mortgage loans that are in arrears. Third is the Principal Reduction Program (PRP), which reduces foreclosures by providing reductions to the principal for those who are experiencing negative equity. And lastly, there is the Transition Assistance Program (TAP), which offers money to pay for relocation fees when foreclosure is unavoidable.

While a comprehensive program like KYHC looks like a powerful dose of medicine to anyone suffering from the downturn of the economy, the opinions are mixed on whether this and other programs will really put a dent in the foreclosure epidemic. For some, the promises of the program seem like an elaborate farce. While the point of the program is to protect home values, preserve home ownership, and promote jobs and economic growth, it has not been all that successful.

The first issue for many is qualification. For example, you must have a low or moderate combined income (depending on your county); your loan cannot be owned by a government entity; the first lien on your home can't be a re-finance in excess of 125% of the NPV of your home; you can't have done a cash-out re-finance on your home; you must have bought your home prior to 1.1.09; and lastly, you have to have had a hardship like an involuntary reduction of income or an increase in your monthly payment coupled with a severe decline in your home's value. While these kinds of restrictions are stringent, many people in need actually do qualify.

Here's the kicker, though. Even if you do qualify, and even though the programs are well funded with $7.5 billion dollars, many large lenders simply won't accept the funds. One California resident with a mortgage from Bank of America was frustrated that the lender would not accept two different payments: one from the Keep Your House California Fund and a personal check to make up the mortgage difference. "Bank of America has rejected the federal funds for my case," says the homeowner, "because they do not want to process a partial payment from KYHC for $3000 and another payment from me for the remaining $180."

"It is truly mind boggling," he continues, "that they would rather receive nothing and [initiate a] possible foreclosure, rather than accept two payments for the next 6 months-or earlier if I can find employment!"

The argument from the banks is that they are still in the process of reviewing the initiative. They claim that their institutions require more effort in terms of adapting to the new programs. To give an idea of how this lack of participation has affected borrowers, the Michigan program, which was meant to aid 30,000 borrowers, has so far only helped 150.

Luckily, there has been some movement to fix the program. For example, U.S. Lawmakers from California are weighing in on behalf of distressed homeowners, telling Ally Financial, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo to "get in the game" and fully participate in the new programs. Still, not much real progress has been made.

While these programs are extremely well intended and well funded they are falling short of helping those who need the funds the most. It's shocking that the big lenders simply won't accept the government's money and would oftentimes rather start foreclosure proceedings. Hopefully in the near future, the feds will put enough pressure on the large lenders to force them to wake up and resolve the processing issues that are making a bad situation even worse.

Published on February 8, 2011