A 30-year-old Pennsylvania program could provide a model for helping unemployed homeowners avoid foreclosure, two New York Federal Reserve economists are urging.

The Pennsylvania Homeowners Emergency Mortgage Assistance Program (HEMAP) has had a roughly 80 percent success rate in helping mortgage borrowers retain their homes despite periods of lost income. That track record, say economists James Orr and Joseph Tracey, suggests that a program of government lending to a carefully screened group of unemployed homeowners can be a successful anti-foreclosure strategy.

Bridge loans for unemployed homeowners?

The pair, in a commentary posted today on the NY Fed web site, note that loss of income is currently the main cause of mortgage defaults. They note that while many anti-foreclosure programs attempt to make a mortgage more affordable, such as through a loan modification, such an approach may not help a homeowner who is jobless.

They suggest a bridge loan program, such as the one in Pennsylvania, that would provide temporary help until the homeowner is once again employed might be a more successful approach. They acknowledge that while there is a risk the homeowner might fail to find work, the success of HEMAP suggests that providing help to a carefully screened group of unemployed borrowers can be an effective way of averting foreclosure.

Four factors to consider

Based on the Pennsylvania program, the authors say there are four basic factors to consider when screening applicants:

1) The homeowner is unemployed through no fault of his or her own;

2) The homeowner was able to keep up with his or her mortgage payments before becoming unemployed;

3) There is equity in the property than can serve as collateral for a bridge loan; and

4) The homeowner has a reasonable expectation of finding a new job at a comparable income to the old one.

Obviously, #3 and #4 present potential problems in the current economy. While it may be possible to identify borrowers who are reasonably likely to find new work, the fact that many homeowners have lost all their equity to falling home values is a more difficult issue.

Negative equity a challenge

In a negative equity situation, governments making a bridge loan to an unemployed homeowner would effectively be making an unsecured loan. One way to address this, the authors suggest, might be to approve negative equity borrowers for bridge loans on the condition that the lender write off a certain part of the outstanding principle.

Since an unemployed borrower is already at high risk of default, the authors reason that taking a writedown to secure a bridge loan would make financial sense for lenders. However, recent experience has shown that lenders are reluctant to write down at-risk mortgages even when to do so increases the likelihood the rest of the loan will be paid off.

Although such a program might be undertaken by the federal government, Orr and Tracey propose that individual states could undertake such an initiative by leveraging existing resources available to them.

Published on March 9, 2011