A successful Pennsylvania program that helps unemployed workers make their mortgage payments could be revamped to help underwater borrowers, according to a report by economists at the New York Federal Reserve Bank.
The report shows that the state-run bridge loan program has a high success rate in allowing carefully screened borrowers to remain in their homes until they find a new job.
While Pennsylvania has not been hit with large drops in property values, the Fed economists suggest the Homeowners' Emergency Mortgage Assistance Program could be revised to require lender/servicers to reduce the principal amount of the mortgage to help underwater borrowers.
In cases of negative equity, lenders are reluctant to write down the principal while the borrower is employed, the authors say.
"However, the incentive for the lender to write down principal increases significantly once a negative equity borrower experiences a job loss. Moreover, the potential to qualify the borrower for a HEMAP loan, which insures the borrower's ability to make the mortgage payments for at least two years, is an added incentive for the lender/servicer to agree to write down the mortgage balance."
This writedown would also reduce the size of the HEMAP loan and the borrower's monthly payment, the economists point out.
In the 10-page report, "Help for Unemployed Borrowers: Lessons from the Pennsylvania Homeowners' Emergency Mortgage Assistance Program," the economists’ main focus is on the efficiency of the Pennsylvania program.
HEMAP doesn’t involve a modification of the mortgage, the lender receives regular monthly payments (including arrearages) and there is a thorough screening process for qualifying borrowers.
But it isn’t easy getting into this two-year assistance program that provides loans of up to $60,000.
To apply for a HEMAP loan, the borrower must be at least 60 days delinquent and have reasonable prospects of getting a new job.
Only 43,150 borrowers have received assistance under the state program out of 183,000 applicants. In other words, only 23% of applicants have received this lifeline.
The key to the program's high success rate is the "careful screening process," the Fed study says.
Around 80% of the borrowers who have received mortgage payment assistance under the 25-year-old Pennsylvania program have retained ownership of their houses.
"Pennsylvania's experience with the Homeowners' Emergency Mortgage Assistance Program suggests that lending by the government to a carefully screened group of unemployed borrowers can be a successful strategy to reduce foreclosures," the report says.
Fed researchers James Orr, John Sporn, Joseph Tracy and Junfeng Huang produced the report.
