WASHINGTON — Facing millions of foreclosures and high unemployment, President Barack Obama on Friday announced a $1.5 billion fund to help unemployed homeowners and other struggling borrowers in a handful of states.
"What we can do is help families that have done everything right to stay in their homes, and we can stabilize the housing market so that home values can begin rising again," Obama said at a town hall meeting in Nevada.
Under the new policy, money that had been reserved for the bank bailout will be re-routed to five states that have seen average housing prices drop more than 20 percent: Florida, Nevada, California, Michigan and Arizona.
Obama said that price declines in homes and high unemployment in these regions have created major challenges for families.
He argued that too many lenders were more focused on "making a quick buck than acting responsible," that "too many borrowers acted irresponsibly by taking on mortgages they couldn't afford" and that government regulators "turned a blind eye to the problem."
According to Obama, three sorts of problems may be addressed: unemployed borrowers, underwater borrowers and those with second mortgages on properties. "This fund is going to help out-of-work homeowners avoid preventable foreclosures. It will help homeowners who owe more than their homes are worth find a way to pay their mortgages that works for both borrowers and lenders alike."
The money will come from the $700 billion Troubled Asset Relief Program. Funding will be doled out to state and local housing finance agencies, which will in turn help hard-hit homeowners. The agencies would then design programs -— which would have to be approved by the U.S. Treasury Department — to help eligible homeowners pay for mortgage modifications or cover other specific expenses. The Treasury Department is expected to announce the allocation for each state in the next two weeks, along with rules for the programs.
Herb Allison, assistant secretary of the Treasury for Financial Stability, told reporters that the allocations are a modest step to stem the housing crisis. However, the program is intended to encourage these states to foster innovative approaches to limit further foreclosures, he said.
"Local housing-finance agencies understand the local markets," he said. "While the housing crisis is national, it takes on local characteristics, and these groups understand the situation on the ground. We want to put to work their creativity and their knowledge to come up with new ideas to test those ideas in their communities."
Obama announced the program in Nevada, one of the hardest-hit states, along with Senate Majority Leader Harry Reid and other lawmakers.
Reid, a Nevada Democrat, is in a battle for re-election in his state, in part due to frustration over high unemployment. Home prices in his state have declined by as much as 40 percent.
The program's announcement comes two days after the Treasury Department announced that a 1-year-old $75 billion program to help 3 million to 4 million homeowners modify their mortgages to avoid foreclosure has only aided a small fraction of those at need.
The program, known as the Home Affordable Modification Program, seeks to aid borrowers by allowing them to modify their mortgages and lower monthly interest rates through any participating lender. Under this plan, the lender would voluntarily lower the interest rate, and the government would provide subsidies to the lender.
According to the Treasury on Wednesday, the Obama program has so far only helped 116,000 troubled borrowers modify their mortgages from three-month temporary plans into more affordable permanent loans. The HAMP program was announced on Feb. 18, 2009.
Henry Sommer, director at the National Association of Consumer Bankruptcy Attorneys in Philadelphia, said he supported the idea of targeted taxpayer assistance to states that need it most.
However, he was skeptical whether the vast majority of the $1.5 billion would ever be used. Sommer pointed out that the largest part of the $75 billion HAMP program so far hasn't been allocated—in large part because only a small number of households have received permanent modifications, which is when the majority of incentive payments go out.
"They are supposed to spend $75 billion, but aren't using it," he said. "I am concerned that even though they announced this program, that the funds in it won't be used."
Sommer also expressed concern that some other states with high unemployment and massive foreclosure rates may not qualify for the additional assistance, because the average price for all homeowners there hasn't fallen 20 percent or more from their peak.
Jaret Seiberg, an analyst at Concept Capital in Washington, said the White House is considering a program that would suspend mortgage payments for jobless homeowners for three months and give the borrower three opportunities to extend the payment deference for up to a year.
Seiberg also said he expects more details of this plan to emerge next week.
The new targeted assistance comes after the special inspector general for the Troubled Asset Relief Program on Jan. 21 released a report warning that the Obama administration's and the Federal Reserve's policies to support the mortgage market could in fact be creating another dangerous housing bubble in some markets, while at the same time failing to do a good enough job to stabilize other markets.
Information from the Los Angeles Times and MarketWatch was used in this report.