Foreclosure-relief funds earmarked for California mostly unspent

by E. Scott Reckard, Los Angeles Times

A federal foreclosure-prevention effort that earmarked nearly $2 billion in taxpayer money to help troubled California homeowners has delivered only about one-sixth of that money in three years.

But officials from the Keep Your Home California program say the pace of payouts is finally set to increase. That’s because more banks, including the largest mortgage servicers, have agreed to use the funds to slash the loan principal amounts for certain borrowers.

Until now, many borrowers seeking aid from the program have been frustrated.

"A lot of people may have called, at one point or another, only to be told they couldn’t qualify because their servicer was not on board," said Diane Richardson, legislative director for the California Housing Finance Agency, which developed the state’s program.

The money has flowed so slowly because a goal of the state program is to use much of the money to write down borrowers’ debt ‘ an idea resisted by many banks and government-sponsored mortgage giants Fannie Mae and Freddie Mac.

When Fannie Mae and Freddie Mac dropped their opposition to the principal-reduction program last year, the gates opened for participation by lenders that sell loans to the government-backed firms, Richardson said.

"That was the driving force behind getting bigger lenders to participate," she said.

Borrowers have faced major hurdles in trying to access the aid. Joshua and Catherine Brewster sought help after Josh lost his job as a legal assistant at Hilton Hotels when a reorganization moved his division out of state.

They battled for a year for a modification from their servicer, Bank of America, to help with their $2,300-a-month mortgage payment. Then they got transferred to the state Housing Finance Agency.

Many additional battles over the loan terms followed, they said, before the Keep Your Home California program approved $47,000 in principal reduction. Their interest rate also was cut to 3.75%, and in January payments fell to $1,676 a month, which they say they can handle.

"We had to fight," Josh said. "People are not conditioned to challenge the banks. It was brutal."

State officials said they hope to hear fewer such stories as the pipeline of loan modifications swells, mainly because Bank of America, Wells Fargo Bank and Chase Bank ‘ the biggest providers of mortgage customer service ‘ all have now agreed to use the funds for principal reduction.

Bank of America began doing Keep Your Home California principal reductions in March 2011. But many banks, including Wells and Chase, were slow to sign on, in large part because Fannie Mae and Freddie Mac were opposed to lowering the balance owed on mortgages. Wells and Chase began writing down loan balances this year.

"We have the funding to help many, many more homeowners with our free assistance," Claudia Cappio, head of the California Housing Finance Agency, said in a statement Monday. She encouraged anyone having difficulty with their mortgage to call the program at (888) 954-5337.

Borrowers seeking principal reductions must show that they owe more than their homes are worth and also must show that they are financially troubled ‘ a requirement that has proved problematic, Richardson said.

"I still think [the money] should be flying out the door, and it’s not," she said. "People have a hard time documenting hardship."

California was among 18 states and the District of Columbia eligible for assistance from the U.S. Treasury Department’s Hardest Hit Fund. The program was financed with $7.6 billion left over from the Troubled Asset Relief Program, or TARP, the government’s effort to stem the financial crisis, chiefly by bailing out giant financial firms and the auto industry.

The federal government allowed the states to tailor their own programs aimed at the specific needs of state residents. However, the Treasury Department had to approve the state programs, and it releases funds only as borrowers qualify for relief, not in a lump sum.

California’s efforts included four programs, including the centerpiece principal reduction effort, which initially was set up to match reductions by banks dollar for dollar. After banks showed little interest, it was changed so that servicers could use the funds to lower the amount owed without a matching contribution from the banks. The program provides as much as $100,000 in principal reduction for financially strapped homeowners with underwater mortgages

The Treasury Department’s latest report on the Hardest Hit program, for the quarter that ended Dec. 31, showed that slightly more than $1 billion in aid had been delivered by the 18 states and the District of Columbia. An additional $236 million had been spent on administration, outreach and counseling.

California had spent $244.6 million of its $2-billion allocation on aid as of the end of 2012, with an additional $45.4 million spent on administration and interaction with potential recipients.

Richardson said about $300 million in aid has now been delivered to state residents, with an additional $300 million in the pipeline.

"At this time last year we had 12 servicers participating," she said. "And now we’ve probably got close to 70."