Combs: Lender can't sue for deficiency.

Of the $268 million allotted to the state since 2010, only about $4 million has been spent as of this week.

About 200 homeowners have received various forms of aid, far shy of the 4,000 the housing agency hopes to help.

Officials and housing advocates say mortgage lenders are the reason for the breakdown: Much of the aid was intended to be used to pay off a portion of what a struggling homeowner owed, as long at their lenders agreed to forgive an equal amount.

But large banks and the federal mortgage agencies that back many loans have been slow to respond or have not agreed to loan modifications, despite the federal backing for the program, officials say. Though dozens of applicants qualified for that form of aid, only three had their banks agree to the loan modifications.

“We have done and are doing everything we can to spend this money on homeowners who desperately need it,” said Michael Trailor, director of the Arizona Department of Housing. “Lenders are making promises and commitments they aren’t keeping.”

Trailor said he has sat down repeatedly with lenders that have agreed to step up efforts to approve loan modifications approved by his agency but still the deals aren’t going through.

He also sat down with regulators of the two mortgage backers, Fannie Mae and Freddie Mac, and appealed to them to work with the program several times during the past year, he said. But he and housing directors in other states that received the federal funds, known as the Hardest Hit Housing program, have been turned down by the mortgage giants.

In response, the Arizona Housing Department is now easing requirements for people applying for aid and has expanded the program to use the money in other ways.

Short-sale aid

Last week, officials launched a program to use the funds to help borrowers complete short sales.

Such sales can help “underwater” homeowners, who owe more than their homes are now worth. In a short sale, the bank agrees to allow a sale for less than the balance of the loan, letting the homeowner avoid foreclosure and take less of a credit-record hit.

The state agency is now offering homeowners $4,500, plus money to pay closing costs such as the real-estate agent’s fee, if they work with their lender to complete a short sale. It started taking applications for its short-sale assistance last week, and several real-estate agents already have made inquiries.

Trailor said the aid doesn’t keep a family in their home, but at least it gives them money to move on.

Unemployment aid

Early this year, after completing only one successful loan modification with the federal money, the housing agency began putting more resources into a program to pay the mortgages of homeowners who are unemployed or underemployed.

Depending on their income, eligible homeowners can receive up to $2,000 a month help with their payments for as long as two years.

Michele and Steven Allman were struggling to make the $850 payment on their Maryvale house earlier this year. He had been out of work hanging drywall for two years.

The couple, in their 50s, wanted to keep their home to retire in but were afraid they would lose it to foreclosure before the end of the year. Then they heard about the state Housing Department’s program to help people pay their mortgages.

“We got a postcard in the mail about the program and thought maybe we could get some help,” said Michele, who was working but for less money and fewer hours and not making enough to pay the mortgage. “We knew it was taking forever to get loan modifications and we might not get the money.”

The couple applied and were approved within weeks. Now Arizona’s federal money is going toward paying more than $700 of their mortgage each month.

Before recent changes to Arizona’s plan, the Allmans wouldn’t have qualified because at least one of the home’s borrowers had to be fully employed. Now, if one borrower is unemployed and the other is underemployed, they can qualify.

“This is our home,” she said. “We recently needed a new roof, and we did the work because we didn’t have the money but wanted to take care of our house.”

The state Housing Department has been able to help 169 Arizona homeowners keep making their mortgage payments and is encouraging more people to apply. About $3.6 million of the federal funds has gone toward this program.

Loan modifications

In March, Bank of America committed to working with Arizona’s housing agency to finalize thousands of loan modifications, reducing what borrowers owed in exchange for a partial payoff.

The program can reduce a homeowner’s principal by as much as $100,000 if the bank agrees to forgive half. That can translate into a monthly payment reduced by more than $1,000.

The state agency estimates at least 30,000 BofA borrowers in Arizona could be eligible for the aid.

But the lender has yet to complete one of the program’s loan modifications, housing officials said. The bank didn’t return calls to comment. Similar problems have stalled efforts to help borrowers with other banks or with federally backed mortgages.

So far, the program has completed three loan modifications and spent $63,000.

“It’s been more than disappointing working with the major lenders, but we aren’t giving up,” said Reginald Givens, foreclosure assistance administrator for the state agency.

The first loan modification under the state program was done in January with National Bank of Arizona. Kim Hensley, a counselor with Genesis Housing Services, a non-profit housing counseling service, worked with a Phoenix homeowner to obtain an $80,000 principal reduction.

“The Housing Department has worked to create some really good programs, and they are really trying to help people,” she said.

She noted that so far, counselors have found success reducing principal only on loans made by small banks. “I have found to do one of these loan mods, you have to stay away from the big lenders,” she said. “They aren’t interested and are just wasting everyone’s time.”

She has also been able to help homeowners with some of the Housing Department’s other programs funded by the federal money, including assistance in paying off a second mortgage. About $42,000 of the state’s federal money has been spent on second-mortgage assistance.

Easier to qualify

In the past, housing advocates’ main criticism of Arizona’s Hardest Hit Housing plan was that it was too difficult for most homeowners to qualify. They had to be two months behind on their mortgage, show at least one of the borrowers was fully employed and have bought their house before 2007.

The state agency’s effort to loosen some of its requirements so more homeowners will qualify is receiving the approval of more housing counselors.

Instead of missing two months of mortgage payments, Givens said, struggling borrowers can now show financial documents to prove they are about to fall behind.

Applicants still have to owe more than their houses are worth, proving they can’t sell to avoid foreclosure. Investors still aren’t eligible for aid to keep homes they don’t live in.

And the most controversial eligibility requirement also still stands. Borrowers can’t have taken out a second mortgage for anything except to purchase the home.

Bob Bingham applied for aid from the Housing Department and was denied because he took out a second mortgage on his Ahwatukee Foothills home in 2006 to pay for his daughter’s college education.

“I think the Housing Department needs to look at that requirement on a case-by-case situation,” he said. “I didn’t buy a big car or even spend the money on a nice dinner. The money I put into my home for several years helped put my daughter through college. What’s wrong with that?”

Trailor and Givens say they will begin looking at more applications on a case-by-case basis to try to qualify more people who have been making their mortgage payments and trying to do the right thing, instead of splurging on luxury items and then expecting to be bailed out.

The Hardest Hit Housing money came from the $700 billion Troubled Asset Relief Program that expired in October of last year. Arizona, California, Nevada, Florida and Michigan received funds from the Hardest Hit Housing fund.

Just over a year ago, the Treasury Department approved Arizona’s plans for using its first allotment of Hardest Hit money, $125 million. Then last December, it gave the state an additional $143 million.

The other states that received funds are also struggling to spend the money. All states must spend their funds by the end of 2017 or lose them.

“I wanted to have helped hundreds of Arizona homeowners reduce their balances and modify their loans by now,” Trailor said. “This has truly been the most frustrating experience I have encountered. I have money to give lenders to help slow foreclosures, and they won’t take it.”

Read more: http://www.azcentral.com/business/realestate/articles/2011/09/30/20110930arizona-trying-new-ways-assist-homeowners.html#ixzz1j5ZcmOMo

Arizona trying new ways to assist homeowners.

When David Martin and his wife bought their north Seattle condo five years ago, they figured they had plenty of time to downsize if they needed to before they retired.

Now, with the property worth roughly $60,000 less than the balance of their mortgage, Martin, 68, has been giving serious thought to just walking away, a process lenders call “strategic default.”

“Guilt and morality are one side, and objective financial analysis are on the other side,” Martin said. “They’re coming to two opposite conclusions. I wonder how many other people are struggling with the same question.”

Strategic defaults like the one contemplated by Martin are on the rise. Asurvey last year by two Chicago-area finance professors, Paola Sapienza at Northwestern University and Luigi Zingales at the University of Chicago, found that roughly three out of 10  mortgage defaults in 2010 were by homeowners who could afford to make their payments, up from 22 percent in 2009.

“It’s a looming problem that’s in the shadows,” said Jason Kopcak, a mortgage trader at Cantor Fitzgerald who advises lenders on how to value the loans on their books. “It’s very worrisome to mortgage lenders.”

Researchers point to a number of forces that are driving borrowers to walk away from their mortgages. At the top of the list is the estimated 12 million homes that are underwater, meaning the owners owe more than they are worth.

Until recently, borrowers like Martin and many industry analysts held out hope that a housing recovery would reverse the rising tide of “negative equity.” But after stabilizing this summer, home prices began falling again, dropping 7.5 percent in the third quarter alone and leaving more homeowners underwater.

Even if prices stabilize this year, millions of underwater borrowers face a long wait before they can sell their homes without having to write a big check to their lender to cover the shortfall. Economists at Goldman Sachs recently forecast that after bottoming in 2013 house prices won’t recover their 2006 peak until 2023. (No, that’s not a typo.)

Many homeowners simply can’t wait that long.

In the early stages of the housing bust, the main causes of defaults included unemployment or other financial setbacks and adjustable mortgages that reset to unaffordable levels, according to researchers. Now, five years into the housing recession, strategic defaults are growing as financially healthy borrowers learn of friends or family who have decided to walk away.

A recent study commissioned by the Mortgage Bankers Association likens the rise in the rate of strategic defaults to the spread of a disease. The longer the crisis drags on, the more homeowners will be exposed to someone who has successfully walked away, making the decision easier, the study suggested. “As fundamentally social animals, humans consciously (and subconsciously) look to their peers when forming opinions, habits and behaviors,” the report said.

“Most people who own a home know of someone — a friend, a colleague a family member — who has defaulted, especially in housing markets that have taken a big hit,” said Chad Ruyle, co-founder ofyouwalkaway.com, a service that advises homeowners on walking away from their mortgage. “They realize these are not bad people. They’re not deadbeats. They’re just like them.”

Researchers say strategic default is also more common among borrowers who feel no personal connection to the party on the other end of the transaction. Gone are the days when you walked into a bank and met with a lender who shepherded your application and congratulated you when the loan was approved, said Michael Seiler, a finance professor at Old Dominion University and a co-author of the MBA study.

“If you defaulted, it was like you were defaulting on your friend,” he said. “Your kids might go to the same school. You all might go to the same church. And you’re constantly reminded of who you’re defaulting on.”

That scenario is a far cry from the modern system of mortgage finance, where loans are sold over the phone or online, chopped up into pieces and then sold to multiple, anonymous investors. Many underwater homeowners who try to negotiate with their lender can’t even find out who owns their loan.

“We’re finding that people are much more willing to walk away when the other party is unknown or what you might call a ‘bad bank,’” said Seiler. “Those are the ones that received a lot of bailout fundsor were active in the subprime market, giving loans to people who couldn’t afford them and they knew that.”

The mortgage lending industry’s widespread reluctance to modify loan terms has also changed homeowner attitudes about walking away, according to Ruyle.

“They feel much better about doing it if they’ve tried to contact the lender and the lender won’t budge,” he said. “They feel justified about it because they’ve tried to do their best to work it out.”

Shifting attitudes about the causes of the housing bust are also playing a role, say researchers. In their surveys, Sapienza and Zingales found that 48 percent of Americans said they would be more likely to default if their bank was accused of predatory lending, even if they are morally opposed to strategic default. Some 11 percent said they’d be less likely to pay their mortgage, and more likely to walk away from their loan, if their lender was cited for using false foreclosure documentation.

The government’s ineffective response to the housing crisis, even as it went to extraordinary lengths to backstop banks, has also propelled walkaways, say researchers. Since the housing bubble burst in 2006, some $7 trillion in home equity has evaporated, according to Federal Reserve data. Now, as home prices resume their fall, some homeowners believe lenders should bear at least a portion of the losses inflicted by a housing bust the industry helped create.

“The money didn’t disappear,” said Martin. “We still owe it to the bank, so the bank will end up getting all of its money back on a loan that no longer has its original value. They’re taking no part in the loss.”

Widespread reports of lenders’ bad behavior, from filing defective paperwork to selling investors bad loans, have begun to erode one of the strongest deterrents to walking away: the sense that skipping out on a debt is morally wrong. University of Arizona finance professor Brent White interviewed hundreds of homeowners for his research on strategic default. He found that, in the eyes of many homeowners, mortgage bankers have lost the moral high ground.

“The reality is: for the bank it is simply an economic transaction,” he said. “They have no moral qualm about taking your house, and they feel no moral obligation to modify your mortgage even if you’re in a difficult financial situation.”

Still, there are much more serious consequences to strategic default than pangs of guilt. Any loan default will damage a borrower’s credit score. But some strategic defaulters are finding that the impact isn’t as long-lasting as widely believed, according to Ruyle.

“You don’t destroy your credit, you wound your credit,” he said. “Just like a wound, it heals over time.”

Ruyle said surveys of the roughly 8,000 customers who have signed up for his service in the last four years found that some strategic defaulters are able to restore their credit in as little as a year and a half.

The bigger risk for walkaway borrowers is that their lender will pursue them in court and win a so-called “deficiency judgment,” a court-ordered, full repayment of the mortgage balance. That process is governed by state laws; some so-called “non-recourse” states bar lenders from pursuing such judgments.

But the force of that deterrent is also weakening, according to Sapienza.

“(There’s an) increasing perception that lenders are not going after borrowers who walk away,” he said.

That perception may be dangerously misplaced, as many lenders continue to aggressively pursue judgments against homeowners who strategically default. That’s why there’s widespread agreement that homeowners considering it need to get solid legal advice from an experienced real estate attorney in their state.

“There’s a process to strategic default and a lot of people don’t know how to do it,” said Kopcak. “They don’t really know what their options are. People really need to talk to a lawyer who knows the process.”

For now, Martin is electing to stay in his home and continue paying the mortgage.

“We intend to continue as we are on the basis that we gain nothing from acting at this point,” he said in a note. ”We think that the real estate market in Seattle will rise by 2013 enough to offer better alternatives. There is a small chance that the federal government will act to offer more rational choices. The real possibility is that the debt might be refinanced in 2013 at a level that might offer enough reduction in payments to allow us to hang on long enough to shore up our financial position.”

In short, giving up at this point may be worst of all alternatives. Giving up seems to run counter to our value system, no matter how financially wise experts seem to believe it may be.”