More Money for Struggling Homeowners

A new federal program is offering aid with a sweet kicker: It doesn't need to be repaid.

For the roughly four million homeowners who have fallen behind on their mortgage payments, the federal government is offering yet another remedy: free money to catch up on their loans.

The effort, called the Emergency Homeowners Loan Program, is the latest in the federal government's efforts to slow down the flood of foreclosures a necessary step to a meaningful recovery in the housing market, says a Department of Housing and Urban Development official. For people who have lost their jobs, the $1 billion program offers loans of up to $50,000 that don't actually need to be repaid, if applicants meet certain requirements.

The goal, says HUD, is to offer short-term aid to people who look like they'll be back on their feet soon. But critics say the loans may leave homeowners worse off in the long run. "This is a short run band-aid, a modest attempt to grapple with the severity of the situation," says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles.

Rolled out by HUD and the nonprofit housing advocacy group NeighborWorks America, the program is making loans with far better terms than anything on offer at a local bank. The loans are interest-free. Payments go directly to the lender for a portion of the borrower's monthly mortgage, including missed payments or past due charges. And when the assistance period -- which runs for up to two years -- ends, 20% of the loan is forgiven with each passing year. In other words, for qualified borrowers who stay in their home for at least five years after the assistance period and who don't fall behind on their mortgage again, this money doesn't have to be paid back.

But some critics say that's where help for consumers ends. By taking this loan, borrowers risk falling further into debt. If they sell their home before the entire loan is forgiven, they'll be on the hook for the remaining amount. The same holds true if they fall behind on their mortgage payments again: they'll need to repay the remaining balance of the loan when they sell or refinance their home. Separately, borrowers aren't required to have equity in their home to receive this money, so someone who has to repay this loan risks owing more on the home later than they do now. For homeowners who are significantly underwater now, the loan may only delay foreclosure, says Gabriel. While the limit each person will get is up to $50,000, loans will average about $35,000 per person, according to NeighborWorks America.

Others say the program doesn't go far enough. The loans will be made available to around 30,000 applicants -- "a drop in the bucket," says Stu Feldstein, president at SMR Research, a housing and mortgage research firm. It's helpful, he says, but it won't be enough to seriously boost the ailing housing market. Roughly 4 to 4.5 million borrowers are behind on their mortgages by at least 90 days or are in foreclosure, accounting for roughly 8% of all mortgages. Housing analysts say the loss of income is the primary reason why borrowers are in danger of losing their homes. Those behind the program counter that the help will be significant for some. "If you are one of those 30,000 people, I think you should be very excited to get this help," says a NeighborWorks America spokesman.

The program started last week and will take applications through July 22. Many experts say it's still too early to say it will be successful, and so far federal assistance programs haven't impacted a significant number of borrowers. The government's Home Affordable Modification Program, which started in 2009 and was projected to help up to 4 million homeowners lower their mortgage payments has so far only permanently helped around 700,000 homeowners. To be eligible, homeowners must have lost income and be at risk of foreclosure due to involuntary job loss, underemployment or a medical or other economic condition; details on the application process are available online through NeighborWorks America.

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