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Changes may bring relief to more 'underwater' homeowners

Keep Your Home California drops a requirement on banks in hopes of making it easier for eligible borrowers to reduce their mortgages.

May 04, 2012|By Alejandro Lazo, Los Angeles Times

As many as 9,000 struggling homeowners in California could see their mortgages slashed under changes to a program aimed at people who owe more on their loans than their homes are worth.

By dropping a requirement that banks match taxpayer funds, state officials are hoping to make it easier for homeowners to reduce their mortgages through the Keep Your Home California program. Rolled out last year, the initiative uses federal funds reserved for the 2008 Wall Street bailout to aid borrowers at risk of foreclosure.

Housing advocates, economists and other analysts have argued that shrinking the mortgages of "underwater" borrowers would boost the housing market by giving homeowners a clear incentive to keep paying off their loans.

But banks and other financial institutions have been reluctant to participate in widespread principal reductions, which is the writing down of loan balances. Lenders argue that such reductions aren't worth the cost and would create a "moral hazard" by rewarding delinquent borrowers.

By dropping the requirement that banks match state contributions and by increasing the amount the state will allocate to individual households to $100,000 from $50,000, officials and advocates hope more homeowners will be helped faster than have been so far. At the same time, officials acknowledge, fewer borrowers will be helped than initially projected because banks won't be sharing the cost.

Officials with the California Housing Finance Agency, which oversees the program, plan to announce the changes Friday. They go into effect in early June.

"We need to find a way to reach as many of those homeowners as we can, including continuing to look for ways to eliminate potential objections that limit banks' participation," said Diane Richardson, director of legislation for the state finance agency. "We believe these changes do both of those things, and we're excited about the opportunities our programs represent for struggling homeowners."

Paul Leonard, California director of the Center for Responsible Lending, said dropping the requirement that banks and other institutions match taxpayer funds could be the only way to get them on board.

"You would like to see the banks making a matching contribution here, and not just using these federal subsidies as a way of doing what they should be doing on their own," Leonard said. "It is certainly better to get the dollars benefiting homeowners than sitting unused."

The Keep Your Home California initiative is part of a $7.6-billion program created by the U.S. Treasury Department to help homeowners in 18 states and the District of Columbia ravaged by the housing bust.

States have struggled to deploy the money.

With a nearly $2-billion share, California is the biggest recipient of money from the Hardest Hit Fund. At the end of the first quarter, California had provided only $63.7 million worth of assistance to 6,847 borrowers. The state estimated it would help more than 100,000 borrowers when it unveiled the program last year.

A slow-moving bureaucracy and the agency's inability to make eligible homeowners aware of the program slowed progress, housing advocates and officials have said.

Bank and government officials have said many homeowners have simply chosen not to participate.

The Keep Your Home California program is aimed at helping low- and moderate-income people. To qualify in Los Angeles County, a family couldn't earn more than $75,600 a year.

The biggest of the program's four parts allocates $875 million as temporary financial help to people who have seen their paychecks cut or have lost their jobs, providing as much as $3,000 a month for six months to cover home payments and associated costs. That has been the most successful part of the program.

The second-largest chunk of money, $790 million, is intended for principal reduction. Instead of matching the state's contribution to write down principal, lenders will be required to modify borrowers' mortgages by either reducing their interest rates or changing the terms of their loans.

Even with the changes to the principal reduction requirements, it isn't clear whether mortgage giants Fannie Mae and Freddie Mac — which own or back an outsized share of mortgages in California — will sign on.

Edward J. DeMarco, head of the independent federal agency that oversees Fannie Mae and Freddie Mac, has contended that reducing principal on mortgages owned or guaranteed by them wasn't consistent with his responsibility to protect taxpayers.

Another part of the Keep Your Home program would use $129 million to help homeowners get current on their mortgages by paying off their delinquent balances. On Monday, that part of the program will also be changed so that up to $25,000 can be paid, an increase from $20,000, according to the California Housing Finance Agency.

alejandro.lazo@latimes.com

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