WASHINGTON – An agency created to prevent foreclosures has turned instead to helping people sell their homes for less than they owe, officials said this week.
Without more support from lenders, Save Our Home AZ can’t modify more than a handful of Arizona’s sour mortgages, so the $268 million fund is trying to find other ways to help troubled homeowners – even if that means aiding so-called short sales.
“The modification effort has been pretty much a failure,” said Michael Trailor, director of the Arizona Department of Housing. “The short sale may be the best tool we have considering the failure of modification.”
About a year after the program began, only three homeowners had reduced the principal amount owed on their homes and only 11 had settled a second mortgage. The housing department, which oversees the program, still has much of its fund available to modify loans but has not been able to find takers because of reluctance from lenders.
While a short sale is not ideal, Trailor said, it prevents foreclosure, has a much smaller effect on a homeowner’s credit and ensures that the property will have another owner. He called it a last resort for homeowners.
“I wish we could say that we had prevented over 2,000 homes from entering into foreclosure or short sale, but we can’t say that because of the resistance we have encountered,” Trailor said.
That resistance comes from banks that cannot or will not modify mortgages to reduce the amount owed, he said. That is particularly true of Freddie Mac and Fannie Mae, the government-sponsored firms that own the majority of Arizona mortgages.
“The key to me is Fannie and Freddie,” Trailor said. “They control the majority of mortgages in this country. … It just cuts out such a huge piece of the mortgage industry that it discourages lenders to participate.”
The $268 million was allocated to Arizona by the U.S. Treasury Department beginning in 2009 as part of the Hardest Hit Fund, which went to five states slammed by the housing crisis. The fund has since expanded to 18 states and the District of Columbia, all of which have programs specifically tailored to their needs.
Since it began, Save Our Home AZ has given troubled homeowners about $3.5 million. Most of the funds have been distributed through an unemployment assistance program, which helps pay the mortgage for homeowners who have lost jobs or earn significantly less than when they financed their homes.
That program has been relatively successful because it requires minimal risk on the bank’s end: Banks simply have to let the fund pay the mortgage in addition to the homeowner. Under the original loan-modification program, by contrast, banks had to forgive up to $50,000 of debt to get matching funds from Save Our Home AZ.
In a short sale, the fund will pay closing costs and can provide the seller with up to $4,500 to pay for a move.
The Treasury does allow fund money to be transferred from one program to the next so all of the money is, in essence, available for unemployment and short-sale assistance.
But hurdles remain. Restrictions on debt-to-value ratios – mortgages that are deeply “under water” – and on cash-out refinances keep many from tapping into the fund.
“There’s a lot of people who need this help, and they’re not able to get it,” said Todd Francis, chief operating officer of Neighborhood Housing Services of Phoenix.
Unlike many other states, Arizona currently does not assist homeowners who performed a cash-out refinance, which means taking out a loan on the property without repaying the original lien. The rule is meant to keep from helping irresponsible borrowers who took out loans to buy luxury items.
Trailor estimated that 20 percent of Save Our Home AZ’s denials are because of cash-out refinancing. But some of those people used the money for medical bills, home improvements or other uses that are sensible in Trailor’s eyes. He said Save Our Home AZ is trying to exempt the more-responsible borrowers.
That leniency could open up the unemployment program to many more Arizona homeowners, said Liza Vasquez, a foreclosure counseling supervisor with Neighborhood Housing Services of Phoenix.Joshua Armstrong is a reporter for Cronkite News Service.