Obama Pledges $1.5B for Unemployed and Underwater Homeowners

The administration announced a new initiative Friday to help the nation's hardest hit housing markets. President Obama has allocated $1.5 billion in aid for states where unemployment is high and home prices have fallen more than 20 percent in the aftermath of the housing bubble.

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Home prices across the country are beginning to stabilize since the administration's economic policies began to take effect almost a year ago. But local conditions vary considerably, and the administration says the legacy of price declines, together with the effects of high unemployment, means that many homeowners in especially hard-hit areas are still facing serious challenges.

The president is setting up an ""innovation fund"" for state housing agencies to develop assistance programs for underwater, as well as unemployed homeowners in their communities. There will be a formula for allocating funding among eligible states based on home price declines and unemployment rates.

According to House Speaker Nancy Pelosi, the money will go to support homeowners in California, Nevada, Arizona, Florida, and Michigan.

The Treasury must approve each Housing Finance Agency's (HFA) program design, which can include direct assistance for the unemployed and borrowers who owe more than their home is worth, as well as programs that address the challenges of second liens.

""The funds must be used to pay for mortgage modifications or for other permitted uses under"" federal guidelines, the White House said in a statement.

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Since the recession began in 2008, unemployment has hit many families who own homes. Those in states where prices have dropped more than 20 percent often find themselves owing more than the house is worth. Such homes are often difficult to sell, and homeowners without a job often can't pay the mortgage and may not have enough income to qualify for a modification. In such circumstances, the administration said, one use of funds would be for HFAs to begin programs to help unemployed homeowners until they have secured a new job.

For states where home prices have plummeted, a large percentage of homeowners are finding themselves underwater on the mortgage. In this case too, a sale is often difficult to secure because lenders may not agree to a transaction that fails to pay back the mortgage in full. The White House said HFAs should experiment with programs that will help borrowers negotiate with lenders to write down mortgages.

In addition to the two top-of-mind housing challenges of unemployment and negative equity, problems can also arise when borrowers have a home equity line of credit or other second mortgage on their home.

The first mortgage lender may be willing to adjust to the home price decline by modifying the loan, but difficulties often surface in coordinating mortgage relief between the first and second lien holders. To circumvent such snags and assure homeowners get an overall modification that truly improves their situation, the administration says HFA funds can be used to pay incentives to second mortgage holders and ensure collaboration.

State HFAs will determine the priorities facing their local markets. The administration said agencies' plans will be under strict transparency and accountability rules, with all funded program designs and success measurements posted online.

The Treasury is expected to announce maximum state level allocations in the next two weeks, along with rules governing the submission of program designs by HFAs.