NY Fed Economists Suggest State Aid for Unemployed Homeowners

Two economists from the Federal Reserve Bank of New York suggest states may be able to help stabilize the housing market by making bridge loans to temporarily unemployed homeowners who struggle to make their monthly mortgage payments.

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James Orr and Joseph Tracy base their recommendations on a successful Pennsylvania program started in 1982 - the Homeowners' Emergency Mortgage Assistance Program (HEMAP).

""While lending to unemployed borrowers is generally risky, HEMAP's experience suggests that lending by the government to a carefully screened group of unemployed borrowers can be a successful strategy to help distressed homeowners,"" the economists write.

In fact, 80 percent of HEMAP borrowers have been able to retain their homes and have repaid their loans.

HUD offered a similar program - the Emergency Homeowners' Loan Program (EHLP) - but the deadline for applications has already expired after two extensions.

EHLP offered to cover a portion of a borrower's monthly payment through an interest-free, deferred payment loan. Homeowners could receive assistance for up to two years or $50,000.

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The economists believe these types of programs are ideal for homeowners who are temporarily unemployed and likely to regain income.

Orr and Tracy believe individual states can leverage some resources already in place to minimize costs for the programs.

For example, the programs could initiate the application process when a homeowner applies for unemployment. Not only does this simplify the process, but it also makes the program proactive -considering homeowners for loans before they become delinquent.

As Orr and Tracy note, the prospect of reemployment is important to the program, which is aimed at helping homeowners through temporary hardships.

While HEMAP evaluates each applicant on an individual basis for his or her reemployment likelihood, Orr and Tracy mention an alternative. States could rely on earnings qualifications already in use in their unemployment programs.

States could also coordinate with servicers to minimize costs. One condition of the bridge loans could be that servicers write down some of the principal for the loans in question.

However, the economists note that this could slow down the process and possibly minimize the program's reach.

""A better approach might be to require broader concessions by large lenders,"" the economists write.

""The program design would have to balance the expected benefits to the homeowner, and the wider community, of providing assistance against the expected costs to taxpayers from default on the loan,"" Orr and Tracy state.

The economists concede that one of the major obstacles of implementing such programs is limited state budgets. In fact, HEMAP has discontinued bridge loans since July due to restricted state funding.