Two economists at the Federal Reserve Bank of New York said states can design successful programs to help unemployed borrowers with monthly mortgage payments only if they are tailored to specific state needs.
The New York Fed economists James Orr and Joseph Tracy highlighted Pennsylvania Homeowner’s Emergency Mortgage Assistance Program, which began in 1983. At the time roughly 4% of the state’s labor force spent more than 26 weeks without a job, twice the national average. Delinquencies and foreclosures began to spike.
Through July 2011, the state received more than 183,000 HEMAP applications for bridge loans, designed specifically to provide up to two years of mortgage assistance at a total cap of $60,000. The success of the program, Orr and Tracy found is that program administrators carefully sifted through who should get funding.
Slightly more than 43,000 applicants received a loan. To date, 80% of them were able to stay in the homes and repay the loan in full.
“Lending to a carefully screened group of unemployed borrowers could be a successful strategy for states to assist distressed homeowners, reduce economically inefficient foreclosures, and help stabilize house prices for the benefit of the public at large. This approach avoids the complexity of working with servicers to change mortgage terms,” Orr and Tracy said in a note about their research Tuesday.
“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 said.
“The logic here is simple: If the problem is the mortgage, fix the mortgage; but if the problem is temporary unemployment, fix the cash flow. Of course, if the problem is both, then tackle each in a coordinated manner,” Orr and Tracy said.