At the start of last month, the U.S. Department of Housing and Urban Development (HUD) announced it had approved five states' bids to administer its long-anticipated and oft-debated Emergency Homeowners Loan Program (EHLP). Reauthorized by last year's financial reform legislation, EHLP is a foreclosure-prevention program that targets distressed borrowers who are unemployed or underemployed or who have suffered a loss of income due to medical conditions.
The $1 billion program divides its funds among Puerto Rico and the 32 states not included in either round of the U.S. Treasury Department's earlier Hardest Hit Fund. Eligible borrowers can receive a 0% interest, nonrecourse loan for up to $50,000 to help cover mortgage payments for up to two years. The loan is forgiven at a rate of 20% per year that the borrower stays current on his or her first mortgage.
EHLP's brief history, however, has been pocked by administrative delays, which has made it vulnerable to political attacks. It is one of several federal foreclosure-relief programs under siege by Republican lawmakers. The Emergency Mortgage Relief Program Termination Act, a bill introduced in February by Rep. Jeb Hensarling, R-Texas, has already passed the House of Representatives and now resides with the Senate Banking Committee. The bill seeks to end the program and rescind unobligated funding.Â Â
The five states whose housing finance agencies HUD has approved to administer EHLP – Connecticut, Delaware, Maryland, Pennsylvania and Idaho – were given the green light because they already have bridge-loan programs that are ‘substantially similar’ to EHLP.
The highest-profile example, the Pennsylvania Housing Finance Agency's (PHFA) Homeowners' Emergency Mortgage Assistance Program (HEMAP), was the focus of a recent study conducted by researchers with the Federal Reserve Bank of New York. As part of the Fed's ‘Current Issues in Economics and Finance’ series, four economists sought to quantify HEMAP's impact, with the potential side benefit of helping to inform future housing policy.
What they found was that during HEMAP's first 26 years in operation, approximately 80% of approved applicants have kept their homes. The researchers pinned the high success rate on the agency's stringent screening process that, in part, considers an applicant's prospects for re-employment.
Daryl Rotz, the PHFA's director of HEMAP, says only 15% of loans made under the program proceed all the way to sheriff's sale. ‘We still think the 85 percent success ratio is remarkable considering the fact we're making loans to people who no one else would make a loan to at that particular time,’ he says.
From 1983 to 2009, 183,040 borrowers applied for HEMAP, and less than 24% were approved. According to the New York Fed study, most of the denials related to an applicant's circumstances (i.e., the person was fired from a job or quit voluntarily, or the applicant's likelihood of regaining employment was low). The PHFA has gotten a bad reputation, on occasion, for not helping enough people, Rotz says, but the reputation is due to HEMAP's strict eligibility guidelines and efforts to narrow in on the best candidates for sustainable performance.
‘Having those strict requirements has made the program a success because we're making loans to those most eligible for this program,’ he says. ‘We're not just giving money away. [Applicants] have to have a reasonable prospect. Certainly, those guidelines limited the number of people we help, but that made the program successful because we help people who are going to get back on their feet.’
The New York Fed study noted that determining a borrower's prospects of resuming full mortgage payments is not an easy task for HEMAP's administrators. Furthermore, confirming that a borrower's financial hardship is due to circumstances beyond the borrower's control requires contact between administrators and outside sources who can validate the circumstances.
While they are substantially similar programs – elements of EHLP appear to be based off HEMAP – there are notable differences between the two. Namely, HEMAP loans carry an interest rate. Unlike EHLP, HEMAP loans must be paid back. In turn, loan repayments have become a major source of the program's ongoing funding. The high loan-repayment rate ‘attests to the program administrators' ability to screen applicants on their re-employment prospects,’ the Fed researchers wrote.
Rotz views the loan-turned-grant nature of a successful EHLP loan as less than ideal. ‘We still feel it should have been a loan that was paid back,’ he says. ‘That is what's made HEMAP a success. Not only are we giving money to people who are facing foreclosure, but they repay their loan.’
Loans maid under the Connecticut Housing Finance Agency's (CHFA) Emergency Mortgage Assistance Program (EMAP), another substantially similar initiative, must also be repaid. EMAP's history is not as extensive as HEMAP's – Connecticut created its program in 2008 – but CHFA's administrator of single-family special programs, Alanna Kabel, notes that many of the 409 loans that have been made are in repayment.
While Rotz is concerned the PHFA might not be able to obligate all $105 million of its EHLP funding by the Sept. 30 deadline, Kabel says Connecticut is unlikely to have that problem with its $33 million appropriation. Despite relatively limited marketing of EHLP, to date, the CHFA has already sent out more than 1,300 applications. The maximum note amount of an EHLP loan is $50,000.
Kabel says EHLP will fill a gap that is not currently met by EMAP. Because of the way Connecticut's legislation was written, EMAP excludes borrowers with Federal Housing Administration (FHA)-insured loans. EHLP does not, she says.
‘We know there are 20,000 FHA-insured borrowers in Connecticut, so we believe that will provide us with a pool of applicants right there,’ Kabel says. The CHFA has so far trained attorneys, servicers, housing counselors and mediators in the state on EHLP, and the agency plans to host a webinar to train non-CHFA servicers. EHLP generally relies very little on servicers, with state agencies carrying the bulk of administrative tasks.
Although EHLP is filling the void in Connecticut when it comes to FHA loans, Rotz notes that EHLP is missing out on an opportunity to help borrowers who only need help covering arrearages. HEMAP offers such assistance, whereas all EHLP loans have to be for continuing assistance, he says. ‘If somebody's already back on their feet, we can't make the loan under EHLP, and we think that's a serious deficiency,’ Rotz comments. ‘Those are the real success stories under the HEMAP program.’
Despite perceived flaws, Rotz believes EHLP will have an impact in Pennsylvania. Kabel says the same is true for Connecticut. Based on the New York Fed study, if EHLP applies a similar methodology as found in HEMAP, the template of foreclosure assistance programs may be ripe for change.
‘While mortgage modifications have gained support as the conventional policy to aid homeowners, our examination of Pennsylvania's HEMAP suggests that loans that tide borrowers through a temporary period of financial hardship are a potentially attractive alternative approach to preventing foreclosures, particularly for unemployed borrowers with a good payment history and sound prospects for resuming their mortgage payments,’ the New York Fed researchers concluded.