A small but growing number of distressed homeowners in California are keeping their houses because of a state program funded with $2 billion in federal stimulus money.
Keep Your Home California's launch in February was marred by procedural delays and criticism from consumer groups that said the eligibility requirements were too narrow and that the program wouldn't serve enough people.
Since then, however, participation has grown quickly to about 7,000 homeowners statewide. The program has provided more than $128 million in benefits, or roughly $18,000 per homeowner.
In the four-county Sacramento area, Keep Your Home California has helped 760 distressed homeowners.
"After working out kinks in the system … we're really starting to pick up speed," said Diane Richardson, Keep Your Home California's program director.
The effort still has a long way to go. It has helped only a fraction of the thousands of California homeowners whose houses slip into foreclosure each month. And if spending doesn't pick up, it's doubtful the state can meet a federal deadline to use all the money.
The most aggressive type of assistance offered under the program – reduction of loan principal – hasn't been used much, because many lenders have been reluctant to participate.
But for the people who have received benefits, Keep Your Home California has offered a crucial lifeline. Take Orangevale resident Jack Hill, who credits the program for saving his home.
The 65-year-old mortgage industry executive lost his job in 2008 and had been trying to make ends meet with his unemployment and Social Security benefits.
Hill said he turned to the state program this summer. The state agency agreed to cover his $1,200-a-month mortgage payments for nine months.
"This really gave me some breathing room," Hill said.
About 50 banks, mortgage services and credit unions have agreed to participate with the housing agency.
To be eligible, a homeowner must be within the low and moderate income levels set for their county, and their home can't be worth more than $729,000.
The program offers as much as $3,000 a month for up to nine months for homeowners who have lost their jobs. It also provides up to $15,000 in mortgage assistance to homeowners who have fallen behind on their payments due to financial hardship.
In addition, the agency provides assistance to homeowners who have to relocate due to a foreclosure sale or a short sale, in which a bank agrees to take less than what is owed. This plan calls for a one-time payment of up to $5,000.
Homeowners also can seek to reduce the principal they owe on their houses. But the actual number of people who have benefited from this provision is low – about 475 – due to a lack of participation by several key lenders.
The banks have to match the amount of money the state agency invests in reducing the principal. Many say they are reluctant to do so because they have their own proprietary loan modification processes, Richardson said.
Greater use of principal reduction nationwide has also been blocked by the policies of Fannie Mae and Freddie Mac, the nation's largest guarantors of mortgages. The two companies, now controlled by the federal government, have declined to agree to principal reductions on mortgages they either own or have packaged into securities – the majority of mortgages nationwide.
In published reports, the Federal Housing Finance Agency, which oversees Fannie and Freddie, has said reducing principal could hurt taxpayers.
Peter Swire, an Ohio State University law professor who was President Barack Obama's point man on loan modifications, said he believes principal reductions are among the best ways to keep distressed borrowers in their homes.
"When a family is way underwater on their mortgage, they realize that they probably will never again have equity in that house," said Swire. "Principal reduction takes underwater families and puts their noses above water."
Barely a dent
Those kinds of results barely make a dent in the state's mortgage crisis, which sees more than half a million new foreclosures each year, said Paul Leonard, California director for the Center for Responsible Lending.
The program currently spends about $16 million a month in homeowner assistance. At that pace, it would take about 10 years to exhaust the federal stimulus money set aside for the program.
"I think it is deeply troubling that there is the possibility that money committed to provide assistance to avoid … foreclosure is going to go unspent," Leonard said.
Richardson said she expects the program to rapidly expand as more banks agree to participate. In August, Bank of America Corp., the nation's largest lender, signed on.
"I still think we will be able to get all of the money spent," she said.
Homeowners such as Laurie Connerly say they're just happy the program is available to them.
The 50-year-old Roseville resident said she's been in and out of work for the past five years, out most recently in June when she was laid off from her job as a loan processor.
Connerly said she sought to modify the loan on her two-bedroom home, but her bank rejected her after a year in which she waited for an answer.
Her savings depleted and retirement tapped out, Connerly said, a friend steered her to the Keep Your Home California program, which agreed to cover her $745 monthly mortgage payments for six months.
Connerly hopes that will give her enough time to find a job.
"This totally saves me," she said. "I would have (lost) the home to foreclosure or a short sale."
Consumer advocates say the $2 billion program should reach far more than 7,000 people.
Keep Your Home California, which is managed by the California Housing Finance Agency, has until 2017 to spend the $2 billion in federal money. Any dollars left over will go back to the federal government.