Underwater Arizona Slotted for HFA Hardest Hit Housing Funds

housing, hit

Arizona will gain dollars from the Hardest Hit Fund

Ever since the current administration tried to “fix housing first,” critics have screamed that programs did not met the needs of Arizona and other states where underwater mortgage rates far exceed the national average of 20%.  Currently, 11 million U.S. homeowners in Phoenix and elsewhere are at greater risk of foreclosure when their loan-to-value (LTV) ratio gets much beyond 20%.  Most homeowners do not qualify for mortgage modification programs which usually stretch out the payments without reducing principle.  In Arizona, 51% of home loans are underwater.

Recently, Arizona has been singled out for special help as one of the five hardest hit states in hopes of spurring recovery.  Working through Housing Finance Agencies (HFA’s), the Obama Administration will direct $1.5 billion to Florida, Nevada, California, Arizona, and Michigan to try some creative approaches to overcome the problems of underwater mortgages, foreclosures, delinquency, and unemployment. The goal is to protect home values, while preserving home ownership and economic growth in a fiscally responsible way.  The HFA’s will have proposals submitted by April 16 to address special concerns in each state and then be able to tap the resources of the (“HFA Hardest-Hit Fund“).

States like Arizona were singled out for help in the new program based on housing price decline from the peak price in the area, unemployment figures, and the number of delinquent loans.  Arizona showed a 36.8% decline, along with 9.1% unemployed, and an 8.8% delinquency rate on loans.  Arizona will receive $125.1 million in special help – along with California ($699.6 M), Florida (418 M) Michigan ($154.5 M), Nevada ($102.8 M.)

It may seem odd that Arizona doesn’t qualify for even more help, given its percentages of underwater loan.  Arizona is second behind Nevada (70%), followed by Florida (48%), Michigan (39%) and California (35%). With the lowest rate of loan delinquency and the lowest unemployment rate, loans for underwater homeowners are not as much of a risk as in the other states. 

Banks these days fear that homeowners will fall into foreclosure due to unemployment, lost income, or hikes in the payment due to interest rate adjustments OR decide to strategically default – walk away from their homes if the LTV rate is too low.  Some mortgage experts like Martin Feldstein, Harvard professor and former chairman of the Council of Economic Advisors under President Reagan, believe that once a person is more than 10-20% underwater, he is likely to consider bolting from the loan and renting or buying elsewhere. Below that, assuming he can make the payments, he is likely to ride out the crisis until housing values have recovered a bit.

The Hardest Hit Fund approach will address these issues by going beyond tools such as mortgage modifications and short sales/ deed in lieu of foreclosure already in use to try creative new approaches.  These tactics might include:

•    Mortgage modifications with principal forbearance

•    Principle reduction for borrowers with sever negative equity

•    Unemployment programs

•    Second lien relief

Given the amount of money available vs. the number of underwater mortgages in Arizona, the plan will not help everyone but the approaches might be tried elsewhere.  Already the Federal Deposit Insurance Corporation (FDIC) has crafted a program that would reward those who could have defaulted but didn’t with principle reduction.  This program aims at preventing strategic default and is aimed a very small number of homeowners whose lending banks were seized by the FDIC. 

I am a huge believer of hands off Government, letting the private sector work through the market swings. With that said, if the Government has decided they are seriously interested in being the answer, then hopefully, pilot programs like this will grow to address the needs of more homeowners.  If the Hardest Hit fund programs operate as planned, they will hatch a variety of new approaches to help those who cannot swim through the maze of their underwater mortgages, as well as those who are hijacking the lifeboats and abandoning their mortgages on principle.  As a matter of fact, the Treasury Department is hoping that programs developed in this program provide data that prove them workable on a broader scale.

For more detail on the HFA Hardest Hit Fund, download the Proposal Guidelines or the Frequently Asked Questions (FAQ). 


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