Foreclosure Aid: States Fall Short on Short Sales

HAMP will not be effective until short sales are addressedA couple of weeks ago, I wrote about the $1.5 billion in new Home Affordable Modification Program funds exclusively for states with the biggest home price drops: California, Florida, Nevada, and Arizona (Michigan somehow made it in, too). Now the Treasury Department has announced Part 2 of that project – another $600 million for states with super-high unemployment: Rhode Island, North and South Carolina, Ohio and Oregon. Unfortunately, it misses its mark.

Let's be clear: The cash aid to the unemployed will bring badly needed relief to a lot of families. (As the Huffington Post reports this week, most are not seeing great results from HAMP.) But until short sales and deeds-in-lieu go from the last option to the first, the system will continue to be rigged in lenders' favor.

Treasury projects that about 50,000 homeowners will receive aid. But remember, it also projected that HAMP would give permanent help to 4 million mortgage borrowers; just 10 percent of that number have received permanent modifications so far.

Washington encouraged states to come up with their own solutions, tailored to their unique local circumstances, and to use the additional funds to help out in situations in which the standard federal programs don't provide enough help. Unfortunately those circumstances appear to include getting results before next Election Day.

Take a look at the states' new programs: All of them focus in one way or another on providing temporary cash aid to unemployed homeowners to help them make their mortgage payments, or to help them qualify for a loan modification. The assumption is that these borrowers will eventually get jobs again and be able to stand on their own two feet.

In many cases, that's a big assumption. Long-term unemployment is reaching higher and higher levels, and what many workers actually need now is not to stay in their homes – it's to have the freedom to unshackle themselves from a house so they can move to where the jobs are. Homeowners with negative equity in their homes are 50 percent less likely to move than others, which isn't surprising but gives a sense of just how many people out there are under "house arrest," unable to sell or move.

Last year, about one in four Portland-area homeowners had negative equity in their homes, and one in three in Cleveland. The unemployment rate is currently 10.4 percent in both Ohio and Oregon. So say you're an unemployed homeowner who wants to move to a state with better job prospects. What are your options?

Depends on which state you live in. Ohio plans to pay lenders an average of $4,000 to encourage "short sales," in which the lender permits a sale for less than the debt owned on the property. "Homeowners who must relocate to gain meaningful employment" are eligible. On top of that, borrowers can get up to $3,000 in relocation assistance under the federal Home Affordable Foreclosure Alternatives program.

But in Oregon, it's a totally different story. There, homeowners will first have to sign up for a cash-aid program, and only after that money is exhausted, after six months, can they sign up for short sale aid. Even then, this "transitional assistance" is supposed to go to just 3,000 families, and guess what? They'll get $3,000 to move to new housing – exactly what HAFA already pays for.

The other states offer much the same menu: Financial aid to ease short sales, or deeds-in-lieu of foreclosure, is either not part of the program or a very small piece of it, usually after other options have been exhausted. Ohio's aims to help fewer than 3,000 families.

Now there are very good reasons for this – for the states, not the homeowners. If they were to hand out checks to help large numbers of homeowners ditch their property and move out of state, it could look very bad for governors, most of whom are running for reelection this year.


More on AOL Real Estate:
Find out how to calculate mortgage payments.
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Find foreclosures in your area.
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