States have radical ideas to stop foreclosure

NEW YORK (CNNMoney.com) -- The Obama administration is giving 10 states a total of $2.1 billion to come up with innovative ways to stem the foreclosure crisis. They are charged with finding solutions for the unemployed and underwater -- two groups typically shut out of loan modifications.

So far, Arizona, California, Florida and Michigan have made public their proposals, which include some pretty radical ideas, including mortgage subsidies and taxpayer-funded principal reductions. Nevada has submitted a plan to the Treasury Department, but has not released it. Treasury officials are reviewing the ideas and should rule on them within the next few weeks.

The other five states -- North Carolina, South Carolina, Ohio, Oregon and Rhode Island -- are still developing their proposals for the so-called Hardest Hit Fund.

The money is only intended to help a small portion of the people struggling with the twin collapses of the economy and the housing market. State officials are still working out the details on who qualifies and how they will be selected.

Here's what the states want to do:

Arizona will receive $125.1 million, which will allow it to help about 4,000 borrowers. The state had 74,000 foreclosures in 2009, according to state officials.

It is proposing to pay up to $50,000 of a delinquent homeowner's balance if their loan servicer matches. The reduction would be forgiven over 10 years as long as they stay in the home. The state would also provide funds to pay off second liens if they are blocking the modification of the primary loan.

The state would also help the underemployed by reducing their loan to reflect their home's current value and then covering up to 30% of their monthly payments for as long as 24 months. The maximum subsidy would be $12,000.

Applicants must be in imminent danger of default and have household income at or below 120% of the area median income. They would also have to prove hardship that's not due to a "self-inflected wound," such as refinancing to take out equity or obtaining a mortgage based on undocumented income.

Offering servicers $50,000 toward the mortgage on an underwater home should make them more eager to participate, said Reginald Givens, Arizona's neighborhood stabilization program coordinator. State housing officials are still negotiating with lenders.

"We're going to help them clearly see where it's in their best interest to write down the principal for the consumer rather than foreclosing," Givens said.

California, which will receive $699 million to help an estimated 38,095 people, is proposing to pay 50% of an unemployed borrowers' mortgage, up to $1,500, for as long as six months. For borrowers who are able to resume making payments but are saddled with arrearages, the state will cover up to $15,000, or 50%, of the amount owed, as long as the servicer matches.

The Golden State will also pay off up to $50,000 of an underwater homeowner's mortgage as long as the servicer matches. And, for those who can't afford to stay in their homes, the state will provide up to $5,000 to help the borrower find new housing.

Borrowers must be delinquent or in imminent default, but have adequate income to sustain modified mortgage payments. They must live in their homes and the loan cannot exceed $729,500.

More than 216,000 homes in California received a foreclosure notice in the first quarter of 2010, which equaled 23% of the nation's total, according to RealtyTrac, an online marketplace of foreclosed properties.

Florida hopes to assist up to 12,000 households with the $418 million it will receive. Still, this is only a drop in the bucket in a state which saw 153,540 properties receive a foreclosure filing during the first three months of the year, according to RealtyTrac.

The Sunshine State will cover up to nine months of a jobless, delinquent borrowers' monthly payments if the servicer agrees to match. The loan would be forgiven over five years as long as the borrower remains current and lives in the home. Florida might also pay down some of the homeowners' principal in order to make the loan more sustainable.

The state, which requires mediation before a servicer can foreclose, would also use $25 million to provide legal representation for borrowers during these negotiations. And it would provide $40 million for downpayment assistance for prospective homeowners.

Requiring servicers to match the payment subsidies will allow the state to help more people, said David Westcott, director of homeownership programs for the Florida Housing Finance Corp., which is administering the funds.

While many Florida residents now owe more than their homes are worth, Westcott said the state is looking to help only those in default because of a financial hardship, such as the loss of a job or a divorce. Those who mismanaged their money or can still afford their mortgages will not be assisted.

"We're not here to make you whole on paper," he said. "We're looking to help people who are committed to their homes and, with a little help, are able to stay in their home."

Michigan, which is receiving $154.5 million, expects to aid more than 16,000 people with its proposals.

The state has the nation's highest unemployment rate at 14.1% in March and saw 45,732 properties receive a foreclosure filing during the quarter. So its program is aimed at helping homeowners currently receiving unemployment benefits, those who have fallen behind in their payments due to a temporary layoff or medical emergency and people who can no longer afford their mortgages because their income has dropped.

It will subsidize up to half the mortgage payments, to a maximum of $750, of the jobless for up to 12 months. And, for those who can once again meet their obligations, it will provide up to $5,000 to homeowners to catch up on missed payments.

The state will also put up to $10,000 toward reducing mortgage principal, as long as the servicer agrees to match. Borrowers can be either current with their payments or delinquent.

"We're trying to create lower permanent monthly payments for homeowners," said Mary Townley, director of homeownership for the Michigan State Housing Development Authority.