The Obama administration announced yesterday that it will extend an additional $3 billion to expand foreclosure-prevention aid to jobless homeowners. Distressed homeowners who are unemployed will be eligible for no-interest bridge loans of up to $50,000 to help them make mortgage payments. The interest-free loans will be for up to 24 months.

A third of the aid will be used to provide additional bridge-loan programs in the areas hit hardest by unemployment, although not all of those areas have been identified yet.

The existing HAMP loan modification program was designed for the subprime crisis, and it has little help to offer those who are threatened by foreclosure due to unemployment or decreased income. Under that program, unemployed borrowers can only get a three-month forbearance on their payments.

With the national unemployment rate stuck around 9.5 percent and with jobless people facing unemployment for an average of nearly six months, the administration was under pressure to expand foreclosure prevention help to the unemployed.

"The biggest single cause of foreclosure today is loss of income or employment-related issues," not expensive subprime loans, said Barry Zigas, director of housing policy for the Consumer Federation of America, in a recent interview with the Christian Science Monitor.

The new program is modeled after a project in Pennsylvania, which has been making similar no-interest bridge loans to unemployed homeowners since 1983. A community organization called the Philadelphia Unemployment Project (PUP) has been lobbying to have that program adopted nationwide.

"More money has been repaid in Pennsylvania than paid out through the program," says John Dodds, director of PUP.

Success Will Depend on How the Program Is Implemented

According to Dodds, the ability of the program to help unemployed homeowners avoid foreclosures will depend on how well the Treasury Department implements the national program.

"We don't want to force [homeowners] to repay the loan until they get back on their feet," he told the Monitor. "The repayment needs to be done carefully so you don't drive people back under again."

He also projected that the pool of money will have to be expanded, considering that nearly 2 million people are currently facing foreclosure and with no end in sight for the unemployment situation.

Lew Finfer of the PICO National Network, an advocacy group pushing for increased foreclosure prevention help, stresses that Treasury will need to be sensitive when distributing the funds so that they aren't concentrated in metropolitan areas. Smaller cities with high foreclosure rates shouldn't be left behind.

"The program has to be flexible," Finfer says. "It needs to be done very thoughtfully and sensitively; there are a number of different variables to take account of."

Finfer and PICO have criticized the administration's so-called "Hardest Hit Fund," which targets the greatest amount of aid to the states with the highest foreclosure rates.

"There's a reason to give more funds to states that have the biggest problems," he acknowledges. "But it seems inequitable that it's all or nothing."

The increased aid was part of the financial reform bill that was signed into law in July. The bill also allocated an additional $2 billion to the Hardest Hit Fund.

Related Resource:

"Unemployed homeowners to get extra foreclosure aid" (The Christian Science Monitor, August 11, 2010)