The State of California is set to use financial aid from the Federal government to pay for the mortgages of troubled home owners to avoid foreclosures. California is ready to receive around $700 million in aid from the Federal government, the largest recipient of funding under the ‘Hardest Hit program”.
California’s twin problems of declining home values and rising unemployment have created a housing crisis for many of Californian families. Officials say they will use these funds to help maximum families remain in their homes and thus stabilize neighborhoods battered by the foreclosure properties crisis.
The California Housing Finance Agency( CalHFA) which administers the funds, will use them for offering qualifying borrowers assistance in mortgage payments if they are unemployed, reduction in loan principal for those whose homes are worth less than their loans, assistance for ending defaulted payments and funding for families who cannot avoid defaulting and are making efforts for down grading.
Under the four pronged, “ Keep Your Home Program”, the Cal FHA offers payment assistance of a temporary nature for mortgage to unemployed and those affected by the recession up to $1500. They also give one time cash payment of $5000 to those who cannot afford to retain their homes to cover such expenses as moving costs, security deposits etc.
The program will mostly be available for low to medium income households but eligibility rules are being re- examined. It is estimated that this program will enable 40,000 household to avoid foreclosures. Applications for the program will have a screening process that starts some time before November 1st, 2010.
Critics of the program say it is a move in the right direction but it does not go far enough. Some point out that best way to reduce distress is to reduce principal on loans but the state’s cap of $50,000 on forgiveness of principal under the new program will render it useless for many residents. After all, home prices have dropped 50% to 66%, leaving residents under water for more than $50,000. Critics say that the Principal Reduction program of the State is a poorly thought out program that will not benefit the bulk of people who require it.
But others say that it is a cause for cautious optimism. While it will not eliminate the foreclosures problem, the offer of the Program to downgrade monthly mortgage payments is an appealing one. How it will work will depend on the way it is accepted and used by lenders. In sum, it is one more tool in the tool kit for fixing foreclosures.
