04/04/2011 07:03 pm ET | Updated Jun 24, 2011

The Non-Mandated Society

A multi-billion program the Obama administration has sent to states hardest hit by the recession to provide emergency mortgage loans to the unemployed was not altruism. It was initiated to save the tax base in middle class neighborhoods -- an essential ingredient to economic recovery. The program had been anticipated by struggling homeowners who'd waited a year for their states to initiate the program that would give them loans to cover their mortgage payments for up to two years.

President Obama established the Hardest Hit Fund in February 2010 to provide targeted aid to families in states hit hard by the economic and housing market downturn. Each state housing agency gathered public input to implement programs designed to meet the distinct challenges struggling homeowners in their state are facing. States were chosen either because they are struggling with unemployment rates at or above the national average or steep home price declines greater than 20 percent since the housing market downturn.

While investigating the program's implementation in California, I came across what may be the primary reason that the Obama administration mortgage programs out of their Treasury Department have not achieved their stated goals.

The California program's stated goal:

Administered by the CalFHA Mortgage Assistance Corporation. The U.S. Treasury Department has approved nearly $2 billion in federal funding to help California families struggling to pay their mortgages. Four key programs: unemployment mortgage assistance, mortgage reinstatement assistance, principal reduction, and transition assistance.

When the unemployment mortgage assistance program, however, was unveiled, it was accompanied by an eligibility test that required the unemployed to prove they'd not yet exhausted their unemployment payments, as so many have, and that they did not have a second or equity line, whether they could tap it or not.

Based on your answers to the eligibility questions, you do not qualify for the Keep Your Home California program for the following reasons: A cash-out refinance or home equity line of credit is not permitted under this program.

For those who know the real estate market, it's not uncommon for a buyer to have utilized an equity line or second to help with their down payment. That source was tapped even more during the recession as struggling homeowners sought to pay their bills from the only bank that would give them credit -- their homes.

The condition that unemployment benefits cannot be exhausted as the Congress refuses to extend those benefits was in other states, as well.

From Alabama's site:

You may qualify if [for Hardest Hit Alabama':
• you are eligible to receive Unemployment Compensation Benefits.
• your total household income is less than 75,740 at time of application.
• you owe no more than 258,690 on your home's mortgage.

These are conditions that block many the program was meant to help before it even got off the ground. How could that have happened?

From the CalHFA site:

NOTE: These programs are only available to homeowners whose mortgage servicing company agrees to the terms and conditions governing the use of these funds. If your servicer is not currently participating in Keep Your Home California, you may want to call them and encourage them to do so. A homeowner cannot receive assistance if their servicer has not signed an agreement with CalHFA MAC. See a list of participating servicers and which programs they are currently offering

I contacted CalHFA, the department administering the new program, and asked for the decision makers behind the two conditions blocking participation in the UMA program. After a series of misdirections to Treasury, who pushed it off on HUD, a CA congressman's office both in CA and in Washington, D.C., and a return to CalHFA, I was told the decision had been made by the banks.

Further investigation into the national Hardest Hit Fund produced similar evidence of roadblocks by banks across the eligible states.

Again from Alabama:

Although your application for HHA assistance may be approved, several servicers have imposed additional requirements before they will accept Hardest Hit funds. We are working diligently with each servicer to provide assistance to all homeowners as soon as possible.

A call to JP Morgan Chase led to a confirmation by two different executives: For those who had exhausted their benefits (a growing number around the nation), they are no longer considered unemployed -- a requirement for their participation in the CalHFA program -- by the bank.

That puts Congress' decision to deny extensions to those who've exhausted their unemployment benefits in a new light. Not only have they taken the unprecedented action to deny extensions when unemployment is over seven percent, they've given the banks and those who tabulate the unemployed the precedent to codify those who've exhausted their unemployment as no longer unemployed.

I also came across another condition aimed at the unemployed -- anyone who has been unemployed during the recession--- that had to do with refinancing or granting new loans. The condition, as relayed to me by Chase, was that a borrower must now show two years of uninterrupted qualified income to qualify for a loan or refinance. If there are any periods of unemployment within that two years, they do not qualify, even if they are currently working.

When I expressed concern that denial of formally unemployed borrowers coming out of a recession with second mortgages or equity lines (set to rise as soon as interest rates come off their historic low) would cause them to be priced out of their homes, I was greeted with the facelessness of a bureaucracy that saw nothing but their own policies as dictated from their boardrooms and no sense of corporate citizenship to help the economy recover its tax base.

That means the well-documented failure of HAMP as managed by banks/servicers is now joined by:

  • the banks' -- as cited in the Chase example -- codification of unemployment benefit recipients as unqualified for standard loan servicing until they have two years of uninterrupted income,

  • the codification of those who've exhausted their unemployment benefits as no longer being unemployed, and, therefore, not eligible for any programs put forth to help the unemployed,
  • the ineligibility of the hardest hit homeowners to qualify for emergency loans if they have a previously tapped second or equity line, even if they can't tap that line.
  • Is this the banks' fault or are they just doing what they do in their faceless bureaucratic way? Banks answer to their global shareholders' requirements for maximum profits. When these programs come from Washington as guidelines rather than mandated, is there any surprise the banks turn the guidelines over to their number crunchers to look for ways to continue to maximize their profits?

    When programs come down from Washington as guidelines rather than mandates, should anyone be surprised if the banks do what's in their global interest rather than America's interest? Would mandates at least give denied borrowers recourse? Perhaps not as much as they should, but without mandates, the programs are blocked to too many of those they're intended to help.

    Even with mandates, the banks would turn over the programs to their number crunchers to find ways to get around the intent. But mandates would give the consumer somewhere to turn. A status change of the unemployed to a protected class would break the bank's codification against them and perhaps change a growing perception of the unemployed as unworthy of support. The actions against those who lost their jobs through no fault of their own are supported by a growing prejudice against the unemployed in Washington and around the country that translates as a lack of empathy (or even good business when it means saving tax bases) -- an us-and-them-better-them-than-me near-theology that seems to be holding whole sections of our population in its non-empathetic thrall.

    Are the unemployed and formerly unemployed now to be Oliver Twist, punished for holding out their empty bowls to the banks while asking, "please, Sir, may I have more?"

    It's not the banks. Too many Americans, including in government, those in the throes of money woes, disconnected due to Internet relationships and 24/7 punditry, and, above all, there-but-for-the-grace-of-God-go-I mindsets, are losing or have lost their capacity for empathy -- one of the most important components of a successful society. They've become open to the drumbeat of the other. The first 'other' was the unemployed... Were the shock doctrinaires shocked they got away with demonizing them -- our neighbors, our family members, our spouses?

    The lack of mandates from Tim Geithner's Treasury on the guidelines to banks undermines economic recovery and puts the 2012 election at risk. The undercurrent of anger in November, 2010, was not the Tea Party asking for cuts, no matter how much that spin is believed by the incurious. It was the desperation of Americans, a full 81% who know someone unemployed, crying out to their representatives and to their president, Help us.

    If programs like the Hardest Hit Fund had the mandate to require that the banks include anyone who'd received unemployment compensation and had not yet found work -- even if they'd exhausted those benefits -- those closest to losing their homes in middle class neighborhoods would be better able to weather the storm until jobs return. That would also mean Washington would have count those who've exhausted their benefits (the so-called 99ers) as unemployed and those numbers could be staggering.

    Reelection politics aside, if the banks were able to include the unemployed in unemployment recovery programs and anyone who's shown any unemployment in the prior two years, that would allow programs to have a better percentage of success than their current rate of failure.

    The additional example of the exclusion of those with second mortgages or equity lines -- even those the homeowner can't tap -- also needs immediate attention as to consequences of that exclusion. When you put that together with the potential of denial of bank services to those who've been unemployed within the prior two years of their refinance request and the inevitable rise of interest rates on their second mortgages and lines, the need for investigation takes on urgency.

    Finally, the government needs to verify whether business has codified those who have received or who have exhausted unemployment benefits within a prior two year period as ineligible for their services and determine whether that codification is a threat to economic recovery.

    [UPDATE] CALHFA has managed to include some servicers' 2nds in their hardest hit fund eligibility, but still require current unemployment benefits for eligibility. No word on other states.