Short Reach for Md. Housing Aid
Officials Say Troubled Borrowers Took Too Long to Seek Help

By Renae Merle
Washington Post Staff Writer
Wednesday, September 24, 2008

In the year since Maryland launched a series of foreclosure prevention programs, the state has helped just 88 troubled borrowers get into new loans or keep up with their payments, at a cost of about $17.9 million.

State officials say their efforts have been hamstrung by borrowers who wait too long to ask for help or are disqualified by low credit scores. Negotiations with lenders to expand the programs have stalled. The "big-picture lesson we have learned is that we can't refinance our way out of this problem," said Raymond A. Skinner, secretary of Maryland's Department of Housing and Community Development.

These are the sorts of troubled homeowners whose loans set off a financial crisis that has gripped Wall Street and now Congress, as lawmakers debate a plan to rescue financial firms by buying billions of their bad mortgages. Democrats have urged, and the Treasury Department has agreed, that the plan should include provisions for helping homeowners at risk of foreclosure.

But the limited impact of Maryland's efforts reflect the continuing struggle to fashion effective programs to help distressed homeowners. The foreclosure crisis is deeper and more problematic in many communities than expected, and creating programs for disparate groups of homeowners has challenged government, lender and nonprofit efforts.

The slow federal and industry response prompted Maryland's government to launch an aggressive effort to head off the problem itself.

Last year, the state housing finance agency began Lifeline, a program targeting homeowners current on their loans but facing an unaffordable increase in their payments. The homeowners are refinanced into new mortgages with lower payments. Then earlier this year, the agency introduced HomeSaver, a refinancing program for borrowers already up to two months delinquent. Under a third program, Bridge to Hope, homeowners are eligible for a loan of up to $15,000 to help them catch up on their mortgage.

But the refinancing programs have not made a significant impact. Since June 2007, 47 homeowners have received refinancing deals worth $11.9 million through Lifeline. Twenty-one have received deals worth $5.7 million through HomeSaver since February. Twenty have received the stopgap loans, for a total of $200,000. The state hopes to recoup that money as homeowners pay back the loans.

"We had expected to have more. As I said, we ran into a number of challenges," Skinner said. "It's just been very difficult and time-consuming to work with these refinanced borrowers."

Other states have struggled with similar programs. Even after lowering credit-score requirements and making more homeowners eligible, New York has refinanced only four borrowers since launching its program in September 2006.

"Early evidence shows they [these programs] are slow to get going," said Kil Huh, project manager at the Pew Center on the States. "States continue to grapple with how to make these programs more acceptable for a larger segment of distressed homeowners."

Maryland and New York are models for states that want to tap the $11 billion in tax-exempt bonds Congress made available this summer for similar refinancing programs, Huh said. "Over time, states are trying to figure out how to make these programs work. These early programs as they are working through the kinks could be models," Huh said.

It's still too early to know the effects of the latest federal proposals, Skinner said. "Our number one concern is our homeowners and where they will turn for help. We will continue to look for ways, either through assistance offered in the housing stimulus bill or our own resources, to provide Maryland homeowners with options."

Maryland officials tout their progress in other areas, including outreach efforts managed through a network of 32 nonprofit housing counseling groups. The state's hotline received 10,000 calls during the past year and about 35 to 45 percent had a positive result -- from a modification of the loan to a quick sale of the property, they said.

"The efforts of housing counseling agencies have been tremendous," Skinner said.

The refinancing programs have proved more complicated. The state housing department wanted to fund them by selling taxable bonds, but Wall Street was reluctant to invest. The state dipped into its reserves to fund the programs but hopes to get a better reception with tax-exempt bonds later this year, officials said.

But the major stumbling block remains reaching homeowners before late payments ruin their credit scores. The state initially expected to funnel homeowners through Lifeline but found that many were delinquent before their interest rates increased, state officials said. Some simply ignored warnings from their lenders, then eventually made a panicked call to the state hotline or a housing counselor.

"I can't tell you the number of people who call me and say 'I am going into foreclosure next week and I need help,' " said Billy Cogman, executive director of Kairos Development, a housing nonprofit based in Prince George's County. "Okay, we can do a lot of things, but we can't do miracles. . . . There have been a few that we have been able to rescue, but the majority haven't been salvaged."

The state's requirements for getting a refinanced loan can also be difficult to meet. There is little flexibility for a homeowner who owes more than the home is worth. Also, under HomeSaver, for example, the homeowner must have a credit score of at least 580. With one or two missed payments, a homeowner can quickly fall below that threshold, state officials said. Both refinancing programs also require that the payments on the new loan not make up more than 50 percent of the borrower's income.

"Nobody comes in our door who has a ratio less than 60 percent," Harrington said.

Mark Westcott, manager of Corridor Mortgage Group's Columbia branch, said he has attempted to refinance about a dozen homeowners into one of the programs, but each failed. Some homeowners had to prove their income as a condition of the loan for the first time and others owed significantly more than their home's value, he said. "By the time the consumer gets to us, it's usually too late," he said.

Relaxing the rules is tempting but not realistic, state officials said. The loans must ultimately be sold to investors intent on avoiding risky borrowers likely to default, they said.

"We, in many respects, operate like a bank. We have to raise capital to finance these loans," Skinner said. "We have to have investors willing to buy this paper, and if the standards are too loose they are not going to do it."

The larger challenge for the state may be expanding efforts to include lenders willing to issue new loans directly to homeowners. The housing department, Montgomery and Prince George's counties -- which lead the state in foreclosures -- have set aside more than $6 million to entice lenders into refinancing more troubled homeowners. If the borrower defaults, the program would repay the lender up to 40 percent of the loan's value.

Since the program was announced in May in Montgomery County and July in Prince George's, no lenders have signed up.