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HUD mortgage aid program stumbled from the start

Mortgage-aid-program-stumbled-from-the-start-NAN2AN7-x-largeLorraine and Jude Austin, who had battled against foreclosure for two years, were “approved” for $48,113 in federal mortgage assistance, read the letter from the Department of Housing and Urban Development.

It cautioned there was no “guarantee” that funding would come through and that final verification was needed.

Almost three months later, the Austins still don’t have final approval for the “emergency” loan they’re counting on to avoid losing their Scott, La., house.

“We’re just waiting,” says Lorraine Austin, 47.

Similar countdowns are likely underway in two dozen states as HUD makes final decisions on almost 5,000 applicants preliminarily approved for up to $50,000 each from the $1 billion Emergency Homeowners’ Loan Program.

That the closing days of the EHLP program are marred with last-minute beat-the-deadline suspense is no surprise. The program announced with fanfare last year as a lifeline to homeowners pummeled by a job loss or an income hit stumbled from the start as HUD took too long to launch it, underestimated challenges, overestimated the number of applicants expected and then ran out of time, say consumer housing advocates and congressional lawmakers who pushed for the funding.

With 13 million consumers unemployed and 4 million mortgages in foreclosure or seriously delinquent, more than half of the $1 billion EHLP funding went back to the U.S. Treasury because the funds didn’t get allocated to homeowners before the Sept. 30 deadline.

Instead of helping 30,000 homeowners, EHLP will help about one-third that number, HUD data indicate.

“This was a bungled program,” says Carol Finegan of the Brooklyn Housing & Family Services agency.

“HUD dragged its feet,” says Rep. Barney Frank, D-Mass., who worked to get the funding.

HUD, which declined to make an official available for an interview for this story, said in congressional testimony, previous interviews and e-mail responses to questions that it worked hard and as fast as possible to make the program successful and fair.

“We understand that there is disappointment that the program is not reaching more families,” said Carol Galante, HUD acting assistant secretary for housing, in congressional testimony in October. “We, too, are disappointed and recognize that the program setup took longer than anticipated.”

The program, one of several federal foreclosure-prevention programs, was new and involved hundreds of housing counselors and mortgage companies. It required new regulations, financial controls, employee training, building of complex data systems and agreements with lenders, HUD said in an e-mail replying to USA TODAY’s questions.

Eligibility restrictions disqualified far more people than expected, HUD says. About 100,000 people applied, Galante testified. Three-quarters of the ineligible applicants were disqualified by the requirements set by Congress, she added.

“We modified the process to benefit as many homeowners as possible within the strict guidelines of the law,” HUD said Wednesday in an e-mailed response to questions from USA TODAY.

HUD officials expected so many people to apply that they created a lottery to decide who could submit applications. In the end, HUD didn’t get enough qualified applicants even after it extended the application period.

EHLP was designed to benefit homeowners in 32 states and Puerto Rico based on population and unemployment. The plan’s design was so specific it spelled out how many recipients were to come from each state’s urban and rural areas.

Instead, the program will heavily benefit homeowners in just three states, where almost half of the preliminarily approved applicants live.

Those states Pennsylvania, Connecticut and Maryland ran their own programs to disburse the federal funds, as did Idaho and Delaware, because they already had similar foreclosure-prevention programs in place.

The three states used their $179 million in total funds and got $45 million more when HUD realized that allocations to other states would be unused, HUD says.

HUD ran the program in the 27 other states and Puerto Rico. Instead of almost 22,000 borrowers getting funds, about 6,000 will get help, HUD’s preliminary data show.

“HUD’s attitude was: It’s such a good program, we’ll have no problem getting people,” says Lewis Finfer, executive director of the Massachusetts Communities Action Network. “But when there started to be problems and we made suggestions, they said, ‘We don’t have time’ or ‘We need to keep going,’ ” Finfer says.

The latest HUD data show that it had approved or closed 811 out of about 6,000 applications. Several hundred have been denied who received preliminary approval, according to HUD. Some of those homeowners have appealed. Some were denied because foreclosure sales had occurred, HUD says.

The five other states approved another 5,688 applicants. Most of those loans have been closed, HUD says.

HUD is working with mortgage companies to get other foreclosure sales postponed pending final approvals, it says. “We’re working with quite a few clients now in that situation,” says Catrina Hieb, of Lutheran Social Services in Sioux Falls, S.D. It helped homeowners apply for EHLP assistance.

‘Some of the best’ help

Wall Street reform legislation, known as the Dodd-Frank Act, passed in July 2010 funded the program.

The $1 billion was split among states left out of the Obama administration’s $7.6 billion Hardest Hit Fund. That fund helps homeowners in 18 states, including California and Florida.

Both programs largely offer no-interest loans to help homeowners avoid foreclosure and weather bouts of joblessness or underemployment. With EHLP, loans help borrowers with mortgage bills for up to two years and will be forgiven if homeowners stay in homes for five years.

The assistance “is some of the best that anybody can get” to avoid foreclosure, says Candace Mason, housing director for the National Foundation for Credit Counseling, which worked with EHLP applicants in 25 states.

The kicker was that funds had to be allocated by Sept. 30, 2011, or they’d return to the U.S. Treasury.

Delays started early.

In October 2010, a HUD press release said the application process would begin by the year’s end.

But that deadline passed and by January, HUD had not even established how the program would run, Finfer says.

Consumer groups say they met with HUD officials.

“We read them the riot act,” says John Dodds, director of the Philadelphia Unemployment Project. But, “They thought there would be such an Oklahoma land rush that there would be no trouble spending this money.”

A week later, Finfer read a Boston Globe article saying that HUD planned to launch a lottery for applicants.

“Can you explain how that would work?” Finfer asked in a Feb. 3 e-mail to HUD official William Apgar, which Finfer provided to USA TODAY. Apgar has returned to teaching at Harvard University and declined to be interviewed.

The article quoted Apgar as saying that HUD now anticipated a start date near March 19 and that the agency had “underestimated the complexity of bringing a totally new program up.”

The lottery was needed, Apgar said, because the program would be “vastly oversubscribed.”

But the March 19 date slipped. too. Instead, HUD didn’t open the program to applicants until June 20 six months later than originally planned.

Even then, the program opened only to “pre-applicants.” Borrowers were asked to fill out a 13-question “pre-applicant” screening form. They were asked relatively easy questions, such as whether they were late on their mortgage and whether they’d lost income because of the recession.

If borrowers passed the screen, they’d go into a lottery. If they won the lottery, they’d be allowed to do a full application. That required submitting numerous documents, including tax returns, pay stubs, birth certificates and notifications from employers regarding job losses or pay cuts.

Housing groups warned HUD as early as April, Finfer says, that the agency’s two-step application process would be too slow and wouldn’t be needed. They noted that Pennsylvania, for instance, had opened its EHLP program to applicants in April and hadn’t found homeowners blowing through the doors, Finfer adds.

HUD officials “were out of touch with the idea that homeowners would be skeptical,” Dodds says, even though consumer groups warned that homeowners might fear the program was a scam or just another government program that wouldn’t work for them.

HUD was also “very worried about any sense of unfairness,” says Bruce Dorpalen of the Affordable Housing Centers of America. “We said, ‘What’s unfair about first come, first served?’ “

Appearing to qualify

Lorraine Austin says she heard of the program shortly after the law was passed in mid-2010. She watched and waited for a year. She finally learned from the local newspaper that it was open to applicants . Austin filed her application in July.

The Austins were more than 90 days late on their mortgage. Her carpet store had failed in the economic wreckage of Hurricane Katrina in 2005. Jude’s concrete-laying work had suffered in the recession.

On July 11, the Austins received a thank-you e-mail, which they supplied to USA TODAY, for applying from Money Management International, a counseling agency that processed EHLP applicants.

On Aug. 2, another e-mail told the Austins that they didn’t win the lottery. MMI could help 181 households in their area. Their number was 882, the e-mail from MMI said.

“So, if 701 homeowners are deemed ineligible for EHLP in your area, we will contact you again and ask you to submit an application,” read the e-mail.

Devastated, Austin picked up her 72-year-old father from his senior day care center. “He said he’d sell his house to help us,” Austin says.

Three days later, MMI sent another e-mail to “share the good news.” HUD had announced “changes” and the Austins could submit a full application.

Falling short

Unknown to the Austins, many applications weren’t meeting the program’s eligibility criteria.

HUD estimated 43,000 applicants passed the initial screen, says an Aug. 11 HUD memorandum obtained by USA TODAY. That wasn’t enough to meet EHLP’s goal because the initial screen was cursory and many would be disqualified later.

“It was obvious by late July that most people were falling out,” says Anthony Lopes, housing director of Cambridge Credit Counseling.

Most of EHLP’s eligibility requirements were defined by the law passed by Congress. But HUD added rules, too.

The law required that applicants suffer a significant hit to income. HUD defined that as 15% or more since 2009.

That wasn’t too restrictive, says consumer advocate Dodds. But many people had lost income, fallen behind on their mortgage and then found a job.

Many of those people weren’t eligible because their incomes weren’t off by 15% anymore, but they were still in foreclosure danger because they couldn’t catch up on late payments. “We had a lot of people knocked out because of that,” says Simone Griffin of housing agency HomeFree-USA.

The Aug. 11 memo spells out six pages of changes that HUD made as it tried to produce successful applicants.

The memo also said counselors should adopt a “first-eligible, first-offered” stance and drop rural vs. urban restrictions.

HUD reopened the program to applicants on Aug. 29 a month after the application period had last closed.

“They should’ve reopened the program as soon as they saw it falling short,” Lopes says.

Mounting challenges

As housing counselors raced against the September deadline, challenges continued. With the program changes, the counselors scoured stacks of applicants whom they’d earlier denied looking to see if they now qualified.

“There were some files we probably went through four or five times,” Lopes says.

Homeowners, too, caused delays. “We were calling people twice a day to bring their documents in,” says housing counselor Jan McNerney of Business & Community Lenders of Texas, a non-profit that assisted applicants.

The housing counselors uploaded borrower documents via a website to the Bank of New York Mellon, which HUD had tapped to be the fiscal agent to do such things as title checks.

The agencies complained about “slow” response times from the fiscal agent, saying that its replies took three to four days and were sometimes “cryptic,” according to September e-mails obtained by USA TODAY.

The national non-profit NeighborWorks America, which helped HUD administer the program, says the bank didn’t always use the website properly, so documents sent didn’t always get noticed, says NeighborWorks spokesman Douglas Robinson.

In a statement in response to questions, the Bank of New York Mellon said, “We have worked hard to provide timely assistance while meeting the program’s guidelines.”

A mistake in ‘frantic’ final days

HUD took multiple steps to get more people to the preliminary approval stage.

In the final days, HUD extended the deadline for application submissions through Sept. 26, then Sept. 27, then Sept. 29 and through noon ET Sept. 30.

On Sept. 26, HUD said housing counselors could submit applications with an incorrect version of a form enabling mortgage companies to share borrower data with HUD and others, but that they should add the correct form “as soon as possible,” says a memorandum to NeighborWorks from HUD EHLP project director Todd Richardson.

HUD had developed two third-party authorization forms, a generic one for the pre-applicant process and a more extensive one for the full application process, Richardson said in an e-mailed reply to a question from USA TODAY.

In the “frantic days” leading up to the deadline, Richardson says, the wrong version was used. “Our mistake was to have two Third Party Authorization forms,” he wrote.

HUD also made a “substantial change” in agreeing to commit funds to homeowners whose applications were uploaded to the bank but still lacked final clearance, Richardson told Finfer in a Sept. 26 e-mail.

While that led to more people getting preliminary approvals needed to beat the Sept. 30 cutoff it will lead to more late denials, too, Lopes says. “We’re going to deal with a lot of complaints,” Lopes says.

The Austins’ house was supposed to go to a foreclosure sale on Dec. 21. Lorraine says the sale was postponed in November, after the Austins were preliminarily approved for EHLP help.

The money would enable the Austins to catch up on their mortgage and help them pay the mortgage for the next two years.

Jude Austin, 50, has seen his concrete-laying work coming back. Lorraine has gotten part-time work. They’ve cut expenses, including DirecTV. The couple, who have three children in college, hope that in two years they’ll again have an affordable mortgage. If not for EHLP, “We’d have no hope,” Lorraine Austin says.

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