While millions of homeowners struggle to pay their mortgages, more than $7 billion sits, unused, in a federal fund that was created to help borrowers avoid foreclosure.
Why? In one word: incompetence.
In 2010, the Treasury Department created the Hardest Hit Fund. The plan was to distribute $7.6 billion among housing finance agencies in states that were hit hardest by the housing crisis, so the states could help borrowers stay in their homes.
But only 3 percent of the $7.6 billion in this fund, or $217.4 million, was spent, as of December, according to a report released Thursday by the Office of the Special Inspector General.
Designed to help millions of homeowners, the program has helped only 30,640 people since it was created.
The main reason for the program's failure may be familiar to you: Fannie Mae, Freddie Mac and the large mortgage servicers refused to participate, for the most part.
An official from Florida Housing Finance Agency, which was allocated more than $1 billion from the fund, explained in the report: "The one billion dollars has been a nice carrot to use for servicers in Florida, but there is no stick with the carrot to force servicers to participate."
Who's to blame? The Treasury Department, at least according to the report. Treasury made the money available for the program, but it lacked planning and oversight. In other words, just like with the bank bailout, Treasury basically said: "Here is the money; we hope you do the right thing with it."
When will the government ever learn that a no-strings-attached policy will never work on the lending industry?
According to the report, Treasury failed to gain support from Fannie and Freddie before announcing the program. Not until seven months after its announcement did Treasury hold a summit with servicers to try to get them on board, the report says.
Months after the Hardest Hit Fund was created, some servicers started to participate in the program, but they embraced only the parts that benefited them. The program, which was made available to 18 states and the District of Columbia, was supposed to help borrowers by:
- Reducing mortgage balances for underwater borrowers.
- Paying off or reducing second mortgages.
- Paying amounts past due on mortgages to help borrowers who had fallen behind on payments.
- Providing unemployment assistance.
- Offering relocation help to those selling homes through short sales or handing over the keys to the lender in lieu of foreclosure.
Guess which part of the program the servicers welcomed? The unemployment assistance, in which the government makes payments for homeowners while they're unemployed. Most of the money spent in the program so far went to unemployment assistance, the report shows.
"The servicers, investors and GSEs make no financial sacrifices in the unemployment and reinstatement programs because the mortgages are essentially paid by the government in whole or in part," the report says.
By the way, for those who complain about how banks got a bailout but homeowners didn't, it might help to know that this program was -- is -- supposed to be your share of the bailout. The money for the Hardest Hit Fund comes from the Troubled Asset Relief Program, which was set up to help banks during the 2008 crisis.
Too bad it's mismanaged. According to the report, at this pace, the fund will have helped fewer than 500,000 homeowners by 2017, when it's set to expire. When the program was announced, Treasury estimated that the fund would help at least 3 million homeowners.
Do you think these $7 billion will help struggling borrowers avoid foreclosure?
Follow me on Twitter @Polyanad