Nevada finds federal money difficult to spend

Lon DeWeese has learned that it's not so easy to spend the government's money.

DeWeese is chief financial officer of the Nevada Housing Division and secretary-treasurer of the Nevada Affordable Housing Assistance Corp., the nonprofit organization selected to distribute the $194 million "hardest-hit funds" allocated for Nevada.

The organization has not been able to take applications from distressed home-
owners seeking help with loan modifications and principal mortgage reductions because it hasn't passed "readiness assessment" from the U.S. Treasury Department, DeWeese said.

"Part of that is you must have signed contracts with banks that are willing to participate because every fund recipient requires concurrence of the bank that's holding their loan, whether it's the unemployment program or the principal reduction program," DeWeese said.

That's been a major sticking point, he said.

The hardest-hit program is funded by the federal government's $700 billion Troubled Asset Relief Program, which specifies that the money go to financial institutions, not individuals. Banks must agree to receive money on behalf of borrowers. Without the bank agreeing to accept the hardest-hit funds, there cannot be any distributions.

So far, only one national bank has shown any "appetite" for participating in a principal reduction program, DeWeese said. Fannie Mae and Freddie Mac, which own more than half of Nevada's outstanding mortgages, declined to participate in principal reduction.

"The real open question is when will nationally as well as state-chartered banks and loan servicing organizations sign their (servicer participation) contracts," he said.

DeWeese objected to a recent report from the Lied Institute of Real Estate Studies at the University of Nevada, Las Vegas, that found Nevada's hardest-hit fund to be largely ineffective in supplementing President Barack Obama's $75 billion Home Affordable Mortgage Program.

The Nevada Affordable Housing Assistance Corp. office is not fully staffed, not open for business and not able to take applications, the Lied report said.

Lied Institute director Nasser Daneshvary said he didn't think there were any "shenanigans" at NAHAC. "They just don't have their act together," he said.

The Treasury announced in June that it had approved foreclosure prevention plans prepared by the five states targeted for hardest-hit funds: Arizona, California, Florida, Michigan and Nevada.

Florida is working to get final approval for its plans and Arizona does not have its program in operation. California started taking applications in November. Michigan is operating its program only through participating lenders.

"Until there's a reasonable number of banks willing to participate, there's no reason to open our doors and take applications because it creates a false sense of hope," DeWeese said. "The overall goal is to help people, not to create the impression that there's a solution immediately available. Raising expectations without the ability to deliver is more devastating than you can imagine."

The good news is the unemployment assistance program appears to have a large number of national banks willing to participate, DeWeese said. Nevada Affordable Housing Assistance Corp. is slated to be a pilot program in 2011 with one of the banks.

"While we were excited to receive funds in the spring, it's like other federal programs where the announcement precedes allocation by several months," DeWeese said.

Banks are required to match the hardest-hit funds up to $25,000 on principal reductions, and their willingness to reduce mortgage principal is crucial to the programs' success, DeWeese said.

In its 48-page report, "Second Chances: Subprime Mortgage Modification and Re-Default," the Federal Reserve Bank of New York found that pre-HAMP mortgages were focused on mortgages that looked especially risky.

"We find that delinquent borrowers whose mortgages receive some kind of modification have a strong tendency to redefault, but that different kinds of modifications have diverse effects to outcomes," the report said.

For homes with negative equity, larger principal reductions at the time of modification can significantly reduce the likelihood to default again, as are mortgages that are modified to restore the borrower's equity position.

HAMP is focused on increasing borrowers' ability to make monthly payments as measured by debt-to-income. Reductions in payment amounts are primarily achieved by subsidizing lenders to reduce interest rates and extend loan terms.

"While such interventions can reduce redefault rates, an alternative scheme would achieve the desired (debt-to-income) by first writing down principal to current market value of the property and then reducing the interest rate as necessary," the Federal Reserve report said.

Las Vegas' mortgage delinquency rate is seriously high and rising, Washington, D.C.-based Foreclosure-Response.org found in a comparison of 366 U.S. metropolitan statistical areas from June 2009 to June 2010.

Las Vegas had the second-highest serious delinquency rate in June at 24.2 percent and the largest increase from the prior year of 4.4 percentage points.

Contact reporter Hubble Smith at
hsmith@reviewjournal.com or 702-383-0491.