HUD offers interest-free $50K loans to unemployed homeowners to stem foreclosures

Call it a hair-of-the-dog solution to a seemingly intractable problem.  The Department of Housing and Urban Development have begun issuing emergency $50,000 loans at zero interest to unemployed homeowners in an attempt to stall foreclosures, using $1 billion of Porkulus funds for the effort and $2 billion from the same source for indirect aid through state governments.  Ironically, while foreclosure seizures are rising, the actual trend is more optimistic:

The Obama administration is providing $3 billion to unemployed homeowners facing foreclosure in the nation’s toughest job markets.

The Treasury Department says it will send $2 billion to 17 states that have unemployment rates higher than the national average for a year. They will use the money for programs to aid unemployed homeowners. Some of those states have already designed such programs.

Another $1 billion will go to a new program being run by the Department of Housing and Urban Development. It will provide homeowners with emergency zero-interest rate loans of up to $50,000 for up to two years.

The news comes as foreclosure seizures have increased by 6% over last year:

The number of U.S. homes lost to foreclosure surged in July, another sign lenders are moving quicker to take back properties from homeowners behind in payments.

Lenders repossessed 92,858 properties last month, up 9 percent from June and an increase of 6 percent from July 2009, foreclosure listing firm RealtyTrac Inc. said Thursday.

Banks have stepped up repossessions this year to clear out the backlog of bad loans. July makes the eighth month in a row that the pace of homes lost to foreclosure has increased on an annual basis.

Also, the cancer appears to have spread to areas outside of the original epicenters of the collapse:

Home foreclosures are climbing in the Northwest and Midwest, areas that had earlier dodged the worst of the mortgage crisis, according to real estate data firm RealtyTrac Inc. With 14.6 million Americans out of work and consumer spending declining, further weakness in housing could push the economy back into recession, former Federal Reserve Chairman Alan Greenspan said Aug. 1.

Foreclosure rates in Utah, Idaho, Illinois and Colorado rose in the second quarter compared with a year earlier, and rank among the 10 highest in the country. The number of homes seized by lenders at least doubled in 19 states and more than tripled in seven of them, according to Irvine, California-based RealtyTrac.

That’s the bad news, and it’s legitimately bad.  The Obama administration has failed to do anything more than to extend the cycle of foreclosures, which merely postponed the inevitable for lenders faced with unsalvageable situations.  However, it masks better news, which is that the actual failure rate is finally declining as the worst cases finally get cleared off the ledgers:

The number of properties receiving an initial default notice — the first step in the foreclosure process — rose 1 percent last month from June, but tumbled 28 percent versus July last year, RealtyTrac said.

Initial defaults have fallen on an annual basis the past six months.

In other words, the market has begun to find its equilibrium, a process in which the Obama administration has interfered for the last eighteen months in a vain attempt to make some political hay while the sun not only didn’t shine, but the skies poured.  The use of a billion dollars to float homeowners over the next two years is hardly the most damaging intervention concocted yet by the administration, but it’s not going to do much without a big change in employment to match it.  The real problem, as just about every one of these news reports acknowledge, is the lack of jobs for American workers.

To fix the foreclosure crisis, the Obama administration has to abandon its top-down, command-economy policies and eliminate the uncertainties that its massive expansion of the regulatory state and of the national debt has created.  Otherwise, the interest-free loans will also mainly default and the foreclosure crisis will only be extended into 2012 … right before the presidential election.

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