Professor Katherine V.W. Stone, of UCLA law school writes that in the “old economy”, periods of joblessness were a clear sign of an unreliable borrower, but not any more, as we are in a “new economy”. Professor Stone’s article is entitled “The 30 Year Prison”, and appears in the August 12, 2010 edition of The NY Times.

Professor Stone calls for a major changes to mortgages–a “flexible” mortgage with the borrower having an option to request a two-year period of “interest only” payments. She suggests that the Federal Housing Administration require that any mortgages it insures be set up to mandate that borrowers who are involuntarily out of work be allowed to convert to an interest-only loan for up to two years. She points out that since the FHA insures almost one-third of the mortgage housing market, in short order the mortgage industry would very likely follow suit, and that this practice would become the norm for all mortgages.

Professor stone writes: “It’s not as if the 30-year self-amortizing mortgage has been around forever. In fact, it is a fairly recent invention. Before the 1930s, homes were financed by three-to-five-year balloon loans. Homeowners made interest-only payments for the duration of the loan, then typically rolled them over into new loans when they came due. During the Great Depression, however, many borrowers were unemployed when their loans came due; banks were reluctant to offer new loans, and owners had not accumulated enough money to pay off their loans. The result was a wave of foreclosures. In response the Home Owners’ Loan Corporation, created as part o the New Deal, developed a new kind of loan: instead of a few years of small payments followed by a very large one, homeowners would make regular payments of interest and principal for 30 years. In the old economy, periods of joblessness were a clear sign of an unreliable borrower. Today, they are simply a function of the job market, which flexible mortgages would take into account.”

Washington will get some share of the $1 billion disbursed to HUD to help with house payments so if you are unemployed and falling behind on house payments, hit HUD up for a loan.

Unfortunately, Washington homeowners get NOTHING from the recent $2 billion disbursed by the Troubled Asset Relief Program to other states. The benefited states as to the $2 billion include Alabama, Illinois, Kentucky, Mississippi, New Jersey, and Washington D.C., as part of the Hardest Hit Fund disbursements.

This $2 billion is the third large grant to the Hardest Hit Fund. Washington has not received any portion of those three grants. The Hardest Hit Fund receives disbursements from the $45.6 billion set aside for housing issues in the Troubled Asset Relief Program. Hardest Hit Fund disbursements to those favored states to date now total about $4.1 billion in three disbursement. The Hardest Hit Fund is, for now, out of money.

To date, the other funds in the $45.6 billion earmarked from TARP to be expended for housing issues include $30.6 billion for loan modification programs (such as HAMP, AKA the Housing Made Affordable Program) and $11 billion for a FHA refinancing program. Thus, there would now seem to be no funds–zero dollars–left to disburse to the Hardest Hit Fund except that, as reported by Mr. Streitfeld in the New York Times, the government has up until October 3, 2010 (the two-year anniversary of TARP) to shift the $45.6 billion in committed funds around within the housing assistance program. Perhaps the government could issue one more Hardest Hit Fund disbursement which would make house payments for people by giving them outright grants or interest free loans to make house payments while unemployed, underemployed or suffering from some other sort of financial stress or strain. If the past is a guide to future policy actions, I doubt that Washington state would be a beneficiary.

While frozen out of the $2 billion Hardest Hit Fund to date, Washingtonians may see a little benefit from the $1 billion that was just disbursed to HUD (Housing and Urban Development) from the new Financial Overhaul Law. This $1 billion HUD disbursement apparently is not part of TARP, so it is $1 billion in “new money” in addition to the $45.6 billion in TARP for housing issues. As to this $1 billion, Mr. Streitfeld reports that HUD indicates it will work with local aid groups to offer bridge loans of up to $50,000 to eligible borrowers to help them pay their mortgage principal, interest, insurance and taxes for up to 24 months by way of interest-free loans to such affected homeowners.

Mr. Streitfeld reports that between the $1 billion HUD funds from the Financial Overhaul Law and the $4.1 billion pumped into the Hardest Hit Fund in three installments, up to 400,000 borrowers could ultimately benefit. However, given the reported 14.6 million unemployed or the 3 million households contemplating foreclosure, this assistance is modest, given the size of the foreclosure problem.