Foreclosure Relief Announced for five states: Arizona, California, Florida, Michigan & Nevada

As we noted in this space yesterday, a recent RealtyTrac report showed that the majority of foreclosures in the first quarter of 2010 were located in just four states, Arizona, California, Florida, and Nevada.

Fourteen of the top 20 metropolitan areas showed decreases in foreclosures, but the overall nationwide foreclosure rate rose by 16 percent. A lot of this increase is due to the aforementioned states.  Theoretically, if the foreclosure crisis could be alleviated in those four states, it would go a long way toward improving the nationwide outlook.

In response to the foreclosure crisis, the Obama administration is giving $1.5 billion in TARP money to the five states that are considered the hardest hit states: California, Nevada, Michigan, Arizona, and Florida.

The plan was floated in February, and it was designed as a test program to let the states try to figure out novel ways to solve the foreclosure problem.  $1.5 billion doesn’t go as far as it used to, so it probably won’t make a huge difference in the long run in and of itself, but if any of the state plans are successful, they could be instituted on a broader scale.  Recently the Obama Administration has announced changes to some of its other homeowner aid programs, the Home Affordable Foreclosure Alternatives (HAFA) program, and the Home Affordable Modification Program (HAMP).  Many have complained that the programs as presently constituted are ineffectual.

As of now, three states have announced how they intend to disburse their funds:

• Arizona is going to institute a program that would reduce mortgage principal for underwater home owners.
• Florida is going to float interest-free loans to unemployed home owners.  The loans would be forgiven over the course of several years if the borrowers stay current on their payments.
• Michigan is going to use the bulk of its money to assist unemployed borrowers.
• California and Nevada have yet to release their plans.

All of the plans would include strict guidelines as to who is eligible to receive relief.  The states do not want to appear to be bailing out those who knowingly took out risky mortgages, speculated on real estate, or otherwise acted recklessly.  Such bailouts create a risk of moral hazard and would be politically unpopular.

What do you think would be the most effective way to help out at-risk homeowners?  Let us know in the comments section below.