The federal government will provide $3 billion to expand an existing mortgage debt relief program as well as create another one, in order to help out-of-work homeowners who are facing foreclosure keep their homes, the Obama administration announced last week.

A $2 billion lifeline from the Treasury Department, to come out resources from the $700 billion Wall Street bailout, will go toward the existing Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (the Hardest Hit Fund). The Department of Housing and Urban Development is putting forward an additional $1 billion in homeowner assistance through its newly created Emergency Homeowners Loan Program (“Jobless Homeowners to Get $3 Billion in Aid,” Chicago Tribune, Aug. 11, 2010).

Hardest Hit Fund

The Hardest Hit Fund, which was created by the Obama administration in February, initially provided $1.5 billion in aid to help the five states with the highest unemployment rates and largest declines in home values obtain federal aid and provide services such as mortgage payment subsidies and mortgage loan modifications. The fund was expanded in March with $600 million in aid for five more states.

Now, for the program’s second expansion, an additional $2 billion will be provided to assist 17 more states — Alabama, California, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South Carolina, and Tennessee — along with the District of Columbia.

Emergency Homeowners Loan Program

The new HUD program, the Emergency Homeowners Loan Program, will get $1 billion to provide interest-free emergency “bridge loans” to struggling homeowners who are at risk of foreclosure due to involuntary unemployment, underemployment, or a medical condition. These loans will provide distressed homeowners with as much as $50,000 a year for up to two years.

To be eligible for the Emergency Homeowners Loan Program, homeowners must be at least three months delinquent on their mortgage payments — but considered likely to be able to resume repaying their mortgage within two years — and must show a good repayment record prior to the event that resulted in their reduced income. The bridge loans can be used to help pay mortgage principal, interest, mortgage insurance, taxes, and hazard insurance.

HUD will announce program specifics and additional details when the loan program is officially launched in the coming weeks.

Critics Question Effectiveness of Mortgage Debt Relief Initiatives

These two mortgage relief programs “will ultimately impact a broad group of struggling borrowers across the country and in doing so further contribute to the administration’s efforts to stabilize housing markets and communities across the country,” Bill Apgar, HUD senior adviser for mortgage finance, said in a statement.

Critics of the aid package, however, are not convinced.

Given the grim housing forecast, “it’s a drop in the bucket,” said Campbell Harvey, a professor of international business at Duke University.

“It will certainly help the people that actually get the loan. But in terms of the overall situation, it’s so small that it’s not going to have an economy-wide impact, and that’s the sort of thing people are looking for,” Harvey said.

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