The $2-billion Keep Your Home California initiative powered by federal funds hasn’t done a very good job of helping Californians, 30% of who are underwater on their mortgages, keep their homes.

One of the four programs that make up the effort offers mortgage principal reduction up to $100,000 for qualified participants, but only 1,000 homeowners have been able to take part since its debut in February 2011. The entire initiative has spent just one-sixth of the available funds: $245 million on assistance and another $45 million on administrative costs. Around 25,000 people have reportedly participated in the four programs and another 10,000 homeowners are awaiting final determination of their eligibility.

To qualify for the principal reduction program, a homeowner must owe more money than their home is worth, meet certain low- and moderate-income requirements, and be undergoing some sort of financial hardship, like a job loss. The program is administered by the California Housing Finance Agency (Cal HFA).

Major loan servicers, many of whom were bailed out by the federal government almost immediately after they helped crater the economy in 2007, refused to participate in the program when it started. The program was expected to immediately attract 100,000 applications from desperate homeowners shortly after launch, but two months later only 200 people had received help.

Mortgage giants Fanny Mae and Freddie Mac joined the lenders in opposing the idea of reducing principal, and it wasn’t until those government-sponsored institutions dropped their opposition last year that major banks got with the program. Bank of America, Wells Fargo Bank, JPMorgan Chase and around 70 other lenders eventually came on board as the program evolved and the economy began to recover.   

Claudia Cappio, executive director of Cal HFA, told the Los Angeles Times that she was surprised that money wasn’t “flying out the door,” but laid the problem at the feet of debtors who “have a hard time documenting hardship.”

The lenders became more involved after the program was changed to have the government directly finance the mortgage reductions rather than just match private lenders dollar for dollar. The program showed a 47% increase in activity from the fourth quarter of 2011 to the fourth quarter in 2012.

–Ken Broder

To Learn More:

Foreclosure-Relief Funds Earmarked for California Mostly Unspent (by E. Scott Reckard, Los Angeles Times)

Keep Your Home California Principal Reduction Program Attracts Major Servicers (Business Wire)

Foreclosure Activity Plunges in California with New Laws in Effect (by Alejandro Lazo, Los Angeles Times)

Golden State Foreclosure Starts Lowest Since Late 2005 (DQ News)

Victims of Foreclosure Fraud Can’t Cash Reimbursement Checks (by Sarah Edelman, ThinkProgress)