The State of Louisiana is awaiting HUD approval to allow lump sum payments to all applicants.

Road Home lump sums urged
La. seeks federal OK to award aid directly

Louisiana has asked federal housing officials to let it pay every Road Home grant recipient directly in a lump sum, with no government strings attached for those with mortgages or other debts, state officials said Wednesday.

State officials want to replace current rules that require homeowners to collect the grants in installments from an escrow account, tied to completion of storm-damage repair work on their homes.

"The advantage of a direct payment would be that homeowners have immediate access to their entire grant award for repairs, and would be in the driver's seat in negotiating with their lender regarding the repayment of any arrearages," or back payments owed on the mortgage, said Walter Leger, housing chairman for the Louisiana Recovery Authority.

"We heard the public loud and clear, and this option would give them what they asked for: sole access to their grant award within days of their closing," Leger said.

With lump-sum payments, the state theoretically gets the money out more quickly and leaves the homeowners to deal with mortgage lenders and contractors on their own. But the proposed policy change will do nothing to speed up the state's lengthy eligibility checks, award calculations and verification procedures that have kept grant closings coming at a slow pace.

As of Tuesday, 6,339 Louisiana homeowners, or about 5 percent of the 121,635 applicants, had closed on their grants.

The federal Department of Housing and Urban Development, which is financing the state's $7.5 billion aid program, is reviewing the new lump-sum payment plan, drafted in response to HUD recently notifying the state that its grant program violated federal guidelines by requiring the installment payments.

Mortgage lenders criticize

Meanwhile, mortgage lenders who were counting on some form of installment payments tied to rebuilding expressed disappointment with the state's response to the HUD directive.

"Rather than select an option that protects borrowers from fraud and promotes rebuilding, the state, because of pressure from HUD, has chosen a path that will lead to more foreclosures, more fraud and less rebuilding," said Francis Creighton, senior director of government affairs for the national Mortgage Bankers Association.

The LRA, which created Road Home policies, and the Office of Community Development, which oversees the program, declined to provide further details of the state proposal Wednesday. The agencies also refused to release the documents they sent Wednesday morning to HUD.

"The state will not be releasing any documents until final approval is received from HUD," Office of Community Development spokeswoman GeGe Roulaine said.

HUD spokeswoman D.J. Nordquist said the department had just received the documents and needed more time to review them.

"We fully appreciate that time is of the essence for all the homeowners of Louisiana who are struggling to get their lives back in order," HUD spokeswoman Nordquist said. "We anticipate having a final answer very soon: no later than Friday."

Tailored to HUD objections

The state changes, however, appear to be tailored specifically to appease objections to the program raised by HUD, so the federal agency would seem likely to approve them. The proposed policy change comes more than two weeks after HUD stepped in and told the state that it was doing too much to force homeowners to use federal money for rebuilding, when HUD had approved the Road Home as a simple compensation program for losses. The state decided to change its payment process rather than run what HUD determined was a forced rehabilitation program, one that required costly environmental and labor reviews.

A change would mark the end of two weeks of complicated negotiations. State officials spent the end of last week and through the weekend negotiating with mortgage lenders. A change in the Road Home installment payment process will nullify pacts the state and the lenders had signed last year, in which the lenders agreed not to commandeer people's grant money for mortgage payments as long as the homeowners could prove they were using the money to rebuild.

Creighton said the state rejected several proposals from lenders to keep some form of payment in installments tied to repairs. The lenders say direct compensation is dangerous for Louisiana's rebuilding effort.

They say it could lead to homeowners taking the money and leaving the area, or spending it on something else while their homes rot and push down all nearby property values. Also, it could open the door for predatory contractors to charge exorbitant fees before work begins, instead of the current setup, in which contractors are tied to the state-ordered system of disbursements.

Creighton said lenders are preparing to take several actions to make sure mortgage borrowers, particularly those who are already in default, don't abscond with the Road Home grants.

Recourse for lenders

If back payments are owed on a mortgage and the lender finds out the borrower got a Road Home check and didn't use it for repairs, the company would be able to assert its rights under most mortgage agreements to "impound a significant share of the grant proceeds to make back payments on the mortgage," Creighton said. The lenders also have the option of putting properties into foreclosure or suing in court to declare the borrower bankrupt.

"We do not want to do this, but at some point we have to do the responsible thing for our companies and shareholders," Creighton said.

To avoid such measures, Leger recommended that mortgaged homeowners who get lump-sum payments should work closely with their lenders to meet legal obligations and get additional financing, if necessary.

"In addition, we believe that establishing a voluntary disbursement account with their lender would be a good way for homeowners to guard against creditors and fraudulent contractors," Leger said.

Creighton said association members are prepared to work with borrowers when they get their money, and Chris Spencer, regional spokesman for J.P. Morgan Chase Bank, said Chase would "work with our homeowners on a case-by-case basis."

The lenders suggested everything from having the state guarantee loans when the Road Home sends applicants their award commitment letters, to issuing checks made out jointly to the homeowners and their mortgage companies, so the borrowers and lenders could work out payment options. Creighton said the state rejected that last proposal, which mirrors the setup in Mississippi.

The Jeremiah Group, a New Orleans faith-based organization, also lobbied to keep some form of the installments in place. It wanted homeowners to have a choice between taking a lump sum, with the possibility of having to pay off mortgage debt, or sticking with disbursements tied to rebuilding. The hope was that HUD would see that as lifting a mandate on rebuilding and allow it without requiring environmental and labor checks.

When that didn't occur, the civic group changed tack and got behind lump-sum payments as a way to get the money out as fast as possible. Still, the group says it's critical that homeowners be made aware of their legal rights at closing, so they know that lenders can't put pressure on them to pay off their mortgages, which Karl Weber, a leader with the Jeremiah Group, said was a problem in Mississippi, where grant recipients received lump-sum checks made out to them and their mortgage companies jointly.

However, Creighton said it's not in the lenders' interest to push borrowers who are up to date on their mortgages to pay off their loans early, which would cut down on interest the lenders earn.

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