The Treasury Department and the Department of Housing and Urban Development have announced a new foreclosure-prevention program, aimed to provide up to $3 billion dollars between the two agencies for targeted aid to unemployed borrowers.

The Treasury Department will add $2 billion dollars to their “Hardest Hit” fund, specifically providing assistance to jobless Americans struggling to pay their mortgages. HUD will offer a $1 billion dollar “Emergency Homeowners Loan Program” that will give 24 months of assistance to the same class of homeowners, those experiencing unemployment or underemployment or an inability to work because of a medical condition.

The Treasury program is doled out to the states experiencing the highest unemployment, at or above the national average, over a 12-month period. Nineteen states and the District of Columbia are eligible for the funding, but curiously, Arizona, one of the biggest foreclosure states, was left off the list. On a conference call, Assistant Treasury Secretary for Financial Stability Herb Allison said that Arizona’s unemployment rate just missed the cutoff for these funds. The program enables states to assist eligible borrowers to pay their mortgages while they find a new job or undertake job training. Funds range from $7 million for DC to $476 million for California.

HUD’s program seems to be potentially more effective.

The program will work through a variety of state and non-profit entities and will offer a declining balance, deferred payment “bridge loan” (zero percent interest, non-recourse, subordinate loan) for up to $50,000 to assist eligible borrowers with payments on their mortgage principal, interest, mortgage insurance, taxes and hazard insurance for up to 24 months.

No-interest loans makes more sense than interest-only reductions or other attempts with the HAMP program that only end up making borrowers more indebted. HUD has not yet determined which areas of the country will have access to these loans.

These new programs to help with record foreclosures are a direct result of the failed HAMP program, which Tracy Alloway finds to be performing even worse than the initial numbers suggested:

The programme actually has a lower success rate than other modification programmes — even those that involve a similar amount of payment reduction.

As (Amherst Securities’ Laurie) Goodman puts it:

“While the HAMP program will show a relatively low re-default rate, the real success rate (32% or so) will be lower than what was historically experienced for modifications with a similar payment reduction. Why slightly lower? HAMP considers only front-end [Debt to Income] DTI (1st mortgage payment + taxes + insurance). Most servicers in their proprietary modification programs have attempted to work with borrowers to reduce their back-end DTI (1st + 2nd mortgage, taxes, insurance, credit card payments, auto loans, etc). Others have declined to modify borrowers where backend DTI is an impossible obstacle. HAMP does not use back-end DTI as an input; HAMP encourages borrower’s who have back-end DTIs >55% to seek credit counseling, but it is not clear this is enforced. We know that of the HAMP modifications that have become permanent, the borrower’s back-end DTI went from 80% before the modification to 65% afterwards (a still unsustainable level!).”

The implication being that while Hamp has helped stabilise house prices in recent months, it’s done so by building up shadow inventory and delaying additional defaults. In other words, once its initial impact starts to fade, we may well be looking at a summer (and autumn) of double-dip house prices.

Read the whole thing. None of these programs have succeeded in doing what’s actually necessary – modifying mortgages so borrowers can pay them, so the foreclosure crisis slows down, and so the housing market can stabilize and prices can find their proper level. And while the new Hardest Hit program may help arrest the second wave of unemployment-driven foreclosures, rate recasts and the continued destruction of home prices will still work their way through the system and cause millions to lose their homes, if nothing is done.