For the roughly four million homeowners who have fallen behind on their mortgage payments, the federal government is offering yet another remedy: free money to catch up on their loans.  The effort, called the Emergency Homeowners Loan Program, is the latest in the federal government’s efforts to slow down the flood of foreclosures a necessary step to a meaningful recovery in the housing market, says a Department of Housing and Urban Development official.  For people who have lost their jobs, the $1 billion program offers loans of up to $50,000 that don’t actually need to be repaid, if applicants meet certain requirements.

The goal, says HUD, is to offer short-term aid to people who look like they’ll be back on their feet soon.  But critics say the loans may leave homeowners worse off in the long run.

Rolled out by HUD and the nonprofit housing advocacy group NeighborWorks America, the program is making loans with far better terms than anything on offer at a local bank.  The loans are interest-free.  Payments go directly to the lender for a portion of the borrower’s monthly mortgage, including missed payments or past due charges.  And when the assistance period, which runs for up to two years, ends, 20% of the loan is forgiven with each passing year.  In other words, for qualified borrowers who stay in their home for at least five years after the assistance period and who don’t fall behind on their mortgage again, this money doesn’t have to be paid back.

But some critics say that’s where help for consumers ends.  By taking this loan, borrowers risk falling further into debt.  If they sell their home before the entire loan is forgiven, they’ll be on the hook for the remaining amount.  The same holds true if they fall behind on their mortgage payments again: they’ll need to repay the remaining balance of the loan when they sell or refinance their home.  Separately, borrowers aren’t required to have equity in their home to receive this money, so someone who has to repay this loan risks owing more on the home later than they do now.  For homeowners who are significantly underwater now, the loan may only delay foreclosure.  While the limit each person will get is up to $50,000, loans will average about $35,000 per person, according to NeighborWorks America.

The application process for this program ended July 22, so critics are closely watching to see whether this program succeeds or causes more problems.  If the program is a success, the government may be more inclined to offer programs such as this in the future.