A troubled state program to help homeowners avoid foreclosure has struggled to efficiently distribute more than $220 million in federal taxpayer money to deserving Oregonians.

The

awarded more than $1.7 million to 242 homeowners it later determined did not qualify for the program. The state made no effort to recover the money and has written it off, a review by The Oregonian shows.

Elsewhere, the program has paid $750,000 to a private company headed by former Portland City Commissioner Erik Sten to craft a refinancing program for homeowners who owe more on their mortgage than their home is worth. While the program shows promise, after more than a year of work, Sten's company has refinanced 11 mortgages.

"It's been a pretty big learning curve," said Margaret Van Vliet, director of

which oversees the anti-foreclosure program. "We didn't have the staff or the systems in place. It was a pretty ugly set of circumstances that overwhelmed the agency."

Van Vliet was installed last October by Gov. John Kitzhaber to fix the agency. She said the agency is slowly getting its act together.

Yet compared to many of the 19 other states receiving money from the Hardest Hit Fund, Oregon is a beehive of activity. As of March, the state had dished out $49.8 million in assistance to 4,579 homeowners. Only California show higher totals.

Five years since the economic crash, millions of homeowners still face the threat of foreclosure. When housing lost 30-50 percent of its value and unemployment surged, families were left unable to pay their mortgage, sell their house or refinance their way into a more affordable payment.

The U.S. Treasury's

program, first announced in February 2010, was another attempt by the Obama administration to provide meaningful foreclosure prevention assistance.

The Treasury put $7.6 billion into the fund for the 19 states deemed to be suffering the worst foreclosure issues.

Oregon got $220 million. Oregon Housing and Community Services, which finances affordable housing projects and runs several other housing-related programs, was put in charge.

State officials were immediately stunned by the demand, wholly unprepared when in December 2010 they opened their doors and got 19,000 applications in two weeks.

The volume wasn't the only complication.

Oregon Housing and Community Services had plenty of experience in multi-family financing and buying multi-family loans. But it had no experience in what effectively was "retail" banking, making financial decisions based on applications from the public.

The agency found itself dealing not only with a public desperate for help, it also had to work with the 150 companies -- mostly large banks -- that service the millions of existing mortgages. The state needed to convince servicers to participate in the program, to halt foreclosure proceedings and agree to accept payments from the state.

Meanwhile, Treasury officials were pressuring Oregon and other states to get going. Even state legislators weighed in with requested changes.

"There were not a ton of instructions from the U.S. Treasury on how to do this," Van Vliet said. "It wasn't our skillset."

Van Vliet's predecessors made the decision to rely on a network of housing counselors working at nonprofit agencies as their initial screeners and underwriters for the program. These counselors had been at the forefront of the foreclosure wars for years. But they had no more experience sizing up individual's creditworthiness than did the state.

The agency began dispensing money in April 2010 as part of its most basic mortgage payment assistance program. Qualifying homeowners could get a year of mortgage payments, or $20,000 (whichever comes first), courtesy of the state and the U.S. Treasury.

The agency later added an offshoot of the program expressly for people who had lost their jobs.

To qualify, homeowners needed to show that they earned less than 120 percent of the median income, they had less than $10,000 in liquid assets and had suffered a loss of at least 25 percent of their income over the prior two years.

The state adopted a streamlined underwriting process to get things moving. That decision proved a major mistake.

Officials later determined that some of their new customers actually were not eligible. The state terminated 242 homeowners from the program. But by that time, the state had extended them more than $1.75 million in assistance.

State officials decided they would make no effort to retrieve the money. There was little doubt the applicants were in financial straits sufficient to qualify for the program. But they lacked documentation necessary to prove it, said agency spokeswoman Karen Tolvstad.

For that reason, the state felt it was "inappropriate" to pursue the money, Tolvstad said, adding that U.S. Treasury officials agreed.

The U.S. Treasury conducted a compliance review of Oregon's program in October. In a subsequent report, it dinged Oregon's underwriting as sub-par on several fronts. It also noted the agency wasn't doing criminal background checks on employees and lacked a process to report fraud to Treasury.

As state officials attempted to fix their in-house programs, it also launched a more challenging undertaking: to help the many homeowners who owe more on their mortgage than their home is worth.

It issued an RFP in August 2010 looking for a company to develop a loan refinance program for underwater homeowners.

One company responded: Sten's

.

Sten, the long-time Portland politician, now lives in Bend,

Further Development proposed the Loan Refinancing Assistance Pilot Project, now known in the agency as LRAPP. It is available only in Deschutes and Jackson counties, the twin epicenters of Oregon's foreclosure earthquake,

The plan evolved in which Further would buy homes of participating homeowners at something under the market value, which would likely be tens of thousands of dollars less than what the homeowner owed on the mortgage. Then the homeowner would buy the house back from Further with a loan funded out of the Hardest Hit Fund.

The homeowner would then repay the loan over time with 6 percent interest, generating a profit for the state.

Key to the plan's success was the cooperation of the homeowner's lender/loan servicer. In effect, the loan servicer would have to agree to a short sale, a commonplace occurrence in these times. In a short sale, lenders and homeowners agree to sell a home for less than is owed, in part, to avoid the pain and cost of a foreclosure.

It took months of work for Sten to get the cooperation of all the varied players, a process that continues to this day. Some object to the notion of reducing a homeowners mortgage on moral grounds.

, the acting director of the

, insists that principal reduction programs will lead to widespread "strategic defaults" by other homeowners.

DeMarco's opinion is vital. His agency oversees the two largest owners of home mortgages, Fannie Mae and Freddie Mac.

But Sten is not without some powerful allies, chief among them

, D-Ore.. Merkley, a member of the Senate Banking Committee, has used his clout to intercede with skeptical U.S. Treasury officials.

"Merkley has been relentless," Sten said. "My program would never have gone through without him."

After months of back and forth, Sten said the U.S. Treasury and the state finally signed off on the program in January and February. Since then, Further has closed 11 deals, reducing homeowners' principal by more than $110,000 on average.

Sten argues that as the kinks get worked out, volume will quickly increase.

But at this point, Further has received $750,000 for just 11 deals.

"It's not a good number," said Van Vliet, who added that she wants to renegotiate Further's contract. She credits Sten and his team for months of wonky policy development, equating it to a complicated R&D project.

"They're betting on a really big coin," Van Vliet said. "If they can make this work, it could be huge. But I don't have the luxury of paying a flat fee."

Meanwhile, Van Vliet has plenty of other concerns.

In an April 6 letter, Mark McArdle, director of the Hardest Hit Fund, said that while Oregon has made progress, a second Treasury review completed in April "indicates that there is more work to be done."

McArdle said Oregon's loan underwriting is still not up to par. State staffers persist in not determining that applicants meet all eligibility criteria.

He promised "more frequent" visits with Oregon officials to ensure future compliance.