Tax-free bonds or no, state housing agencies are finding out that dealing with the subprime borrower mess is harder than it looks. Bloomberg reported Friday morning that housing agencies in Massachusetts, Ohio and New York are “turning away so many applicants that they’ve had no need to raise funds.” The news comes on the heels of a proposal by Sens. John Kerry and John Kerry (D-MA) and Gordon Smith (R-OR) to tack an extra $10 billion onto the economic stimulus package being considered by Congress to enable states to issue tax-free bonds backed by subprime mortgage refinancings. From the story:

Since New York said it would commit $100 million in July, three of the 500 loans envisioned have been made. Massachusetts extended four loans under a $250 million program started in August, and Ohio made just 36 of the thousands anticipated by Governor Ted Strickland. … More than 50 percent of subprime borrowers are being rejected by state programs because their homes have lost too much value or they’ve accumulated excessive debt, estimates Geoffrey Cooper, emerging markets director at a unit of MGIC Investment Co., the country’s biggest mortgage insurer. “These things are basically public relations gimmicks,” said Bruce Marks, chief executive officer of Neighborhood Assistance Corp. of America.

In other words, even if the states get $10 billion in Federal funding and are allowed to issue tax-exempt bonds backed by refinancing troubled subprime borrowers into new mortgages, very few such borrowers will likely be able to take advantage of the program — at least, not unless Capitol Hill wants to also let state agencies offer no-doc, interest-only adjustable rate mortgages. Bloomberg reported that at least 10 states have introduced subprime refinancing programs to help stem foreclosures. Goldman Sachs has estimated that state housing agencies had planned to raise at least $430 million through the sale of taxable bonds — plans that many housing agencies are now realizing won’t be needed:

Housing officials in Ohio, Massachusetts, New York, Connecticut, and Maryland say they underestimated the extent of the crisis as well as the number of applicants. “Often the borrower just has too much debt and the home does not have the value to support the refinancing,” MGIC’s Cooper said at a conference in Washington on Jan. 17.