UDPATE 1-Hard-hit U.S. states to get funds to aid homeowners

(Adds background on fund and program details)

By Corbett B. Daly

WASHINGTON, June 23 (Reuters) - Five of the states hit hardest by the slump in U.S. housing prices will soon begin receiving funds from a special $1.5 billion fund intended to head off some foreclosures, the Treasury Department said on Wednesday.

State housing agencies in Arizona, California, Florida, Michigan and Nevada can use money from a so-called "Hardest Hit Fund" for foreclosure mitigation that was announced in February by U.S. President Barack Obama.

Treasury officials said each of those five states have had their proposals approved and are now eligible to begin receiving funds, though it could be weeks or months before the money is disbursed.

The five states have had average price declines of 20 percent or more. Obama made the announcement in Nevada, which has seen some of the sharpest price declines and is home to Senate Majority Leader Harry Reid. Reid faces a tough re-election fight in November.

Some of the programs that states proposed will try to assist homeowners who are facing negative equity by reducing the principal of loans that they owe. Others will help unemployed or under-employed people keep up their mortgage payments or will be used to finance short sales of homes to avoid foreclosure.

Arizona will get up to $125.1 million for these purposes while California gets up to $699.6 million and Florida up to $418 million. Michigan has been approved for up to $154.5 million of funding and Nevada up to $102.8 million.

The $1.5 billion fund was announced in February but shifted money from an already existing $50 billion program, known as the Home Affordable Modification Program. The $50 billion authorization is itself part of the $700 billion bank rescue package approved by Congress in late 2008.

The HAMP program has been widely criticized as ineffective and Treasury Secretary Timothy Geithner was grilled about it on Tuesday by Elizabeth Warren, the Harvard law professor charged with overseeing the bank rescue plan.

UNCLEAR HOW MANY WILL GET HELP

The Treasury Department on Monday said more people had been kicked out of trial loan modifications than had received permanent modifications.

While Treasury has "committed" $50 billion to the HAMP program, less than $200 million has actually been disbursed as slightly more than 340,000 homeowners have received permanent loan modifications.

Asked if a similar percentage of the $1.5 billion fund would be spent, Herbert Allison, Treasury assistant secretary for financial stability, told reporters he expects all $1.5 billion will be spent.

Officials did not have an estimate of how many homeowners would be helped with the Hardest Hit Fund, first estimating that it could be up to 90,000, and later saying it could be more than that -- or it could be less than that.

Phyllis Caldwell, chief of the Treasury's Homeownership Preservation Office, said the program's focus is on learning new ways to help homeowners that could then be applied nationally, "not about the numbers" of homeowners helped.

Treasury said a second set of five states, which includes North Carolina, Ohio, Oregon, Rhode Island and South Carolina, would likely be approved in coming weeks and the $600 million would begin flowing after that. (Additional reporting by Glenn Somerville; Editing by Jan Paschal)