Obama’s plan for homeowners in crisis has just a 27% success rate so far. Feds say new system will help.
By Alan Zibel
Associated Press
Posted: Tuesday, Jun. 22, 2010
WASHINGTON The Obama administration’s flagship effort to help people in danger of losing their homes is falling flat.
More than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. That’s more than the 27 percent who have managed to have their loan payments reduced to help them keep their homes.
Last month alone, 150,000 borrowers left the program – bringing the total to 436,000 who have exited since it began in March 2009.
Administration officials say borrowers will get help in other ways. But analysts fear the majority will still wind up in foreclosure.
A key reason so many have fallen out of the program is that federal officials initially pressured banks to sign up borrowers for the program without first insisting on proof of their income.
When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.
Also, many borrowers complained that the banks lost their documents. The industry said borrowers weren’t sending back the necessary paperwork.
Treasury officials have directed lenders to shift to a new system. They are now required to collect two recent pay stubs at the start of the process. Borrowers have to give the Internal Revenue Service permission to provide their most recent tax returns to lenders.
The growing number of people leaving the program could lead to a new wave of foreclosures. If that happens, it could weaken the housing market and hold back the broader economic recovery.
Most of those who left the program were rejected during a trial period lasting at least three months. More than 6,300 dropped out after having their loans modified.
Another 340,000 homeowners, or 27 percent of those who started the program, have received permanent loan modifications and are making payments on time.
Experts say more borrowers are likely to drop out in the coming months. One chief reason: some homeowners who owe more on their loans than their properties are worth are likely to conclude that paying an oversized mortgage simply isn’t worth the cost.
Even after their loans are modified, many borrowers are simply stuck with too much debt – from car loans to home equity loans to credit cards.
Obama administration officials contend that borrowers are still getting help – even if they fail to qualify for the program.
The administration published statistics showing that nearly half of borrowers who fell out of the program received an alternative loan modification from their lender. About 7 percent fell into foreclosure.
Another option is a short sale – one in which banks agree to let borrowers sell their homes for less than they owe on their mortgage.
To encourage more of those sales, the Obama administration is giving $3,000 for moving expenses to homeowners who complete such a sale, or agree to turn over the deed of the property to the lender.
The original mortgage modification was announced a month after Obama took office. It was designed to lower borrowers’ monthly payments – reducing mortgage rates to as low as 2 percent for five years and extending loan terms up to 40 years.
