April 14, 2010

The Obama administration's mortgage-modification program is not keeping pace with the deluge of foreclosures hitting the market, a government watchdog found.  Only 168,708 homeowners have received long-term mortgage modifications under the president's plan, as of February, a small fraction of the 6 million borrowers who are more than 60 days behind on their loans, according to the Congressional Oversight Panel's latest report, released Wednesday.  The president's foreclosure-prevention plan will likely assist only 1 million troubled borrowers, short of the administration's original goal of up to 4 million homeowners. The program is funded with $50 billion in Troubled Assets Relief, or TARP, funds, putting it under the panel's purview.

"For every borrower who avoided foreclosure through HAMP last year, another 10 families lost their homes," the panel said of the administration's Home Affordable Modification Program. "It now seems clear that Treasury's programs, even when they are fully operational, will not reach the overwhelming majority of homeowners in trouble."

Getting a loan will be pricier

The panel's report is the latest to slam the president's foreclosure-prevention efforts. Last month two other government watchdogs released blistering reports that slammed the administration for poor implementation of the program and raised doubts that 4 million troubled borrowers could stay in their homes.  While the panel commends the Treasury Department for its push to convert more trial adjustments to long-term modifications, it lays out several concerns, including the long-term sustainability of the modified mortgages and the ultimate cost and goals of the program. Also, the panel is concerned that the half-dozen foreclosure-prevention programs launched by Treasury over the past year has resulted in confusion and delays.

After initially unveiling the loan-modification plan in February 2009, the administration rolled out programs aimed at: the unemployed; those who owe more than their homes are worth; and borrowers with second liens. Also, the government is funneling $2.1 billion to housing agencies in 10 states where home prices have dropped significantly. And, the administration has set up a program to encourage short sales, where servicers allow borrowers to sell their homes for less than the value of their mortgage. In response to the panel's criticism, the Treasury Department said its efforts will help prevent many foreclosures. A Treasury report to be released Wednesday will show that 230,000 homeowners have received permanent modifications as of the end of March.

"We strongly agree with the COP's assessment that foreclosures are at an unacceptable high rate, which is why this program has been designed to prevent avoidable foreclosures," a spokeswoman said in a statement. "As we have said before, these programs are not intended to help every homeowner in trouble."
Second liens and principal reduction

In its report, the panel noted the importance of helping borrowers with second liens and of reducing loan balances for those whose homes have greatly dropped in value. The Obama administration last month required banks to consider principal reduction as a way to modify home loans to an affordable monthly payment, but did not require that they actually lower the mortgage balance.  Though consumer advocates say both these steps are critical, banks have moved slowly on both these fronts. At a Congressional hearing on Tuesday, lawmakers grilled bank executives about their efforts to modify second liens and to reduce principal. Officials from Bank of America, Citigroup, JPMorgan Chase and Wells Fargo told representatives that they support such initiatives, but on a limited scale.

"There are certainly individual cases or even segments of borrowers where principal reduction may be appropriate," said David Lowman, chief executive officer for home lending at JPMorgan Chase. But "broad-based principal reductions could result in decreased access to credit and higher costs for consumers, because lenders will price for principal forgiveness risk."