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Obama Foreclosure Plan Falling Far Short Of Targets

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The Obama administration disclosed on Friday that it has made little progress in helping struggling homeowners attain long-term relief under its signature foreclosure-prevention effort, reaching only 18 percent of the target announced just six weeks ago.

On Nov. 30, the administration kicked off a "Mortgage Modification Conversion Drive" to help distressed borrowers in the trial phase of its program convert to permanent mortgage modifications.

"Roughly 375,000 of the borrowers who have begun trial modifications since the start of the program are scheduled to convert to permanent modifications by the end of the year," read the Treasury Department's press release that day.

At the time 31,382 borrowers had received permanently lower payments. The final tally for the year, announced on Friday, was 66,465, with another 46,056 awaiting signatures by borrowers.

And even that only came after Treasury sent employees to various mortgage servicers in an effort to understand why more homeowners weren't being helped, and to get servicers to redouble their efforts. They were dubbed "SWAT teams."

"These are tiny numbers. Tiny, tiny numbers," said Diane E. Thompson, a lawyer with the National Consumer Law Center. "Treasury has really pulled out all the guns and we're really up to only 66,000 modifications?

"They're not even halfway where they need to go," Thompson continued. "Look, Treasury did a lot of work to get these numbers up, and they're still really small."

The figure was one of many disappointing numbers released Friday, cumulatively casting further doubt on the effectiveness of a mortgage modification program designed to stabilize the housing market by reducing borrowers' monthly payments, keeping them from losing their homes. The new data raises questions as to whether enough homeowners are being helped at all.

Treasury officials emphasized the positive, noting that more than 900,000 homeowners have entered temporary trial plans under the Home Affordable Modification Program (HAMP) and that Treasury's efforts have "yielded measurable success," said Phyllis Caldwell, chief of Treasury's Homeownership Preservation Office.

But only 12-16 percent of eligible homeowners have transitioned into a permanent modification. "The conversion rate is terrible. It starts to look as if the servicers are deliberately sabotaging HAMP, despite the billions they could be earning if they did this right," Alan M. White, a professor at Valparaiso University School of Law and an expert on housing issues, wrote in an e-mail. The program pays mortgage companies and investors for successfully modifying home mortgages and reducing monthly payments.

Less than 10 percent of those with permanent modifications have received a reduction in mortgage principal.

Independent housing analysts and mortgage experts have called for the program to more aggressively write down mortgage principal, arguing that it remains the best way to reduce foreclosures while getting investors in mortgage-backed securities the most money possible on their investment. Mortgage servicers have largely balked, and the administration hasn't pushed for it.

Meanwhile, estimates are that between one-quarter and one-third of all homeowners with a mortgage owe more on the mortgage than the house is worth. Academic and Federal Reserve research shows that principal cuts result in more sustainable modifications; so does federal data maintained by the Office of the Comptroller of the Currency.

HAMP is the main thrust of the administration's $75 billion effort to keep homeowners out of foreclosure. Distressed borrowers enroll in trial plans, and after paying the new mortgage payment for three months are eligible for permanent relief. Borrowers need to provide documentation proving income and hardship, which has caused hiccups because homeowners aren't fully completing the required documentation, servicers and the administration argue. Homeowners and housing advocates pin the blame on the servicers.

Among the other numbers released Friday: The 66,465 homeowners who have transitioned from trial plans into permanent modifications have received a median reduction of about $516 in their monthly payments. About 75% of borrowers in trial plans are current on their payments, said Assistant Treasury Secretary Michael S. Barr.

The 854,000 homeowners in trial and permanent modification plans have collectively saved more than $1.5 billion thus far on their mortgage payments. But that actually only works out to an average savings of about $1,800 per borrower. And by comparison, as of last week more than $373 billion in taxpayer money has gone to banks, AIG, and the domestic auto industry via TARP, according to Treasury data.

In announcing the program last March the administration said it could help as many as four million troubled homeowners.

In addition, with unemployment at 10 percent, the government watchdog created to keep tabs on the bailout has questioned HAMP's effectiveness at dealing with jobless homeowners. To be eligible for the program borrowers need minimum levels of income. Without income, they're not eligible.

Wall Street analysts already are writing off the administration's effort to stem what is predicted to be a rising tide of foreclosures. About three million foreclosures are expected this year following last year's 2.8 million. Analysts expect the government to adopt new programs altogether, especially with Congressional elections less than 10 months away.

"HAMP is running into issues of too few permanent modifications, and re-default performance is expected to be poor," Barclays Capital said in a December research note to clients. "At the same time, the number of homes in foreclosure and deep delinquency continues to balloon.

"This leads us to believe that what we have seen is only the first wave of government programs to tackle foreclosures. The next year or two will likely see many changes and additions to these programs as the government tries to keep foreclosures under tight control in the face of adverse performance and elevated unemployment, especially as elections approach."

Meanwhile, Treasury officials said Friday the plan was "on target to reach the goals laid out by President Obama last February."

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