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Slow Start to U.S. Plan for Modifying Mortgages

The Obama administration’s plan to help millions of troubled homeowners avoid foreclosure by reducing the size of their mortgage payments is just getting off the ground.

AP

So far, two months after the program went into effect, about 55,000 homeowners have been extended loan modification offers, according to a senior administration official. At the same time, foreclosures continue apace. RealtyTrac reported Wednesday that foreclosure filings reached 342,000 last month, up 32 percent from April 2008. Moody’s has estimated that more than 2.1 million homeowners will lose their homes this year.

Because of the size and complexity of the modification program, the administration has only recently assembled most of the pieces. In late April, officials fleshed out their plan to modify or forgive second mortgages — one of the big stumbling blocks in modifying primary mortgages — and provided more details on the Hope for Homeowners program, for borrowers who owe more than their homes are worth. Congress is close to acting on legislation to protect mortgage servicers from potential lawsuits from investors, while also expanding the Federal Housing Administration’s ability to modify loans.

The banks, too, are just now beginning to get their mortgage modification machines up and running.

While it is still too early to know how effective the program will ultimately be, many homeowners who have tried to gain entrance say they have been successful only through persistence — and sometimes, the help of a lawyer.

What may be a larger issue, however, is the continuing deterioration of the economy, experts say. The longer it takes to set the program in motion, they say, the fewer people will qualify for modifications. The expected rise in unemployment in coming months may keep a growing number of homeowners out of the program.

“We have a debt crisis, and mortgage is at the center of it,” said Alan M. White, an assistant professor at Valparaiso University School of Law in Indiana who specializes in foreclosures. “To get out of it, we need to reduce the debt, and that is not really happening.”

The administration remains confident that the program will end up offering help to as many as three million to four million homeowners, with the pace of modifications beginning to pick up in coming months.

“If you think about the context and scale involved, it is an extraordinary, rapid effort,” said Jenni Engebretsen, a Treasury spokeswoman. She noted that 14 mortgage servicers had signed up for the program, covering 75 percent of the market.

A vibrant mortgage modification program is a necessary bulwark against the wave of foreclosures. Without it, housing prices will continue their downward spiral longer, said Mark Zandi, chief economist at Moody’s Economy.com.

“It prolongs the economic agony,” he said. “The pain will not go away until foreclosures subside.”

Mr. Zandi was not as optimistic that the program would help as many as the administration expects. He estimated it would end up assisting only 1.5 million to 2 million homeowners over the next few years. Even so, he added, the program will, in the end, “make a meaningful difference.”

The Obama plan aims to lower monthly payments to 31 percent of the borrower’s gross income by reducing interest rates to as low as 2 percent, extending the loan term or deferring principal. Mortgage servicers can reduce principal but are not required to.

The mortgage modifications to date have come in various forms, but some have not reduced monthly payments and most have not reduced the balance owed — crucial for people who owe more than their homes are worth. Still, the number of loan modifications with lower payments has increased in recent months, an encouraging sign.

In April, 59 percent of loan modifications reduced payments, 29 percent increased payments and 12 percent of modifications kept payments steady, according to Professor White at Valparaiso. Borrowers with loan modifications that have not cut their payments tend to default again within six to 12 months.

To persuade mortgage servicers and investors to sign on to mortgage modifications, Democrats originally sought legislation that would have given bankruptcy judges the power to reduce primary mortgages. The threat of a principal reduction in bankruptcy would have served as a stick to have modifications done outside court, experts said. But the measure failed in the Senate last week after intense lobbying by the banking industry.

Several experts said reducing the amount of principal would go a long way toward helping borrowers who owe more than a home is worth — those informally known as under water.

“Even if they do drop your loan payment, you can still be in deep negative equity, which is not an immediate crisis,” said Adam J. Levitin, an associate professor at Georgetown University Law Center. “But let’s say you need to relocate because the auto manufacturer you work for is radically downsizing. You are faced with losing your house in foreclosure or a huge balloon payment. And neither of those is palatable.”

“If you don’t want all of the spillover effects from foreclosure, you have to keep people in their houses,” he added.

But the modifications may not be enough for the underwater homeowners. “In many ways, we are kicking the can down the road,” Mr. Zandi said. “Many of these homeowners are under tremendous amounts of financial pressure, and they have significant negative equity positions. Lowering their mortgage debt-to-income ratio helps, but it doesn’t solve their problem in a significant way and many will redefault in the future.”

Help slow to arrive

About 15.4 million borrowers, 20 percent of single-family homeowners, are underwater, up from 13.6 million at the end of last year, according to Moody’s. Being underwater is one of the biggest indicators of default, experts said.

The administration tries to address the problems of the underwater homeowners through its Hope for Homeowners refinancing program. In its previous incarnation, the program was deemed a failure after it produced only about 50 new loans.

Under the new initiative, mortgage servicers are required to vet borrowers for Hope for Homeowners after they have qualified for a trial loan modification. If borrowers are qualified, they refinance into new loans through the Federal Housing Administration. Mortgage investors must accept a write-down on their investment and the government backs the new loan.

Despite the federal backing, lenders must also be willing to make the new loans, said Rod Dubitsky, a mortgage analyst at Credit Suisse.

Many homeowners, consumer advocates say, do not even know they are eligible for a modification. Others may think they are eligible, but have to navigate a maze of rules and bureaucracies.

Amy and Robert Darr, of Coshocton, Ohio, for instance, fell behind on their payments in October after Robert’s hours were cut; he is a maintenance worker at a foundry. They tried to catch up on their payments when they received their tax refund, but by that time the couple had received a foreclosure notice. They contacted their lender to see if they would qualify for a loan modification, and provided the lender with the required paperwork.

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But CitiMortgage refused to suspend the foreclosure proceedings. Citigroup declined to comment.

“Hopefully, we will qualify,” Mrs. Darr said, “because I don’t want to lose my home.”

The couple contacted Southeastern Ohio Legal Services, which filed a motion with the local court to suspend the foreclosure and is currently waiting for a response.

“The right hand doesn’t know what the left hand is doing,” said Melissa Benson, a staff lawyer with the legal services organization. “Most people who get foreclosure complaints don’t even know how to put up a fight at all. And they lose fairly quickly.”