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Dropouts Rise in Loan Modification Program

The number of homeowners dropping out of the Obama administration's main mortgage assistance plan is growing, and is now almost equal to the number who have received permanent relief.

Mortgage
Mortgage

More than 299,000 homeowners had received permanent loan modifications as of last month, the Treasury Department said Monday. That's about 25 percent of the 1.2 million who started the program since its March 2009 launch. They are paying, on average, $516 less each month.

However, the number of people who started the process but failed to get their mortgages permanently modified rose dramatically in April.

To complete the program, borrowers must make at least three payments on time. About 277,000 homeowners, or 23 percent of those enrolled, have dropped out during this trial phase. That's up from about 155,000 a month earlier.

Many borrowers are still stuck in limbo, unable to complete the process and caught up in a bewildering bureaucracy, housing advocates say.

"These mortgage companies have to get it together," said Henrietta Thompson, housing coordinator with United Family Services in Charlotte, N.C. "We're not getting anything done."

Most analysts say the administration's program has yet to make a dent in the foreclosure crisis, and critics say it is merely delaying an inevitable surge in foreclosures. But officials insist the program is helping the housing market turn around.

"The number of homeowners receiving significant relief through a mortgage modification continues to rise," Phyllis Caldwell, chief of Treasury's homeownership preservation office said in a statement.

The program is designed to lower borrowers' monthly payments by reducing mortgage rates to as low as 2 percent for five years and extending loan terms to as long as 40 years. Mortgage companies get up to $75 billion taxpayer incentives to reduce borrowers' monthly payments.

But there have been problems from the start. One of the big ones: Initially, borrowers were able to state their income verbally and provide proof of their income later. That jammed up the system as many borrowers didn't provide a complete set of documents, and some complained that their information was lost.

Treasury officials have directed lenders to shift to a new system. Starting with loan modifications that go into effect June 1, they are required to collect two recent pay stubs at the start of the process. Borrowers will have to give the Internal Revenue Service permission to provide their most recent tax returns, rather than submitting the returns themselves.

Among those who have completed the program, 3,744 borrowers, or 1.3 percent, have dropped out, up from about 2,900 a month earlier. Most of those borrowers likely defaulted on their modified loans, but a handful either refinanced or sold their homes.

Borrowers who don't get help will likely end up losing their homes. That can happen through foreclosure. Another option is a short sale, which is when banks agree to let borrowers sell their homes for a reduced price if they owe more than it's worth.

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.

Mortgage companies will now have to set their minimum bid before the house is listed for sale. If the offer is above that, the lender must accept it. That's a big change from current practice. Lenders generally don't calculate how much money they are willing to accept until they have an offer in hand, causing long delays.

The new program will boost short sales this year, but 80 percent of distressed sales this year are still likely to be foreclosures, estimates Celia Chen, senior director of Moody's Economy.com.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.