Stall in Applications for Federal Mortgage Program
A major effort by the Obama administration to keep homeowners out of foreclosure may be reaching its limits long before the crisis abates.
The government’s loan modification program has helped about 300,000 defaulting households get permanent new loans, according to federal data released on Monday. But that is only a small fraction of the estimated four million households in danger of foreclosure and of the 1.7 million households that the government thinks would qualify for the program.
Begun only a year ago, the Making Home Affordable Program already seems to be running low on applicants. The number of borrowers that enrolled in the trial phrase in April was only about a third of the number that signed up in September.
There are several possible reasons for the scarcity in applicants. Some borrowers may feel it is more financially advantageous to default, pay nothing for many months and then walk away from the house. Others may have committed fraud when getting their mortgage and are reluctant to come forward. And many may simply be unaware of the program.
More than 637,000 households are now in the trial phase of the program, during which borrowers need to consistently make their payments. Many in that phase do not survive to a full modification, when a permanent new loan is secured. The number of failed trials, 278,000, is nearly as great as the number of successful ones.
“The program is dying,” Calculated Risk, a popular financial blog, said after examining the data.
David Stevens, assistant secretary for housing in the Department of Housing and Urban Development, said the program was “in transition.” The data released on Monday was collected by the department and the Treasury.
The administration is now requiring loan servicers to verify the income of households at the beginning of the trial rather than at the end. That is expected to enable more households to graduate to full modifications by ensuring they have the income to keep up with payments on the new loans.
In the meantime, Mr. Stevens said, “We expect the number of those in trial modifications to increase again.”
The modification program has been heavily criticized for a slow start, something administration officials acknowledge is true. Julia R. Gordon, senior policy counsel for the Center for Responsible Lending in Washington, said the pace was still glacial.
“There are millions of people in trouble on their mortgages, and for whatever reason, we’re not moving quickly enough to help them,” she said. “This is a sword of Damocles hanging over the housing market.”
For borrowers who get permanent modifications, payments are reduced by about $500 a month, but that might not keep them out of trouble. While permanent modifications have been canceled for only about 1 percent — presumably after they did not make their new payments — many struggle under a high debt load.
Median debt payment in April for borrowers with permanent modifications was 64 percent of their gross income, up from 61 percent in March. Debt includes not only mortgage payments but also taxes, insurance, homeowner or condominium fees, alimony, car leases and second mortgages.
The modifications reduce the interest payment of the borrower and often extend the term of the loan as well. Sometimes payment on a chunk of the principal is postponed.
New government programs to deal with the crisis include encouraging lenders to forgive some of the principal owed. Another program facilitates short sales, in which the borrower owes more than the house is worth. These programs do not yet have a track record.
Mr. Stevens said the modification program should be considered in the context of the administration’s broader efforts to shore up the housing market. These efforts included keeping a lid on home mortgage rates, a tax credit and refinance programs for those who owe more than their house is worth.
“We were dealt the worst foreclosure crisis we had seen since the Great Depression,” Mr. Stevens said. “The modification program was created without any framework or reference point, but it has had significant impact.”