Federal Mortgage Program-Stall in Applications
The effort by the Obama administration to keep homeowners out of foreclosure is reaching its limits way before the crisis abates.
The government’s loan modification program has helped about 300,000 defaulting households get new loans according to data released.. 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.
There are several possibilites for the scarcity of applicants. Some may feel it is more financially advantageous to default, pay nothing for numerous months and then walk away from the house. Some may have committed fraud when getting their loans and are reluctant to come forward. And some may not be aware of the program.
More than 637,000 households are in the trial phase of the program, during which borrowers need to continually make their payments. Many do not achieve a successful modification, and secure a new loan. The number of failed trials, is nearly as great as the number of successful ones.
“The program is dying,” Calculated Risk, a popular financial blog, stated.
David Stevens, assistant secretary for housing in the Department of Housing and Urban Development, said the program was “in transition.”
The administration now requires loan servicers to verify the income of households at the beginning of the trial rather than at the end. This is expected to allow more households to achieve 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 criticized for a slow start, which administration officials acknowledge is true.
“There are millions of people in trouble on their mortgages, and for whatever reason, we’re not moving fast enough to help them,” Julia Gordon, senior policy counsel for the Center for Responsible Lending said.
For borrowers who get modifications, the payments may be reduced by about $500 a month, but that might not keep them out of trouble.
Modifications reduce the interest payment 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.
“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.”
(Reprinted from New York Times, mary 17, 2010)
