Mortgage Plan Gaining Steam
But Foreclosure-Prevention Program May Not Be Enough, Report Says

By Renae Merle
Washington Post Staff Writer
Friday, October 9, 2009

The Obama administration touted progress on its foreclosure-prevention program Thursday after hitting an interim target of signing up 500,000 borrowers three weeks ahead of schedule. But in a report to be released Friday, a congressionally appointed oversight panel questioned whether reaching that goal would be enough to slow down the foreclosure crisis.

The program, known as Making Home Affordable, got off to a bumpy start when it was launched in March with homeowners and consumer advocates complaining about the difficulty of reaching lenders, long telephone wait times and documents that were repeatedly lost. But senior administration officials said Thursday that the program is now gaining momentum.

Under the $75 billion government program, lenders are paid to lower borrowers' mortgage payments; the administration has said the program was aimed at helping up to 4 million borrowers before expiring in 2012. It is part of a larger government effort to revive the housing market that senior administration officials said has also kept mortgage rates low and prompted millions of borrowers to refinance their loans.

"The broad signs that you see in the housing market . . . are encouraging," said Treasury Secretary Timothy F. Geithner. It is still early, and "we're still living with some risks that housing is going to be a source of weakness for the broader economy and that you still face a . . . large number of families across the country still at risk of losing a home they can afford to stay in."

Report Questions Benefit

The industry trumpeted its progress so far. Wells Fargo nearly doubled the number of modifications it started last month to 62,989, or about 20 percent of its delinquent borrowers eligible for the program, according to government data released Thursday. Bank of America helped about 95,000, or 11 percent of its eligible borrowers, and company officials said the bank is on track to help 125,000 by November.

"We feel really good about the momentum," said Steve Bailey, Bank of America's home retention strategies and policy executive.

Despite the recent progress, economists expect millions of borrowers to lose their homes over the next few years. The government program has likely reduced the number of foreclosures by about 7 percent to 8 percent during the past six months, said Paul Dales, U.S. economist for Capital Economics. But some of the borrowers helped by the program may have been able to avoid foreclosure on their own while others may still default on their loans later, said Dales.

"What it won't do is stop foreclosures from rising," Dales said. "It will just rise by less."

A draft report by the Congressional Oversight Panel, which is monitoring the government's Troubled Assets Relief Program, noted that the foreclosure effort is not set up to tackle two of the most pressing causes of mortgage delinquencies: rising unemployment and risky home loans known as option adjustable-rate mortgages, which reset to significantly higher payments. Over the next few years, millions of those loans are scheduled to shift to potentially higher interest rates, creating the prospect of a new wave of foreclosures.

"It increasingly appears that [the government program] is targeted at the housing crisis as it existed six months ago, rather than as it exists now," the report said. Acknowledging the Treasury's near-term goal of reaching 500,000 borrowers, the report said, "the achievement is relatively small in relation to the magnitude of the foreclosure crisis."

The modifications started so far have lowered borrowers' median interest rates to about 2 percent from 6.85 percent, according to the report, and reduced their payments by $500, to $849.31.

In a statement, Treasury spokeswoman Meg Reilly said "constructive feedback" from the panel is welcome and noted that the administration is already studying more ways to help unemployed homeowners. "The housing crisis was never going to be fixed overnight. Instead, it requires a comprehensive strategy focused on providing sustained support for American homeowners," she said. "We believe that the Making Home Affordable program is an important part of that strategy."

Work Yet Ahead

Not all parts of the government program are operational. After announcing in April that borrowers with a second mortgage could see payments on those loans reduced significantly as part of the program, the administration has yet to sign contracts with lenders to implement it. Homeowners and consumer groups continue to complain that qualified borrowers are being rejected by lenders and that there isn't a clear appeals process.

The government program "had many obstacles, problems, and operational and technological challenges getting started and . . . is just now gaining momentum," Richard H. Neiman, superintendent of banks for the New York State Banking Department, said in a statement included in the report.

It is also unclear how many borrowers will make enough payments to survive the trial period of a modification, the first three months, or might redefault on their loans later. The conversion rate to permanent modifications has been low so far, according to the report, and the Treasury has not released data on how many redefaults it expects.

"Redefaults mean that foreclosures have been delayed, rather than prevented," the report said.

Staff writer Binyamin Appelbaum contributed to this report.

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