Report cites flaws in foreclosure prevention effort, sees new wave of defaults

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By Renae Merle
Washington Post Staff Writer
Wednesday, January 20, 2010; 6:45 PM

The high level of foreclosures plaguing the country will get worse before it gets better, according to report issued Wednesday by state regulators that found that mortgage relief being offered to distressed borrowers is not keeping up with the need.

The country is at "risk of a devastating acceleration of foreclosures unless improvements are made in foreclosure prevention efforts," according to the report by the State Foreclosure Prevention Working Group, which is made up of 12 state attorneys general and three banking regulators.

The report found that the number of borrowers falling into trouble on their mortgages exceeded the number of borrowers able to tap into a federal mortgage assistance program. The foreclosure relief process appears to be backlogged, with some mortgage servicers taking six months to complete a loan modification, according to the report, which includes data from 13 large mortgage servicers.

"We certainly have not turned the corner on the foreclosure problem, despite major and commendable federal and state efforts," said Tom Miller, the Iowa attorney general and the head of working group.

The report identified weaknesses in the government's mortgage relief effort, known as Making Home Affordable, including cumbersome documentation requirements. The program has slowed the tide of foreclosures, but "implementation failures have hindered the program's ability to reach its full potential," the report said.

The report also found that not enough loan modifications lowered the principal balance of the borrowers' loans, a troublesome finding as many homeowners now owe more than their home is worth because of the sharp decline in home prices. About 9 percent of loan workouts in October reduced the unpaid balance by more than 10 percent. In fact, more than 70 percent of loan modifications left the borrower with a higher principal balance because of an accumulation of fees as well as delinquent amounts, the report found.

Treasury Department officials have said they currently have no plans to address negative equity. "As we have previously said, we are continually reviewing our housing plan to ensure that it promotes stability in the housing markets," Michael Barr, a Treasury assistant secretary, said in a statement.

Numerous studies have shown that borrowers with no equity are more likely to default on their loans. "Modifications that reduce principal continue to be rare and, yet, for borrowers who are upside down, principal reductions may provide the only long-term solution with payments that are affordable and an incentive to stay in the home," said Sarah Bloom Raskin, Maryland's commissioner of financial regulation and a member of the working group. "The alternative is a foreclosure, which is even more costly to everyone."


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