The U.S. has miles to go with its mortgage modification plan

With foreclosure filings occurring every 13 seconds in America, is the Obama Administration really moving fast enough to get help for homeowners in trouble? It took about nine months to get 500,000 of them started on the road to mortgage modification.

A half-million homeowners helped is surely progress, but with 2 million foreclosures this year and economists predicting that number will hit 6 million over the next three years, the government's program is looking more and more like half-empty sandbags thrown against a steadily rising flood.
In a Congressional report released Friday, panel members raised questions about the scope, scale and permanence of the mortgage rescue efforts. It concludes that the Treasury Department's Home Affordable Modification Program "is targeted at the housing crisis as it existed six months ago, rather than as it exists right now." The biggest flaw cited is that current strategy lacks a clear path to help those facing unemployment.

The report goes on to note that when planning for the modification program, Treasury was primarily dealing with subprime mortgage loans in foreclosure, but today -- thanks to the soaring unemployment rate -- families who took out conventional, fixed-rate mortgages and made down payments of 10 percent to 20 percent are now also facing foreclosures.

In response to the jobs concern, Treasury Department spokeswoman Meg Reilly could only promise that the department was continuing to study further ways to help unemployed homeowners. But Administration economists have known the unemployment rate was going to be near or top 10 percent for months now. Continuing to study this problem won't help stem ongoing foreclosures.

While it's good to see mortgage servicers -- those who collect mortgage payments and keep the records -- step up and finally improve their statistics, even the best performer, Citigroup (C), has started trial modifications for only 33 percent of its eligible borrowers in the first eight months since the program was announced, according to The Wall Street Journal. JPMorgan Chase (JPM) takes second place with 27 percent of its eligible borrowers beginning trial modifications. Wells Fargo (WFC) has 20 percent, and Bank of America (BAC) has 11 percent.

Participating homeowners must make payments on time for three months and provide required paperwork to get permanent modifications. No one knows how many of the trial modifications will be successful. The best guess came from Steve Bailey at Bank of America who told the Journal he thinks about 50 percent will succeed in getting a full modification. Still, some of those mortgage holders are likely to end up as foreclosure risks again in the next year or two.

When the Obama Administration announced its plan with lots of fanfare, it hoped to help 4 million borrowers before the program ends in 2012. Based on that goal, the government has reached about 12.5 percent of the people it wants to help. That's probably too slow a pace to make a really strong impact on the foreclosure rate.

In a related story, concerns are now being raised about the FHA and its risk of needing a bailout as well. Former Fannie Mae executive Edward Pinto told the House Financial Services subcommittee on Thursday that the FHA will suffer $40 billion in losses from foreclosures and will be unable to cover its bad loans from the insurance fund. He expects the FHA to need taxpayer help. FHA Commissioner David Stevens responded that the agency won't need a bailout and believes it has enough funds on hand to meet future loses.

The FHA is facing additional scrutiny because it's the only lender making loans with low down payments to people who lack good credit. The FHA does require income verification, which wasn't necessary for most subprime loans, so its mortgages aren't as risky as the subprime loans that started this crisis. Pinto, and some Congressional FHA critics, want the FHA to raise its required down payment to 10 percent (it's now 3.5 percent), reduce the cap on how much money can be borrowed, and require FHA-approved lenders to co-insure.

The FHA's Congressional supporters say they don't see a need for changing the FHA's mortgage requirements. Subcommittee Chairwoman Maxine Waters (D-Calif.) agreed with Stevens and said the FHA should continue to be a major source for home mortgage support. Let's hope she's right.

Lita Epstein has written more than 25 books including The 250 Questions Everyone Should Ask About Buying a Foreclosure and The 250 Questions You Should Ask to Avoid Foreclosure.
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