US foreclosure scheme faltering

Washington: Just as the housing market recovery has stalled, so has the Obama administration's main programme to ease home foreclosures.

Only 36,695 homeowners received permanently lowered mortgage payments in July through the much-criticised Home Affordable Modification Programme, the smallest increase since December, administration officials said on Friday. And the number of people dropping out of the programme continued to soar.

Overall, nearly half the homeowners who entered the programme since it launched in March of last year have dropped out. Many had hoped the $75 billion (Dh275 billion) programme would be a silver bullet to the foreclosure problem, but it's turned out to be a dud, said independent banking analyst Bert Ely.

That's not surprising, he said, given the depth of the housing market crash and recession, combined with a slow recovery.

"Even with a substantial reduction in mortgage payment and even some reduction in principal, you still have people who are over their head financially because of their reduced financial circumstances," Ely said.

"Isn't it time to just rethink this whole business of modification ... and let the market clear through foreclosures and short sales?"

The Los Angeles-Orange County area continued to have the most active trial and permanent modifications under the programme, with 44,617 total modifications in July, or 6.6 per cent of the national total. But that was down from 48,846 total modifications in June.

The Inland Empire was third nationwide, with 35,169 total modifications in July, or 5.2 per cent of the total. So far, 434,716 homeowners nationwide have received permanent modifications since the programme began last year.

The pace had picked up significantly starting in December after administration officials began pressuring mortgage servicers to convert more three-month trials under the programme into permanent modifications.

The number of permanent modifications nearly tripled from January to May. Even in June, the administration reported that more than 50,000 new permanently modified mortgages were added.

July's slowdown in the programme's growth comes amid a struggling real estate market.

During the second quarter of the year, there were a record 269,952 home foreclosures, up 38 per cent from the same period a year earlier, according to Irvine research firm RealtyTrac.

Last month, Southern California home sales plunged 21.4 per cent compared with a year earlier, according to research firm MDA DataQuick of San Diego.

"While there has been some stabilisation in the housing market, it remains clear that we have more work ahead," said Raphael Bostic, an assistant secretary at the Department of Housing and Urban Development.

The Obama administration programme provides cash incentives to servicers to modify mortgages.

Homeowners who qualify first get a three-month trial modification with lower payments. If they make those payments, the modification can be made permanent. Only at that point does the servicer get the incentive payment.

The administration's stated goal was to modify 3 million to 4 million mortgages through 2012.

Cancellations

The pace of new, temporary mortgage modifications under the programme slowed in July, increasing just 1.3 per cent to 1.3 million. Overall, about 47 per cent of trial modifications started since the programme began have been cancelled.

In addition, 12,912 permanent modifications have been cancelled, mostly because the homeowner missed at least three straight payments.

Increasing numbers of cancellations were the latest problem for the administration's modification programme, which has been plagued by complaints from homeowners of bureaucratic runarounds by servicers, including lost paperwork and unreturned phone calls.

Herbert M. Allison Jr, the Treasury Department's assistant secretary for financial stability, said the administration expected cancellations to continue as mortgage servicers work through earlier modifications that were made without documentation.

Those stated-income modifications were needed last year because so many people were in need of quick foreclosure assistance, he said.

Many of the homeowners who got those early modifications under the programme were removed because it turned out they "did not meet the qualifications for various reasons, such as income levels or the fact that they were not in the home itself," Allison said. But many of those who were cancelled out of the programme have been helped by modifications made outside of the Obama administration programme.

For the eight largest mortgage servicers, including Bank of America, CitiMortgage and Wells Fargo Bank, 45 per cent of homeowners whose trial modifications were cancelled received an alternative modification.