The government’s foreclosure relief program just isn’t working.
That was the assessment Thursday of two reports from government watchdogs and a panel of witnesses at a congressional hearing trying to find out why the Obama administration is falling far short of its goal of preventing millions of Americans from losing their homes.
Treasury officials at the hearing acknowledged problems in the year-old mortgage-modification program and announced changes designed to address issues that have limited its effectiveness. Only 170,000 homeowners have completed the process to get their monthly payments reduced out of 1.1 million who began it over the past year.
A failure of the government's latest effort to stem the tide of foreclosures would threaten more than the roughly 8 million homeowners at risk of losing their homes in the next two years, according to John Taylor, president of the National Community Reinvestment Coalition.
"If we have another 8 million homes to go into foreclosure it will have a devastating effect on our economy, and job losses will continue to rise," Taylor told the House Committee of Government Oversight and Reform.
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Three years after the housing bubble burst, the number of homeowners falling behind on their mortgages continues to rise. A separate report Thursday from U.S. banking regulators showed that the number of seriously delinquent mortgages jumped in the fourth quarter, led by a sharp increase among the most creditworthy borrowers. Some 13.6 percent of all homeowners with mortgages — more than one in seven — are behind in their payments, according to the Office of the Comptroller of the Currency. It was the seventh consecutive quarterly rise.
A Treasury official at Thursday's hearing acknowledged that the government's Home Affordable Modification Program had encountered a series of unforeseen roadblocks. But he also announced changes designed to speed the modification of loans to more affordable terms.
“We've been learning as we went along,” said Assistant Treasury Secretary Herbert Allison Jr. “We want to continue to improve this program."
The HAMP program is designed to head off foreclosures by lowering borrowers' monthly payments through a series of voluntary concessions from lenders. Guidelines call for cutting mortgage rates to as little as 2 percent for five years, with the difference subsidized by the government, and extending the loan’s term to 40 years. More than 100 lenders have agreed to follow the guidelines, but the decision to modify an individual loan is entirely up to the lender or investors holding the mortgage.
The program has been riddled with problems from the beginning, drawing fire from homeowners, housing counselors, consumer advocates and attorneys working with borrowers. Many report long wait times getting through to lenders, multiple requests for paperwork, lost documents and little or no explanation when applications are denied.
The Treasury also said it will make changes in response to one of the most frustrating complaints. In many cases, lenders are moving to foreclose on a property — even after homeowners get approved for loan modification.
"The new guidelines will make clear that if the homeowner enters into a fully verified modification plan, all pending foreclosure actions must be stopped," Allison told the congressional panel.
But such changes have been a major source of "confusion and delay," according to a report from Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, who testified Thursday. He criticized the Treasury for not setting clear targets for how many homeowners are expected to get help under the $75 billion program.
"We believe it is unacceptable that one year into the program Treasury has yet to identify its goals," he said.
The program also has yet to tackle the issue of millions of homeowners who have second mortgages that must also be modified to make their first mortgage affordable. A year into the program, those guidelines still have not been established, according to Gene Dodaro, acting comptroller general of the Government Accountability Office, which issued a report Thursday critical of HAMP.
"A lot of program details aren’t very clear yet,” Dodaro told the panel. “Until the details are established (mortgage) servicers are going to be reluctant, understandably, to sign up for the program.”
Housing counselors and attorneys say those servicers — companies that handle mortgage payments on behalf of lenders — have been slow to add enough staff to cope with the flood of calls and mail from distressed homeowners. Allison acknowledged the bottleneck.
“I’m not cutting them any slack but they’ve had to get up to speed and they’ve had teething problems along the way,” he said. “All of us know we have more to do, and they have more to do.”
Members of the panel told of constituents who have faced numerous hurdles trying to get their mortgages modified. Reps. William Lacy Clay, D-Mo., and Diane Watson, D-Calif., expressed concerns about what they said was a disproportionately higher foreclosure rate for African-Americans than for whites.
“We have a dual system of mortgage finance in this country — one for whites and one for blacks,” Taylor said. “Black and brown communities were targeted by subprime lenders after banks had closed their branches in those.”
Allison said the current disparity in foreclosure rates between blacks and whites is a reflection of “widespread predatory lending practices during the the mid-part of the decade.”
“The damage already exists," he said. "And we want to make sure that in our program there is no discrimination as people are considered for modifications."
Pressed for details about what measures are being taken, Allison said the Treasury is collecting data on the modification program and will “confront servicers" if they are discriminating against homeowners.
Despite the changes, Dodaro told the panel Congress should “explore some other alternatives.” But it will also have to consider how to continue to work with families who have already signed up with the HAMP program.
“You have 800,000 people in trial modifications that have to be dealt with equitably," Dodaro said.
But members of the the panel also noted the risk of continuing to promote a program that is falling short of its goals.
“We are ourselves setting up for failure,” said Rep. Jackie Speier, D-Calif. “The program doesn’t work.”