Mortgage-modification program shows improvement

More than a half-million homeowners have been offered a chance to modify their mortgages to lower interest rates since February's launch of Obama administration efforts to reduce foreclosures nationwide.

Yet in testimony yesterday before a subcommittee of the House Financial Services Committee, Assistant Treasury Secretary Michael Barr indicated that the Home Affordable Modification Program, though more successful than previous steps, still had problems.

A continuing issue, Barr said, is the failure of some of the 45 loan servicers in voluntary compliance with the program to convert offers of trial modification into the real thing.

So far, these servicers, representing 85 percent of the nation's 45 million mortgages, have offered 570,000 borrowers trial modification, in which homeowners try the lower rates to see if they can consistently make payments.

But only 360,000 trial modifications are actually under way, he said. The administration wants to have 500,000 in operation by Nov. 1.

By contrast, Barr said, 2.8 million of the five million borrowers eligible are already participating in the government's Home Affordable Refinance Program. Through this program - designed to help homeowners who can still make their mortgage payments but cannot refinance, often because the value of their homes has decreased in today's depressed market - borrowers whose loans are held by Fannie Mae or Freddie Mac switch into a more affordable mortgage.

Yet to be either modified or refinanced, Fitch Ratings Inc. reported yesterday, are 88 percent of the one million so-called option adjustable-rate mortgages originated between 2004 and 2007.

Option ARM borrowers are in urgent need of assistance before those mortgages reset, resulting in additional foreclosures, according to Sylvia Alayon, vice president of operations for the Consumer Mortgage Audit Center.

"Housing bills are about to skyrocket as much as 63 percent" for those option ARM borrowers who have been able to make monthly payments of interest and principal, interest only, or just part of the interest due, Alayon said yesterday.

In the government's Home Affordable Modification Program (HAMP), there has been "substantial variation" in the performance of servicers in processing requests, Treasury officials said, a result of inadequate staffing and training, among other reasons.

Treasury Secretary Timothy Geithner and HUD Secretary Shaun Donovan have called on servicers "to devote more resources" to the program so it can succeed.

Barr testified that Freddie Mac was developing a "second-look" process for modification applications that have been declined. In addition, there will be a greater effort made to reach eligible borrowers and connect them with HUD-approved counseling agencies to help with the modification process.

Treasury data show that Bank of America Corp. more than doubled its modifications to 59,891 in August from July, while Wells Fargo & Co. improved 64 percent, to 33,172.

Citigroup Inc.'s rate was 23 percent; JPMorgan Chase & Co.'s was 25 percent. Morgan Stanley's Saxon Mortgage Services received top-performer status, with trial modifications for 39 percent of 73,694 eligible loans.

Still, figures show that 88 percent of troubled borrowers are not taking advantage of the program.

Bruce Dorpalen, ACORN's national director of housing counseling, said in a conference call yesterday that foreclosures were proceeding without modification, even though HAMP stops the process until a loan has been reviewed.

"We have seen a steady stream of borrowers who are two weeks away from a foreclosure-sale date when they should not be," he said.

"Once trial modifications have been obtained," Dorpalen added, "servicers appear to be following the rules."

The Home Affordable Modification Program is available to all borrowers regardless of loan-to-value ratios, with a $729,750 limit for single-unit properties.

Borrowers can be current on payments but must demonstrate financial hardship or risk of default.

Servicers must adhere to program guidelines for all loans and evaluate every one using a test to determine the net present value of the property to see if the costs of modification would be less than foreclosure.

Servicers must cut the borrower's first lien to a 31 percent debt-to-income ratio, meaning the monthly payment can be no more than 31 percent. This is done by lowering the interest rate to a floor of 2 percent, extending the amortization up to 40 years, or forgiving principal until 31 percent is reached.

The monthly payment will remain in place for five years if the borrower remains current, and the rate will step up each year to a specified cap fixed for the life of the loan.

Information: www.makinghomeaffordable.gov or 1-888-995-4673.

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