Only about 4% of troubled borrowers have received long-term help under the Obama administration’s foreclosure prevention program, Treasury officials said Thursday.

A nearly equal number of trial modifications have been denied permanent assistance, the report showed. The reasons include not making monthly payments on time, not submitting all the necessary paperwork and not qualifying for reasons such as insufficient income.

The report, the first comprehensive tally of permanent modifications made, shows that loan servicers have converted 31,382 people from trial adjustments to long-term assistance as of Nov. 30.

But 30,650 people in trial modifications have been denied, according to Treasury officials.

The dearth of permanent modifications has fueled concerns that the $75 billion plan will fall far short of its goal to help up to 4 million delinquent homeowners.

The number of troubled borrowers currently in trial modifications rose to 697,026, up from 650,994, a month earlier.

“Our focus now is on working with servicers, borrowers and organizations to get as many of those eligible homeowners as possible into permanent modifications,” said Phyllis Caldwell, chief of Treasury’s Homeownership Preservation Office.

Banks and the administration have come under fire in recent months as delinquent borrowers languish in trial modifications. Lawmakers lambasted servicers and Obama officials at a congressional hearing Tuesday for not doing more to help homeowners facing foreclosure.

Last week, the administration announced it was ramping up its oversight of loan servicers’ conversion operations, sending in SWAT teams to break up any logjams, and requiring banks to submit updates twice daily on their efforts. Administration officials called financial executives to Washington this week to urge them to quicken the conversion pace.

“We’re not satisfied yet with how this program is unfolding,” said Treasury Assistant Secretary for Financial Stability Herbert Allison at the House Financial Services hearing. “The servicers have a lot of work to do, and we’re holding them accountable for their performance.”

While the permanent modification figures are disappointing, there is still time for the Obama administration to turn the program around, said Alan White, a law professor at Valparaiso University. But he would like to see a big increase in the numbers in the next month or two.

“Treasury is aware there is a problem,” White said. “We’ll see if they are able to do something about it.”

Thursday’s announcement came hours after a report showed the foreclosure crisis might be mitigating somewhat. Foreclosure filings fell by 8% in November, the fourth consecutive month of declines, according to RealtyTrac, an online marketer of foreclosed properties.
The paperwork

Under the president’s plan, delinquent borrowers are put into trial modifications for several months to make sure they can handle the new payments and to give them time to submit their financial paperwork. Once the modification becomes permanent, servicers, investors and homeowners are eligible to receive thousands of dollars in incentive payments.

If they qualify for a long-term modification, borrowers can keep making the lower payments for five years, after which time the interest rate is set at the rate at the time of the adjustment, or about 5% today. Borrowers in modifications are saving an average of more than $550 a month.

Loan servicers say they are having trouble getting the necessary documents from borrowers.

Some 375,000 people should be eligible to receive long-term relief by year’s end. But only one-third of homeowners who have made at least three trial payments have submitted all the needed forms, Treasury officials have said. Some 20% have not submitted any paperwork. Banks and government agencies have hired outside companies to knock on borrowers’ doors to assist them with completing the paperwork.

Homeowners, however, maintain that their financial institutions are constantly losing the paperwork.

Donna Belanus, who just made her fourth trial payment to Wells Fargo, has repeatedly faxed her financial information and hardship letter to her loan servicer after being told her file was incomplete. The Elkhorn, Wis., resident was told a month ago that she’d receive a decision soon, but she’s still waiting.

“If you give them everything, they should have an answer,” said Belanus, who saw her monthly payments drop nearly $350 under the trial modification. “I don’t want to lose my home because they take too long. It’s uneasy not knowing what’s going to happen.”

A Wells Fargo spokesman said Belanus’ file is complete and is in the review process. She should be notified of a decision within 45 days.
Denied
0:00 /2:06A rare case of mortgage reduction

Once their files are complete, borrowers may be denied long-term help if they don’t meet the program’s criteria.

At JPMorgan Chase (JPM, Fortune 500), for instance, some 29% of borrowers offered trial plans did not make the required payments and are not eligible for permanent modifications, the bank reported. Another 51% have made the three required payments but have not provided all the needed paperwork.

The bank has launched a program to call borrowers 36 times, reach out by mail 15 times and make at least two home visits to retrieve the required forms.

About 20% have met all the criteria and the majority are expected to be put in long-term modifications soon, the bank said.

So far, some 4,302 borrowers at Chase have received permanent modifications, while another 16,131 have been approved for long-term help. The servicer has offered trial modifications to 199,033 borrowers.

“We continue to work very hard to convert customers from a trial modification to a permanent modification that lowers their monthly payment, but it has been a struggle,” said Charlie Scharf, head of retail financial services at Chase.

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At 8 a.m., homeowner Rodney Wynn was drowning under his $1,800-per-month, 13.4% interest rate mortgage. But by 5 p.m., he had found some relief: a 4.7% loan with a $970 monthly payment.

Wynn, a program director for a youth home in North Carolina, is just one of a growing number of homeowners getting dream workouts on their mortgages. Some are even getting sweet 2% deals.

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Rosie Brooks had her $48,000 mortgage forgiven in exchange for a one-time $3,000 payment.

Nearly 80% of all loan modifications resulted in lower payments in the second quarter (the latest figures available), according to the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision. That’s up from just over 50% three months earlier. Still, just a paltry 4% of all homeowners in need of workouts are receiving them.

When loans are made affordable, borrowers are less likely to default. A year after modifications, according to the OCC report, just 34% of borrowers whose loan payments had been reduced 20% or more had redefaulted compared with 63% of borrowers whose payments had been left unchanged.

“We’re hearing there’s a lot more give from lenders,” said Rick Sharga, a spokesman for RealtyTrac, the online marketer of foreclosed properties. “It often makes sense for the banks to take anything they can get.”

Wynn was able to get his modification at a “Save the Dream” event offered by the Neighborhood Assistance Corporation of America (NACA) in New York City last Friday.

Lenders from nearly all the major banks and servicers were in attendance and promising to restructure loans based on what borrowers could afford. As a result, many homeowners walked in with their mortgage problems and walked out with solutions.

In fact, according to Bruce Marks, NACA’s founder, 40% of attendees left with decisions the same day. About 80% are expected to receive workouts within weeks. His organization has already hosted about 400,000 borrowers at more than a dozen of these events.
5 who are contemplating walking away from their homes.

The most common restructuring seemed to be one that reduced interest rates to the minimum of 2% for the entire life of the loan. That’s partially because NACA has agreements with all the top lenders to reduce interest rates to as low as 2% if that’s what it takes to make loans affordable.

For example, Californians Steve and Elena Servi received a 2% fixed-rate loan from Wells Fargo that replaced the 6.75% adjustable rate mortgage on their Rowland Heights house.

“We had a jumbo loan and we thought no one would work with us,” said Elena.

But it’s in the bank’s self interest to salvage deals — even if it means slashing payments — because the alternative, foreclosure, can cost them more.

“We’re getting a lot of borrowers looking for a better interest rate,” said Jason Ferebee, a Wells Fargo Community Relations exec who was supervising his company’s operation at the NACA event.

He explained that his auditors send each applicant through a kind of flow chart, or “waterfall” as he called it, of possible fixes. It starts with seeing if they fit the guidelines for a Home Affordable Modification Program (HAMP) workout. If borrowers don’t qualify, then the bank will go through a series of its own programs, ticking down the list to more radical cuts until they reach one that’s affordable for the borrower.

At that point, the lender then decides whether it’s more profitable to offer that workout or take the borrower to foreclosure. Most times these days, they try harder to make the modification work; foreclosures are simply too costly.

In the case of the Servis, their house had lost perhaps 40% of its value since they purchased it five years ago. Repossessing the home would have cost Wells Fargo more than $100,000 in lost value alone, plus the legal expenses, commissions, taxes and other expenses the bank would have incurred.

“I’d say we restructure loans for close to half the borrowers we see here,” said Ferebee.
But wait, there’s more

More severely stressed borrowers in many hard-hit areas have gotten even more radical deals. There are even some who are having their debts forgiven entirely.

“The interest rates they’re offering [delinquent borrowers] are a lot lower than they used to be,” said Tanya Davis, a foreclosure prevention counselor for Empowering and Strengthening Ohio’s People (ESOP) in Cleveland. “They cut them to 0% for three years, then 2% for a year, then 4%, capping out at 5%. I have a case where they lowered the interest rate to zero for the entire life of the loan.”

Lenders are very reluctant to repossess properties in the worst hit parts of cities such as Cleveland, according to Jim Rokakis, treasurer of Cuyahoga County, where Cleveland is located. “Rather than going to a sheriff’s sale, some banks are just giving back the houses,” he said.

Rosie Brooks, a retired hairdresser, has been paying off her house for more than 20 years, but it hasn’t been easy since one of her daughters came down with leukemia 10 years ago.

“She was very sick and that cost me every dollar I had,” she said. “I got behind.”

She had paid $38,000 for the house and had refinanced the loan a couple of times. By last year, her mortgage balance was more than $42,000. She no longer works and is dependant on Social Security. The payments became impossible to afford.

She contacted ESOP, and her counselor, Scott Rose, knew her lender was unusually sympathetic. Three weeks later, Rose was able to tell Brooks that he had gotten her a workout — and it was a real dream.

The bank forgave her entire debt in exchange for a one-time payment of just $3,000, which Rose was able to obtain through a loan from the county’s foreclosure-prevention program.

Why was the bank so generous?

“To some extent, there an altruistic component to it,” said Rose. “Mostly though, it’s because it’s in the bank’s financial interest.” To top of page

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It should come as no surprise that fewer troubled borrowers will redefault if their loan payments are lowered in a mortgage modification.

Now, there’s federal data that shows this is true.

Only 18.7% of borrowers who had their loans modified in the second quarter were delinquent three months later, according to a banking regulators’ report released Monday. This compares to 30.7% of borrowers in the first quarter.

Why the sharp drop in redefaults?

Regulators attribute it to their March directive that urged financial institutions to make sure the loan modifications they do are affordable and sustainable.

As a result, the percentage of modifications that decreased monthly payments shot up to 78.3% in the second quarter, from 53.5% in the first quarter, according to the report issued by the Office of Thrift Supervision and the Comptroller of the Currency.

Before, many servicers just tacked late payments and interest onto the end of the loan, not actually lowering the amount owed. So borrowers who couldn’t afford the loan before couldn’t afford it after modification, either.

More than 60% of homeowners who received modifications in the third quarter of 2008 were delinquent once again a year later, the report showed. Only 42.7% of adjustments made during that quarter decreased payments.

Now, servicers are routinely lowering interest rates, extending the term of the loan and sometimes reducing the principal to make the loan more affordable.

“What this shows is if you reduce payments, you have a greater chance for sustainable modifications,” said Bryan Hubbard, spokesman for the Comptroller’s office.
Foreclosures: How does your state rank?

The report’s results do not cover the 80,400 trial modifications initiated under President Obama’s foreclosure prevention program in the second quarter. That’s because those adjustments are not counted until they become permanent.

Since those trials are only being converted to permanent modifications now, the first data that reflects the program’s performance will be available in March, Hubbard said. But Monday’s report “bodes well” for the president’s plan, since it calls for payments to be reduced to 31% of a borrower’s pre-tax income, he said.

Servicers are doing more to help people stay in their homes, assisting more than 680,000 borrowers in the third quarter, the report shows. That’s up 68.7% from the second quarter. More people are getting modifications than foreclosures: There were 369,000 newly initiated foreclosures during the quarter.

Some 40% of the home retention efforts were trial modifications under the president’s plan.

But the foreclosure problem still threatens to dwarf the actions servicers are taking. Only of every six people who were seriously delinquent or in foreclosure received a trial or permanent modification, the report said.

Also, servicers remain woefully behind in providing permanent help to borrowers in trial modifications. Only 4% of those in the trial period have been converted as of Nov. 30, according to the Treasury Department.
Bad news

The lower redefault rate and increased home-retention initiatives were among the few bright spots in the 49-page report.

More homeowners — particularly prime borrowers with the best credit backgrounds — are falling behind in their payments.

Some 6.2% of mortgages were at least 60 days delinquent at the end of the third quarter, up 16.7% from the previous quarter and 73.8% from a year earlier.

But prime borrowers’ delinquency rate jumped 19.6% from the previous quarter and 116.2% from a year earlier. Their rate stood at 3.6% at the third quarter’s end. That’s mainly due to rising unemployment and the weak economy.

Option adjustable rate mortgages, which are considered the next ticking time bomb in the housing market, are also performing worse than the overall mortgage sector. Some 16% were seriously delinquent, and nearly 12% were in the process of foreclosure.

Option ARMs allow homeowners to choose how much they want to pay each month, and the vast majority decide to pay a minimum amount — even less than the interest due.

Also, the number of foreclosures in process topped 1 million for the first time. That’s 3.2% of mortgages, up 9.4% from the previous quarter and 82.4% from the previous year

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