$75 billion mortgage bailout no help to many homeowners

Nine months ago, the Obama administration offered banks $75 billion in taxpayer money to rework troubled mortgages.

Yet so far, $75 billion hasn't been enough to compel many lenders to permanently reduce monthly mortgage payments for millions of cash-strapped homeowners. Indeed, tens of thousand of borrowers who have asked for relief have instead seen their payments and loan balances increase under the Obama plan. A surprisingly high percentage are sliding back into default.

The Treasury Department announced this week that 650,994 homeowners nationwide have received temporary, three- to five-month trial modifications under the administration's foreclosure-prevention plan. That represents one in five eligible homeowners at least 60 days behind on their mortgage payments, according to the Treasury.

"We're reaching borrowers at a larger scale than any other modification program to date," Assistant Treasury Secretary Michael Barr said.

The $75 billion approved for the plan, known as the Home Affordability Modification Program, or HAMP, was never meant to go to borrowers directly. Instead, the money would be used to encourage lenders to modify mortgages rather than foreclose on properties. Banks would receive up to $4,000 for every loan they modified. For banks, a loan modification may be less costly than a foreclosure, particularly if a house is worth much less than the value of the mortgage.

But despite the financial carrot, the percentage of homeowners who have seen their trial modifications become permanent loan restructurings -- with payments reduced for more than just a few months -- remains abysmally low. A mere 1,711 borrowers nationwide had successfully completed their trial period and received permanent loan modifications as of Sept. 1, according to a report by the Congressional Oversight Panel.

And many more who have been approved for relief under the plan have actually seen loan payments and balances increase -- as lenders simply roll back payments, fees and taxes into the remaining life of the loans. "It's relief of a kind, but a lot of these modifications don't get to the root cause of why the person defaulted in the first place -- the mortgage payment was too high," said Mary Bujold, president of Maxfield Research Inc., a Minneapolis-based market-research firm.

It's too early to determine if these patterns will continue, but many experts say the HAMP plan overpromised and underdelivered by giving lenders too much leeway in how they could modify loans. Others argue that banks have an incentive to keep borrowers in temporary loan modifications in order to delay having to foreclose on the house and take a loss.

"I think the Obama administration probably underestimated how difficult it is to solve the mortgage problem," said Rick Sharga, senior vice president of RealtyTrac, a firm that tracks foreclosure.

Mortgage modifications come in many forms. In some cases, lenders can lower interest rates, extend the loan term or reduce the amount of the loan by forgoing part of the principal. Of loans modified during the second quarter, 22 percent were either left unchanged or saw their payments increased, according to a recent report by banking regulators.

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)

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