President Barack Obama's plan to fix the foreclosure crisis has been a dud, putting the housing market recovery at risk.
Hopes were over-inflated when Obama unveiled the program before an adoring audience of Arizona high school students last February. Almost a year later, it appears only about 750,000 homeowners — a fraction of the 3 million to 4 million originally projected — might complete the application process, predicts Mark Zandi, chief economist at Moody's Economy.com.
The more borrowers who can't be helped, the more foreclosed properties will flood the market. And that means the nation's housing market, which appeared to recover last summer, could soon take another turn for the worse.
A record 2.8 million households were threatened with foreclosure last year, up more than 20 percent from a year earlier, RealtyTrac Inc. reported this week. The foreclosure listing firm expects another record this year.
Home prices, meanwhile, are down 30 percent nationally from the peak in mid-2006, and there is mounting evidence they will fall again over the winter as low-priced foreclosures make up a larger proportion of sales.
"It's a very serious threat to the housing market, and still one of the most significant risks to the broader recovery," Zandi said.
The Obama plan aims to help borrowers in financial trouble by making their payments more affordable. Modifications made under the program include a lower interest rate and often a longer repayment period. The average monthly payment has been cut by $500 on average.
The homeowners receive temporary modifications, which are supposed to become permanent after borrowers make three payments on time and complete the required paperwork, including proof of income and a letter explaining the reason for their troubles.
However, just 66,500 borrowers, or 7 percent of those who signed up, have completed the program as of December, the Treasury Department said Friday.
Another 49,000, or more than 5 percent, have dropped out of the program entirely — either because they missed payments or were found to be ineligible. Thousands more remain in limbo awaiting an answer.
There's blame on both sides: Mortgage companies say they have struggled to get back the necessary paperwork, while homeowners and housing counselors say navigating the bureaucratic maze often seems impossible.
But the 102 participating companies are getting wildly different results. While a handful of mortgage companies are "very good at it," said Michael van Zalingen, director of homeownership services at Neighborhood Housing Services of Chicago, "some either don't care or can't figure it out."
The biggest company in the program, Bank of America, has completed modifications for fewer than 2 percent of the 200,000 borrowers it has enrolled. Rebecca Mairone, a Bank of America executive, said the bank has started sending notaries door-to-door to get signed documents back quickly.
Companies with disappointing results "need to do much better," Michael Barr, an assistant Treasury secretary, told reporters Friday.
Another major mortgage company, Wells Fargo & Co., is doing better but still has completed modifications for fewer than one in 10 borrowers.
To speed up the process, Wells Fargo has been holding a borrower assistance events in several major cities. It brought 200 loan counselors to Baltimore's downtown convention center this week.
"You get a little more consideration with the person when you're eye to eye with someone," said Odella Taylor, 50, a Wells Fargo borrower who fell behind on her home loan last year after separating with her husband.
Even with such events, Wells Fargo projects only about half of its 74,000 borrowers who made at least three trial payments as of last month will wind up being approved. The rest either won't send back all the required documents or will be deemed ineligible according to the government's formula.
For borrowers who can't get into the program, the stress and frustration are extreme
"It's like being on a little capsule above Earth and realizing the oxygen tank is running out," said Nicole Vaughn, 50, of Sonora, Calif.
She says Select Portfolio Servicing Inc. denied her application three times last year, for ever-changing reasons. She still hasn't given up, and is working with her housing counselor to challenge the calculation that led to the most recent denial, something that borrowers are allowed to do under the program's rules.
As of December, Select Portfolio had approved 16 percent of borrowers enrolled in the program, and rejected 25 percent. A spokesman said the company "is continuing to work with the customer to analyze potential modifications under government guidelines."
Other companies are doing better. Ocwen Financial Corp. and Carrington Mortgage Services, have modified loans for 40 percent of their enrolled borrowers and rejected only a handful.
"We have found the most optimal ways to communicate with borrowers, to overcome fear and suspicion and to develop an effective rapport and trust," said Paul Koches, Ocwen's general counsel. "The proof is in the numbers."
Another major difficulty is that the program is failing to keep up with soaring job losses. Unemployment, now at 10 percent, is expected to remain elevated all year.
That's a problem for homeowners like Cindy Rose, 52, of Murietta, Calif. She and her husband have seen their painting business drained by the recession.
So they went to their mortgage company, Litton Loan Servicing Inc., for help. In August, they were approved on a trial basis for the Obama plan. The couple's new payment was about $1,700 a month, down from about $2,650.
But a few weeks later, they got a confusing letter in the mail explaining several potential reasons for their rejection.
A Litton spokeswoman declined to comment on the Rose family's case, but said that the company "is following the program's guidelines."
They have since filed for bankruptcy and staved off foreclosure so far. But Rose fears she and her husband, who was recently diagnosed with lung cancer, will soon lose their home of 13 years.
"All these horrible things have happened in the economy," she said. "And there's nobody there for you."
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