More than 29,000 troubled American homeowners have been stuck in mortgage modification purgatory for at least a year, with no end in sight, under the Obama administration's anti-foreclosure program, according to a recently released report from a watchdog panel appointed by Congress.
These homeowners were supposed to receive lower payments on a trial basis lasting three months and then gain so-called permanent mortgage modifications--lowered payments lasting five years. But more than a year after beginning their trial phase, they have yet to be granted the permanent relief, leaving them unsure about their ability to hang on to their homes. Meanwhile their lenders continue to report them to credit bureaus as delinquent, impairing their ability to borrow in the future.
The new data, disclosed last week in a report from the Congressional Oversight Panel, added the latest sign of trouble to an anti-foreclosure program that was once supposed to help 3 to 4 million hang on to their homes. It is now on track to aid less than one-fourth that number.
The homeowners stuck waiting for permanent relief now contend with a higher cost of living thanks to lower credit scores and higher mortgage debt. They're also prevented from moving on as they try to keep a mortgage teetering on the verge of foreclosure.
"It's horrifying, but it's not surprising," said Diane E. Thompson, counsel to the National Consumer Law Center. "I hear about this everyday from people. When I go out to do trainings, I have people put their hands up in the room and I try to think of prizes for the person who has the oldest trial mod, and they're routinely 18 months old."
Twenty-eight homeowners who entered the program in March 2009, or more than a year-and-a-half ago, remain in the trial phase. Some 475 have been in trial limbo for 18 months. More than 29,100 borrowers have been stuck in the trial phase for at least a year, data through October show.
"After promises of hope, the fact that so many families remain in financial limbo goes to the heart of our biggest concern: some mortgage servicers on their own simply seem not to be up to the task of effective, widespread mortgage modification," said Richard H. Neiman, New York's top bank regulator and a member of the oversight panel. Neiman added that "Treasury has not been able to hold them fully accountable."
While the Treasury Department discloses the number of homeowners who have been in the trial program for at least six months, Treasury has never revealed the number of borrowers who have been in the trial phase for at least a year. Bank of America, the nation's largest bank by assets, accounted for nearly half of all the aged trials, according to Treasury's latest publicly-released scorecard.
Thompson said the number of homeowners stuck in limbo is likely much higher as mortgage firms self-report their data to Treasury, and are likely to skew the numbers in their favor.
The modification initiative, known as HAMP, long ago was dismissed by housing experts as a failure.
More homeowners have been bounced from the program than have received permanent relief.
The average borrower lucky enough to get into a five-year plan ends up owing more on their mortgage than they did prior to entering the program. Research shows that homeowners in this state, known as being underwater, are less likely to move--such as in pursuit of a job--and more likely to default.
And more than a third of those in so-called permanent mortgages spend more than 80 percent of their monthly income servicing debt, raising questions about the long-term sustainability of the modifications.
The oversight panel said HAMP would prevent less than 800,000 foreclosure, at a cost of about $4 billion. The administration originally allocated $50 billion in bailout funds to help homeowners.
Last week, the Treasury Department official overseeing its bailout programs admitted for the first time that the mortgage modification initiative will not meet the goal laid out by President Obama when he announced the program in February 2009. Then, Obama said it would enable "as many as 3 to 4 million homeowners to modify the terms of their mortgages to avoid foreclosure."
"I think it's apparent from our numbers that we will not have 3 to 4 million" permanent modifications, said Tim Massad, Treasury's acting assistant secretary for financial stability.
More than 2.8 homes received foreclosure notices last year, according to real estate data provider RealtyTrac. The Federal Reserve expects 7.4 million homes to enter foreclosure this year through 2012. It recently revised its projection up from 6.5 million as the crisis has worsened.
Treasury officials say the program's shortcomings are due to mortgage firms' inability to handle the huge influx of distressed borrowers that flooded the system when the housing market soured; the changing nature of the housing crisis, which was once dominated by subprime mortgages and now remains depressed due to a lingering high unemployment rate; and borrowers' lack of maintaining proper documentation describing their circumstances, like monthly income.
To deal with the borrower issue, Treasury redesigned the program to require documentation in order to enter the trial phase, rather than the previous practice of rushing to get homeowners enrolled in the program and asking for their paperwork later.
Treasury maintains that this has led to better results.
But according to the oversight panel's data, nearly 30 percent of borrowers who made their first trial payment in June--and made their payments on time in July, August and September--remain in the trial phase. A little more than half actually converted into a permanent modification, making it the only month dating to March 2009 in which the conversion rate eclipsed 50 percent, data show.
Andrea Risotto, a Treasury Department spokeswoman, cautioned that there is some lag between when a decision on a permanent modification is reached and when that is entered into the system.
Still, Treasury officials argue that even with homeowners remaining in limbo, they're still benefitting from the program as they're able to continue living in their homes, at a reduced rate, and without cost to taxpayers (the initiative only pays for permanent modifications).
"The trial period provides immediate relief to struggling homeowners at no expense to taxpayers," Risotto wrote in an e-mail. She added that Treasury data show that a majority of borrowers rejected during the trial phase end up in alternative foreclosure-prevention programs.
Thompson, who works with homeowners and their advocates, completely disagreed.
"The big overarching thing is, nobody wants to be in a trial mod. Everyone wants resolution in their lives," she said. "Everyone in foreclosure is desperate to get out of foreclosure. It's incredibly stressful, it's humiliating, and shameful. Nobody feels good about it. People want it done, they want it over with, they want to be able to move on."
Also, even though the homeowners are making their payments, they're still being reported as delinquent to the major credit reporting bureaus, Thompson said.
"So think about what that does when they go to apply for a car, or what it does to their credit card rates, or if they're applying for a job, or want to move, or even want to rent a place," she said. "It affects their cost of living and their ability to manage their life in all sorts of ways. Credit is a huge issue."
Finally, when homeowners are in the trial phase their mortgage company tacks on to their mortgage principal the difference between their old monthly payment and the reduced amount. The longer the trial, the more gets added.
Thompson said that for some of these homeowners, that tacked-on amount is enough to tip the scales against a permanent modification when their mortgage company finally decides to run the formula that determines whether they keep their home, or are forced out. A bigger debt load works against homeowners, she added.
"This is not a good deal for homeowners."