“The government program as currently structured is petering out. It is taking in fewer homeowners, more are dropping out and fewer people are ending up in permanent modifications,” said Mark Zandi, chief economist at Moody’s Analytics.
The program is intended to help those who are at risk of foreclosure by lowering their monthly mortgage payments. Friday’s report from the Treasury Department suggests the $75 billion government effort is failing to slow the tide of foreclosures in the US, economists say.
More than 2.3 million homes have been repossessed by lenders since the recession began in in late 2007, according to foreclosure listing service RealtyTrac Inc. Economists expect the number of foreclosures to increase well into next year.
Besides forcing people from their homes, foreclosures and distressed home sales have pushed down on home values and crippled the broader housing industry. Home builders have found it difficult to compete with the depressed prices that have discouraged potential sellers from putting their homes on the market.
Approximately 630,000 people who had tried to get their monthly mortgage payments lowered through the government program have been cut loose through July, according to the Treasury report. That’s about 48% of the ones who had enrolled since March 2009, and it is up from more than 40% through June.
Roughly 32% or about 421,804 of those who started the program, have received permanent loan modifications and are making their payments on time.
RealtyTrac reported that the number of US homes lost to foreclosure surged in July to approximately 92,858 properties, up 9% from June. The steady rise of repossessions has been increasing and the nation is now on track to having over more than 1 million homes lost to foreclosure by the end of 2010. That would be a significance loss of more than 900,000 homes repossessed in 2009, the firm says. According to RealtyTrac, lenders have taken over an estimated 100,000 homes a year.
Zandi said the government effort will likely end up helping only about 500,000 homeowners lower their monthly payments on a permanent basis. That’s a small percentage of the number of people who have already lost their homes to foreclosure or distressed sales like short sales - when lenders let homeowners sell for less than they owe on their mortgages.
Zandi predicts another 1.5 million foreclosures or short sales in 2011.
“We still have a lot more foreclosures to come and further home price declines,” Zandi said. He said home prices, which have already fallen 30% since the peak of the housing boom, would drop by another 5% by next spring.
Many borrowers have complained that the government program has been a nightmare for them. Borrowers also claim banks often lose their documents and then claim the necessary paperwork wasn't returned.
The banking industry said borrowers weren’t sending back their paperwork. They also have accused the Obama administration of initially pressuring them to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many homeowners dropped out or were disqualified.
Obama officials dispute that they pressured banks. They have defended the program, saying lenders are making more significant cuts to borrowers’ monthly payments than before the program was launched. Some of the largest lenders in the program have offered alternative programs to those who fell out.
Homeowners who qualify can receive an interest rate as low as 2% for 5 years and a longer repayment period. Those who have successfully navigated the program to reach permanent modifications have seen their monthly payments cut on average by about $500.
After all the required paperwork is finished, homeowners receive a temporary modification, this is to become permanent after they make 3 on time payments. That includes proof of income and a letter explaining the reason for their troubles. This process has taken far longer.
Over 100 participating lenders get taxpayer incentives to reduce payments. As of mid-June only $490 million had been spent out of a potential $75 billion the government has made available to help stem the wave of foreclosures.
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