Of the government’s goal of assisting 4 million homeowners, they have fallen way short to only 680,000 that have received temporary modifications from lenders since inception in march, the House Financial Services Committee has given strong criticism to the mortgage industry for the poor results.

“Taxpayer-funded foreclosure mitigation programs have been an abject failure, throwing money at programs that do not work is absolutely insane”, said Rep. Jeb Hensarling, R-Texas.

Under the program, eligible borrowers who are behind or at risk of default can have their mortgage interest rate reduced to as low as 2% for five years.  They are given temporary modifications, which are supposed to become permanent after borrowers make three payments on time and complete the necessary paperwork, including proof of income and a hardship letter.

On Thursday, the government plans to release the first figures on how many modifcations have been made permanent.

Much of the criticism for the disappointing results is being leveled at the banks, many of which received billions in taxpayer bailout dollars.  Calls are growing louder on Capital Hill for the Obama adminsitration to take a tougher approach.

Rep. Emanuel Cleaver, D-Missouri said, “We have not spanked anybody, I think they’ve come to the conclusion that spankings are not on the agenda.  Why can’t we do something to one of them?”

Herbert Allison, the Treasury Department’s assistant secretary for financial stability, commented that punishment could be in the works.  “We are putting them on notice, we will exact penalties and they will be publicly outspoken as who is performing and not.”

Lenders are stating that a majority of borrowers either don’t complete the paperwork or don’t make the payments.  At Bank of America, only a quater of the 65,000 borrowers in trial modifications have sent their paperwork back.

The bank blamed “ineffective communications with customers, shortcomings in document maintenance, misunderstandings about program requirements, and the inability to comply by some borrowers.”

But those explanations only prompted House members to threaten more legislation to curb the foreclosure crisis.  A record 14% of homeowners with a mortgage are either behind on their payments or in foreclosure.  Bargain-priced foreclosures are dragging down home values in neighborhoods across the country.  Nationwide American homeowners have lost $4 trillion in home equity since the housing bust.

Rep. Barney Frank, D-Mass, holds the position of the committee chair said, “We are frustated by what’s happening.”  He has proposed $3 Billion in assistance for unemployed homeowners to a bill set for vote in the House this week.

The Treasury Department said it will withhold payments from mortgage companies that aren’t doing enough to make the changes permanent.  Officials will monitor the largest mortgage companies through daily progress reports.

The goal is to increase the rate at which troubled home loans are converted into new loans with lower monthly payments.  At the end of October, more than 650,000 borrowers, or 20% of those eligible, had signed up for trials lasting up to five months.

But as of early September, only about 1,700 homeowners had completed the process.  Treasury officials projected Monday that 375,000 homeowners would hit the deadline to convert to permanent modifications by year-end.  In an effort to shame the companies into doing a better job, Treasury will publish a list in December of the mortgage companies, also known as servicers, that are lagging.

“We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones, ” Phyllis Caldwell, who recently was named to lead the Treasury Department’s homeownership preservation office, said in a statement.

Under the adminstration’s $75 billion program, companies that agree to lower payments for troubled borrowers receive $1000 for completing the modification and $1000 per year for three years for every year that the borrower is current on the completed modification. 

“This requires the lender to lower the payment to a payment that the borrower can afford.  The lenders stand to gain more money pushing the borrower into foreclosure and adding on additional fees. USA Today September 15,2009”

Many Mortgage companies, however, said they have had trouble getting borrowers to return necessary documents to complete the modifications, which allow homeowners to have their mortgage interest rate reduced to as low as 2% for five years.

“The documents were confusing.  Borrowers did not understand the process wasn’t closed until the documents came in, even when they came in, they were not always complete.”, said Sanjiv Das, chief executive of Citigroup’s  mortgage unit.

Mortgage finance company Freddie Mac has hired an outside company Titanium Solutions to send real estate agents around the country to knock on borrowers’ doors and help them complete the paperwork.

The program has come under heavy criticism for failing to do enough to attack a tidal wave of foreclosures.  Analysts say the foreclosure crisis is likely to persist well into the next year as rising unemployment pushes more people out of their homes.

About 14% of U.S. homeowners with mortgages were either behind on payments or in foreclosure at the end of September, a record level for the ninth straight quarter, according to the Mortgage Bankers Association.

The Congressional Oversight Panel, a committee that monitors spending under Treasury’s bailout program, concluded last month that foreclosures are now threating families who took out conventional, fixed-rate moartgages and put down payments of 10% to 20% on homes that would have been within their means in a normal market.

Treasury’s program, known as the Home Affordable Modification Program (HAMP), “is targeted at the housing crisis as it existed six months ago, rather than it exists right now,” the report said.

These homes largely represent loans that are delinquent but have not yet resulted in foreclosure sales.

Roughly 7 million properties are desitned to go into foreclosure compared with 1.27 million properties in early 2005, according to a September study by Amherst Securities Group.

Dean Baker, co-director of the Center for Economic and Policy Research in Washington D.C. stated, “There’s a huge supply out there and the foreclosure process can take a long time.  When it comes to (the housing recovery), we’re not home free.”

There is often a long lag time between a borrower going delinquent and the bank taking the home. Here’s Why:

• Moratoriums – New state laws imposing short-term moratoriums have slowed the time line from delinquency to foreclosure.

• Overwhelmed lenders – Banks dealing with a surge in refinancing, mortgage modifications and defaults are overwhelmed with demand, so it can take  longer to initiate a foreclosure sale.

• Modifications – Many loans now are first examined to see if they might qualify for a modification.  This drags out the time line and means it is taking longer for homes to go into foreclosure.

• Asset write downs – Banks may in part be waiting to liquidate homes through foreclosure because they don’t want to write down the value of the asset.  Lenders can keep homes on the books at a higher value until they are sold at foreclosure.

Mark Zandi at Moody’s Economy.com states, ” There is a lot of foreclosed property in the pipeline that will hit the market and depress prices.

Foreclosed homes often sell at prices below those on the market and can therefore drag down overall home values.

The shadow market of foreclosed homes eclipses the number of homes lost this year.  Zandi anticipates there will be about 2.4 million homes lost next year through foreclosure, short sales and deed-in-lieu foreclosure.   That compares with 2 million homes lost in 2009.

Jumana Bauwens, a spokeswoman at Bank America stated, “The bank is projecting an increase in foreclosures in part because customers will not be qualifying for existing loan-modification programs.

Mortgage company executives were summoned to Washington by the Obama Administration and demanded that they move faster on lowering payments for homeowners sliding to foreclosure. The companies were called on by the treasury officials to hire and train more people quickly to handle applications from homeowners that are seeking relief.

The $75 Billion program to prevent foreclosures has been little received by Mortgage companies not because of limited capabilities to handle the capacity but because the lenders have a greater incentive to collect lucrative fees on delinquent loans.
When home buyers stop paying on their loan, mortgage companies that service the loans collect fees out of proceeds when homes are ultimately sold in foreclosure. The longer a borrower remains delinquent, the greater the opportunities for these mortgage companies to extract additional revenue- fees for insurance, appraisals, title searches and applicable legal services.

Mortgage companies, some of which are affiliated with the nation’s largest banks, are paid to manage pools of loans owned by investors. These companies typically collect a percentage of the value of the loans that they service. They extract their share regardless of whether borrowers are current on their payments or not. Their percentage often increases on delinquent loans.
Legal experts say the opportunities for additional revenue in delinquency are considerable, confronting mortgage companies with a conflict between their own financial interest in collecting fees and their responsibility to recoup money for investors who own most mortgages.

Federal Reserve Bank of Boston concluded in a paper they released, “The rules by which servicers are reimbursed for expenses may provide a perverse incentive to foreclosure rather than modify.”
Under the Obama administration’s foreclosure program, a servicer that modifies a loan for a homeowner collect’s $1,000 from the government, followed by $1000 a year for the next three years as long as the borrower remains current.
Experts say the administration’s incentives are often outweighed by the benefits of collecting fees from delinquency, and then more fees through the sale of homes in foreclosure.

Fannie Mae Announced a new policy that they are undertaken which will supposedly help thousands of borrowers that are on the verge of Foreclosure. These foreclosure threatened borrowers will have the opportunity to rent their homes from Fannie Mae as opposed to losing them to Foreclosure. A government-controlled company, currently unnamed, will manage the “Deed for Lease” program. This program will allow borrowers to transfer ownership to Fannie Mae and sign a one-year lease, with month-to-month extensions after that.

Jay Ryan, a Fannie Mae vice president stated “The program will “eliminate some of the uncertainty of Foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities.”

In the first half of the year, Fannie Mae repossessed 57,000 Foreclosed properties. Through its process known as deed-in-lieu of Foreclosure Fannie Mae took back 1,200 properties. So in comparison, this program is likely to help a relatively small number of homeowners.

This program of “Deed for Lease” is designed to help homeowners who don’t qualify for a loan modification under the Obama administration’s plan, but still want to remain in their homes. Fannie Mae is not planning to market the homes for sale during the one-year rental period. They have also have declined to identify the outside company that has been hired to manage the properties.

To qualify, homeowners have to live in the home as their primary residence and prove that they can afford the market rent (which could be more than what they are paying for mortgage), which would be determined by the management company. The rent can’t be more than 31% of their pretax income (This is for that one year lease that you are signing). Once the one year has completed, you are then on a month to month and it has not been determined as to what your rent will be nor if your property will be sold to a private investor.

Fannie Mae’s sibling company, Freddie Mac, launched a similar effort in March. That policy, however, requires the Foreclosure to be complete and only allows month-to-month leases. A Freddie Mac spokesman declined to say how many borrowers have participated.

So in short, the government will become the largest owner of foreclosed properties in the nation.

In third quarter there were 937,840 properties which had foreclosure filings, which was a 23% increase from third quarter of 2008 reported by Realty Trac.

The number of properties in some stage of foreclosure was 5% higher than in the second quarter. One in every 136 U.S. housing units received a foreclosure filing during the quarter, which happens to be the highest quarterly foreclosure rate since Realty Trac starting reporting in first quarter of 2005.

Realty Trac advisor, Rick Sharga stated “We’d hoped this year would be the peak as far as foreclosures, but we’ve since concluded that will not be, we should see a peak in foreclosures at the end of 2010.

Due to the moratoriums that were in acted in several states and the many homeowners that had applied for modifications with their lenders, foreclosure proceedings were frozen.  We have seen a spike in foreclosures because the moratoriums have ended and the borrowers who have been denied modifications by their lenders.

A large number of adjustable-rate loans are slated to reset, which means they can bring higher monthly payments for homeowners.  Higher payments, coupled with a 9.8% unemployment rate that is expected to rise above 10%, could also cause a growing number of borrowers to lose their homes.  This could amount to a sizable second wave of foreclosures.

There are presently 2.8 million active interest-only home loans with an outstanding principal balance of $908 billion.  Interest-only loans produce low monthly payments based on the loans interest for five to seven years, but then the payments jump when the principal is included, according to First American CoreLogic.

Mark Zandi of Moody’s Economy.Com stated, “Foreclosures should remain really high as long as unemployment is rising, and that is through next spring.” Zandi estimates there were 3.8 million notices of default filed this year and that in 2.1 million cases, borrowers will lose their homes to foreclosures to rise.

California, Florida, Arizona, Nevada, Illinois, and Michigan accounted for 62% of the nations foreclosure activity in the third quarter, according to Realty Trac.
A federal program announced in March to help homeowners get more affordable monthly payments has now put 500,000 borrowers into three-month trial modifications.

Geographic areas that are seeing high rates:

State                       Foreclosure Filings             Pct. Chg.

Alabama                                   5,951                               173.9%

Alaska                                      764                                  36.4%

Arizona                                    50,342                               24.6%

Arkansas                                 5,178                                 39.6%

California                               250,054                                18.6%

Colorado                                16,265                                  12.5%

Connecticut                           5,113                                    10.0%

Delaware                               778                                    -11.7%

Dist. of Col.                            1,183                                 -11.1%

Florida                                  156,924                                 23.3%

Georgia                                 33,385                                   25.1%

Hawaii                                   2,743                                   141.5%

Idaho                                     6,531                                   153.5%

Illinois                                   37,270                                    30.3%

Indiana                                  12,101                                   -15.8%

Iowa                                      1,951                                     31.9%

Kansas                                    3,402                                    47.1%

Kentucky                               3,279                                     12.5%

Louisiana                                 3,986                                    98.7%

Maine                                      1,053                                   33.1%

Maryland                                14,803                                  85.6%

Massachusetts                        12,667                                   34.8%

Michigan                                 37,026                                  22.3%

Minnesota                             10,620                                   100.3%

Mississippi                             2,220                                     241.0%

Missouri                                 7,892                                    -11.2%

Montana                                  293                                      -6.7%

Nebraska                                 735                                     -29.7%

Nevada                                   47,925                                   58.9%

New Hampshire                       1,944                                      -2.2%

New Jersey                           18,108                                    1.2%

New Mexico                            2,183                                       84.7%

New York                                 15,242                                    5.3%

North Carolina                         9,818                                       -6.0%

North Dakota                        114                                          -20.3%

Ohio                                     29,645                                     -11.7%

Oklahoma                              5,032                                       22.0%

Oregon                                  10,318                                     76.6%

Pennsylvania                          14,167                                     15.5%

Rhode Island                         1,554                                        -2.8%

South Carolina                        7,546                                       59.7%

South Dakota                         364                                          205.9%

Tennessee                               10,888                                     -9.1%

Texas                                       29,838                                     8.7%

Utah                                       9,553                                       96.3%

Vermont                                     62                                       169.6%

Virginia                                     16,687                                     4.14%

Washington                              10,375                                    33.0%

West Virginia                                570                                     356.0%

Wisconsin                                 11,181                                   105.2%

Wyoming                                    217                                   -14.9%

U.S.                           937,840                                      22.5%