UPDATE 3-Over half US home loan aid applicants drop out

* Dropouts still high on home loan relief plan

* Poor documentation, defaults still a problem

* ‘Hard road ahead,’ official warns

(Adds comments by U.S. Treasury official, paragraphs 5-6)

By Glenn Somerville

WASHINGTON, Oct 25 (Reuters) - More than half the 1.37 million troubled U.S. homeowners who started trial loan workouts have dropped out of the program intended to help stabilize housing markets, the government said on Monday.

A release from the Treasury and the Housing and Urban Development departments on the Making Home Affordable Program, or HAMP, showed nearly 700,000 have had trial modification programs canceled by the end of September.

That represents about 51 percent of homeowners who sought lower monthly payments but were dropped, around the same proportion of failures as a month earlier.

The most common causes for canceling trial modifications were insufficient documentation and trial payment defaults and ineligibility on the part of homeowners whose housing expense was already less than 31 percent of their household income.

A U.S. Treasury official said, however, the loan modification program was helping set standards for potential relief that lenders are adopting more broadly and so makes it simpler for stressed homeowners to seek help.

“The program wasn’t designed to try to prevent every foreclosure but instead to help people who could sustain a loan modification,” said Tim Massad, acting assistant Treasury secretary for financial stability. “Early data shows that well beyond the trial phase, the majority of homeowner are maintaining their HAMP modifications.”

Treasury launched the mortgage modification program in April 2009 to try to find a way to reduce mortgage payments for struggling homeowners who wanted to keep their homes but who were at imminent risk of foreclosure.


The essence of the program is to offer taxpayer-financed incentives to mortgage servicing firms to get them to cut payments to no more than 31 percent of a qualifying homeowner’s income.

The program has won tepid support at best from U.S. lawmakers and the public in view of the widespread and ongoing wave of foreclosures still taking place across the country.

It also is a sensitive issue ahead of November’s congressional elections because the Obama administration wants to present itself making a concerted effort to help Americans who must deal with an unemployment rate near 10 percent and fear of eviction from their homes.

When the program was announced, the administration said its goal was to aid three million to four million homeowners by the end of 2012. HUD Assistant Secretary Raphael Bostic said it was helping “responsible borrowers” but conceded housing conditions remain difficult.

“With many unavoidable foreclosures still in the pipeline, it’s clear that we have a hard road ahead,” Bostic said in a statement.

There are still some 173,500 homeowners with trial modifications in place hoping to convert them to permanent status. Treasury said that in September 27,840 permanent loan modifications were begun.

But in some parts of the country, home prices are still falling and putting homeowners “under water” on their mortgages -- owing more than their properties are worth -- and therefore sapping their will and ability to keep up payments on existing or modified loans. (Reporting by Glenn Somerville; Editing by Chizu Nomiyama and Andrew Hay)