May 17, 2010 / 5:20 PM / 9 years ago

Cancellations rise in mortgage rescue program

WASHINGTON (Reuters) - More borrowers could be expelled from the Obama administration’s premier home rescue program in coming months as mortgage servicers make final decisions on trial modifications started under looser rules last year, U.S. Treasury officials said on Monday.

In a report on the Home Affordable Modification Program, the Treasury said cancellations of trial modifications spiked to 277,640 in April from 155,173 in March as servicers moved to purge a backlog of borrowers who could not meet documentation guidelines or stay current on their reduced monthly payments.

Borrowers achieving permanent modifications in April, meanwhile, rose to 295,348 from 227,922 in March, according to the report. The April total excluded about 3,744 borrowers who either sold their homes, stopped paying their mortgages or did not comply with other conditions.

“We’re dealing with a bulge in trial modifications, a temporary bulge that the servicers are working through, now at a rapid pace,” Herbert Allison, Treasury assistant secretary for financial stability, told reporters. “They see a relatively higher percentage of cancellations from that population, because those trials were initiated based on stated income rather than the homeowners producing the documents upfront.”

Starting in June, the Home Affordable Modification Program will require all homeowners to prove upfront that they have the income to qualify for a mortgage modification before their payments are reduced.

Some mortgage servicers — companies that collect monthly mortgage payments — began requiring upfront documentation in March. This contributed to a drop in active trial modifications, to 637,353 in April from 780,951 in March.

The Treasury program relies largely on interest rate reductions to reduce payments by up to $500 a month for some borrowers. It channels incentive payments from federal bailout funds to loan servicers for each successful modification they process.

But the program does little to deal with the problem of home values that have fallen below the mortgage principal amount.

“INCOMPLETE ANSWER”

A trade group representing mortgage investors said the latest report shows that the Treasury’s program is “an incomplete answer to the foreclosure crisis.”

Instead, the group, the Association of Mortgage Investors, supports shifting away from a short-term modification plan toward one that reduces mortgage principal and the overall debt burden for borrowers.

The Treasury report showed that while housing expenses were cut to 31.0 percent of borrowers’ income for those in permanent modifications, total debt payments still took 64.3 percent of their income.

The April total of borrowers with permanent modifications represented about 9 percent of delinquent loans that met the program’s guidelines, compared with about 6.7 percent in March.

But those borrowers represented only half of the loans that would have been eligible for participation in the program because investor properties, abandoned homes and those with too low debt-to-income ratios were filtered out.

Treasury officials said that among options for those who were dropped from the modification program are short sales — in which the lender closes out the loan from sale proceeds less than the principal amount — transfers of deeds to the lender without foreclosure, or “self-cure” — cases in which an owner finds a job and can resume paying the mortgage.

Reporting by David Lawder; Editing by Padraic Cassidy and Dan Grebler

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