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A Bitter Pill For Mortgage Borrowers

NEW YORK (TheStreet) -- Top banking executives said this week that it may take years for the country to see a full-fledged housing recovery -- and that a government rescue program may actually be hindering progress.

The housing market recently began another leg down, despite hopeful signs last year after the Obama administration rolled out its "Making Home Affordable" program. Home sales have dropped dramatically since some incentives expired in April. Despite homes being more affordable than ever, demand has been feeble, prices remain soft and there's more than a year of supply on the market.

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The latest sign of weakness came Wednesday, when the Mortgage Bankers Association said applications had fallen for the second week in a row. Though mortgage rates remain at historic lows, refinancing requests dropped 11%. Though home prices are still deeply discounted in many regions, applications for new purchases also fell marginally.

At an event this week, Bank of America (BAC) CEO Brian Moynihan estimated that it will take the bank another three years to work through its 1.5 million "seriously delinquent" borrowers. Jamie Dimon, who heads rival mortgage lender JPMorgan Chase (JPM), said federal initiatives have simply delayed the inevitable for many borrowers.

"We have been writing off foreclosures that are delayed because of HAMP," said Dimon, referring to the government's Home Affordable Modification Program. While the initiative has "reduced [foreclosures] a little bit," he added, "we think it is going to go back up to where it was."

The federal government has been attacking the mortgage crisis on several fronts -- targeting an interest rate of zero; extending $75 billion in workout-plan incentives; funneling special money to the "hardest hit" states; and encouraging more "dignified" means of exiting unsustainable mortgage debt -- such as short sales or deed-in-lieu transactions -- since a foreclosure moratorium was lifted earlier this year.

But while homes have become more affordable and more available than ever before, only a select group of borrowers have benefited from the enormous amount of federal spending.

Banks have been targeting affluent borrowers for new loan originations, while low funding costs have helped pad their bottom lines. Meanwhile, the troubled borrowers targeted by the rescue initiatives have become a cost burden that the industry can't shake and the government can't seem to help.

Moynihan described the mortgage business as "a tale of two areas."

Bank of America has hired over 20,000 associates, as well as outside contractors, at a great expense to manage through the rest of its troubled mortgage debt. The bank is largely grappling with troubles from vintage loans originated by Countrywide in 2005 to 2007. Moynihan said that that BofA has made progress on working through a tidal wave of modification requests and customer complaints, but predicted more pain ahead.

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