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Mortgage Mayhem: Homeowners Stranded

The government's Home Affordable Modification Program's mission is to offer mortgage modifications, but banks have found ways to work around it, leaving many borrowers vulnerable to scams.

Editor's note: This is the first part of a series examining the government's "Making Home Affordable" program and the struggles of homeowners seeking a mortgage-rate modification. Check back Thursday for the second installment.



) -- A year and a half after the Obama administration unveiled a sweeping rescue plan for homeowners, surprisingly few have been rescued.

The $275 billion

"Making Home Affordable" program

had the potential to reach up to 9 million troubled homeowners, according to initial estimates. Instead, paperwork delays, confusion over eligibility requirements and hesitance of banks to participate has left millions out in the cold.

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  • Just 24% of borrowers eligible for a federal mortgage-modification program have received permanent mortgage modifications. While 1.6 million homeowners were eligible as of the last report, more than half a million had abandoned the program, seeking other solutions or falling victim to the housing market's collapse.
  • Since its inception in February 2009, nearly 6 million homes have received foreclosure filings, according to RealtyTrac -- despite a foreclosure-moratorium that predated the program and lasted through March.
  • In desperation, homeowners have handed millions of dollars to shysters promising fast-track solutions. No less than five federal agencies and attorneys general in more than 30 states have taken action against thousands of such individuals. Yet the government response has been uncoordinated and unhelpful to those who most need assistance.
  • The banking industry has taken a woefully long time to help its customers. Yet solutions implemented by the industry have been more effective than the government's: 89% of homeowners who have gotten permanent modifications have done so through banks' proprietary programs.

The complexity and haphazardness of the mortgage-modification process has already frustrated millions of homeowners across the country. The backlog of homeowners requiring assistance has climbed as unemployment remains stubbornly high. False starts have threatened the progress of an economic recovery that now appears to be dangling by a thread.

Uncle Sam's Promises

President Obama unveiled the

"Making Home Affordable" program in February 2009 as a solution to a mortgage crisis that had clearly spiraled out of control.

"While this crisis is vast," said Obama, "it begins just one house and one family at a time."

Despite that simple pledge, the president's program has been plagued by difficulties and complaints from homeowners and mortgage servicers alike. It got off to a rocky start and performance has lagged ever since.

The most recent report, for June 2010, shows the number of eligible borrowers to be far shy of the administration's initial targets. Just 1.6 million borrowers now qualify for the most high-profile prong of the broader federal program, called the Home Affordable Modification Program, or HAMP. Others have been excluded because properties are vacant, or because owners earn too much money, don't owe enough money or haven't seen home values plunge far enough.

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To hear Treasury spokeswoman Andrea Risotto discuss difficulties in implementing the program, click the audio button below.


An early problem with the administration's solution to the country's housing woes is obvious in hindsight: The industry was simply unprepared for the huge wave of refinancing requests it was about to face. Banks had shucked their employee ranks, particularly in battered mortgage divisions. It took months to drum up the manpower necessary to answer phones, send out paperwork and process requests.

Furthermore, the industry had been accustomed to handling delinquent borrowers through collections agencies, not in-house loss-mitigation divisions. This strategy shift took time to implement at the handful of giant mortgage servicers that hold a large concentration of the country's mortgage debt.

Meanwhile, the government was unclear about requirements and didn't cast a wide enough net to help the neediest borrowers. Just a month after its bombastic inauguration, the "Making Home Affordable" program was already

being restructured. Fannie and Freddie then altered their standards and created

technology platforms to help move things along. Then the program itself was

modified once again in March, amid continued criticism.

Even with the changes, banks have been unwilling or unable to cure many troubled loans using the government's prescription. The Treasury Department eventually attempted to shame banks into helping more homeowners by detailing their individual statistics in monthly reports, beginning in June 2009.

Most recently, the administration added a program called Home Affordable Foreclosure Alternatives, which advocates short sales and deed-in-lieu transactions as last-ditch tactics to avoid foreclosure, as well as a second-lien modification program, an unemployed homeowner assistance program and a "Hardest Hit Fund," which aims to provide billions of dollars in aid for the most economically depressed states.

"There isn't one solution for every household in America," says Andrea Risotto, a Treasury Department spokeswoman who focuses on the housing programs. "To an extent, that's what's made it an operational challenge for the government and for servicers, but why we keep trying to expand the options that are available for homeowners so we can find the best solution for each family."


To hear more from Risotto on additions to the Home Affordable Modification Program, click the audio button below


Still, the early limitations of "Making Home Affordable" made it unworkable for many borrowers seeking assistance.

Fewer than 390,000 homeowners are now in permanent modifications through the Home Affordable Modification Program. Meanwhile, nearly 530,000 participants have canceled modifications and nearly 6 million homes have received foreclosure notices since the program's inception.

The Obama administration aimed $75 billion at this part of the program, but it has largely been a failure. Those funds were to be used to incentivize banks into modifying mortgages for "at-risk" borrowers. Participating servicers are now eligible to reel in far less - $28.7 billion, as of the most recent report - only after borrowers are placed in permanent modifications. The country's biggest servicers,

Bank of America

(BAC) - Get Bank of America Corporation Report


Wells Fargo

(WFC) - Get Wells Fargo & Company Report


JPMorgan Chase

(JPM) - Get JP Morgan Chase & Co. Report



(C) - Get Citigroup Inc. Report

, stand to receive the most money from the program but

haven't been capitalizing on the opportunity much.

There are also indications that funds may have been improperly disbursed. Rep. Spencer Bachus (R-Ala.) proposed a hearing on the topic last week, following allegations from a former

Fannie Mae


employee who said Fannie had pushed people into workouts improperly to receive funds.

On the other hand, some parts of the program have had success. Short sales and deed-in-lieu transactions have climbed

at a break-neck pace. The $200 billion devoted to purchasing securities from Fannie Mae and

Freddie Mac


has also helped push down mortgage rates tremendously. Traditional 30-year fixed mortgages touched yet another record low of 4.44% in early August.

But low rates do little good for the big backlog of people who

can't take advantage of them -- held back by paperwork delays, servicer intransigence and an economic situation that isn't pretty. Unemployment remains high, consumer confidence is weak and small-business optimism is at historic lows.

For many Americans, refinancing dangles like a low-hanging fruit just out of reach.

"We see a huge disconnect between the health of Wall St. vs. Main St," says Matthew Tuttle, a financial adviser who runs a wealth-management firm in White Plains, N.Y. "The 0% interest rates have helped banks and brokerage firms increase profitability ... but the real economy is still mired in a recession."

Or, as Jack Reutemann, a financial adviser who heads Research Financial Strategies, puts it: "Where's the bailout for Joe the Plumber?"


Written by Lauren Tara LaCapra in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.