GAO: More Homeowners Have Been Cancelled Out of Obama’s Homeowners Program than Obtained Permanent Loan Modifcations

By Edwin Mora | January 18, 2011 | 6:30 AM EST

In this Sept. 18, 2010 photo, a "new price" sign has been added to a realtor's sign at a home in Glendale, Calif. Home prices rose in July for the fourth straight month, but many cities are bracing for declines in the year ahead. (AP Photo/Reed Saxon)

( –  Under President Obama’s program intended to help struggling homeowners avoid losing their property, more borrowers have had their trial reduced payment loans cancelled than have received permanent modifications, according to the Government Accountability Office (GAO).

In February 2009, the Treasury Department announced that by modifying troubled home  mortgages – i.e., reducing the monthly mortgage payments to 31 percent of their gross monthly income -- the Home Affordable Modification Program (HAMP) would help 3- to 4-million homeowners who were experiencing trouble paying off their home loans.

Almost two years later, HAMP, which offers assistance to homeowners through a cost-sharing arrangement with mortgage holders and investors to reduce to affordable levels the monthly mortgage payment amounts of those at risk of foreclosure, is facing tough challenges.

“The program had a slow start and has not performed as anticipated,” the GAO report noted, adding that “despite program changes that are intended to increase the number of mortgage loan modifications made under HAMP, more borrowers have had their trial modifications canceled than have received permanent modifications.”

From the beginning of the federal program in April 2009 through November 2010, 1.4 million loan modifications had been made under HAMP on a trial basis, the GAO said. However, of those, 729,000 trial loan payment reductions were cancelled. Fewer than 550,000 were converted to permanently modified loans.

“The number of new permanent modifications started each month increased from roughly 36,000 in December 2009 to more than 68,000 in April 2010 and then decreased to about 31,000 in November 2010,” stated GAO.

To be eligible to receive a permanent loan modification, a loan must cover a “single-family dwelling, owner-occupied, [and] primary residence” and the borrower must “successfully complete a 3-month trial modification period” and make mortgage payments on time.   

Trial home loan modifications started under the program peaked in October 2009, a few months after the program’s inception, but declined thereafter.

“Trial modifications started each month peaked in October 2009 and then declined from roughly 118,000 new trials in December 2009 to about 31,000 new trials in November 2010,” GAO stated.

Treasury attributed the decline in trial modifications, in part, to new program requirements that began on June 1, 2010. From that day forward, lenders were required to establish HAMP eligibility by “using verified information rather than the verbal financial information that was initially accepted for all HAMP trial periods,” the report noted.  

Moreover, the GAO pointed out that despite HAMP, national data on default and foreclosure rates shows that many homeowners continue to struggle with making their mortgage payments.

“As of June 2010, an estimated 4.6 percent of all mortgages nationwide were in some stage of foreclosure,” stated the GAO. “Default rates (loans 90 days or more past due) in the second quarter of 2010 were still more than five times higher than they were at the start of 2005, increasing from less than 1 percent to roughly 4.5 percent of all mortgages.”

“Foreclosure starts grew from about 0.4 percent to about 1.1 percent during this period, meaning roughly 490,000 mortgages entered the foreclosure process in the second quarter of 2010, compared with about 165,000 in the first quarter of 2005,” added the GAO. “Finally, as of the end of the second quarter of 2010, loans in the foreclosure inventory have increased more than three times since the first quarter of 2005, to more than 2 million loans.”

Treasury instituted HAMP in April 2009, authorizing the program to use up to $75 billion-- including $50 billion in Troubled Assets Relief Program (TARP) funds and $25 billion provided by government-owned Fannie Mae and Freddie Mac. So far, approximately $500 million have been disbursed under HAMP.

Though HAMP has not met expectations, the GAO pointed out that in March 2010, Treasury announced the creation of four additional TARP-funded homeowner assistance programs “in an effort to reach a broader range of borrowers, including those who are unemployed or have mortgages with high loan-to-value ratios,” according to GAO.

“The newly announced programs have had very limited activity to date and Treasury continues to face challenges in expeditiously implementing a prudent design for these programs, as GAO recommended in a June 2010 report,” the report noted.

A closely watched index shows home prices tumbling by the sharpest annual rate ever in July, but the rate of decline is slowing.

As of Sept. 30, 2010, $543 million in unrecoverable in funds had been disbursed for TARP housing programs, according to the GAO, including the estimated $500 million disbursed for HAMP, the Treasury’s primary homeowner assistance program.   

It is not known how many borrowers have been – or will be -- helped under the additional housing programs to GAO.

TARP, which was created under President Bush in 2008, gave the U.S. Department of the Treasury the authority to purchase or guarantee “troubled assets” -- mortgages and mortgage-backed securities, that were “deemed to be at the heart of the [financial] crisis, along with any other financial instrument Treasury determined that it needed to purchase to help stabilize the financial system,” noted the GAO.

However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), signed into law on July 21, 2010, set a new spending ceiling for TARP, in effect prohibiting Treasury from incurring any additional obligations, the GAO noted.