Loan Modification Program Proves to be Ineffective

The Obama administration’s Home Affordable Modifications program, under which distressed homeowners are being helped by modifying their mortgage loans so that they can avoid foreclosure, is likely to prove ineffective.

The latest statistics released by the Treasury Department and the Housing and Urban Development Department show that the number of borrowers who are defaulting on modified mortgage loans is quite high. Last month, the number of ‘cancelled’ loans doubled and reached close to 3,000 from around 1,500 in February. An even larger number have not been making their mortgage payments on time.

Many of these loans have become delinquent because of the borrower being unable to pay even after more favorable terms being given under the modified loan. These figures cast a serious doubt on the effectiveness of the loan modification program.

The Congressional Oversight Panel recently released a report in which it stated that very few of the trial modifications will get the nod of the parties for becoming permanent modifications. Even with the terms being modified for five years, many of the borrowers will continue to face the threat of foreclosure, as they will be unable to pay despite modifications. Therefore, the plan is not expected to be successful in its goal of preventing millions of foreclosures.

However, the Treasury has strongly defended the program by pointing out that the number of permanent modifications increased by more than one-third last month and many more modifications are awaiting approval of the borrower. In comparison to the total number of modifications made, the percentage of default is very low. The Secretary for Housing and Urban Development, Shaun Donovan, said that some defaults are inevitable in the current economic scenario, but overall the program has yielded good results.

With conflicting views from the two sides, the program can best be described as having only modest success. The program is expanding with new initiatives being introduced, such as allowing distressed homeowners to sell their properties for an amount lesser than that of the balance mortgage amount and reductions in the principal amount. But the effectiveness of these new initiatives might also be quite low, as many banks have already said that they would not agree to principal amount reductions.

The number of people entering trial modifications is also falling, which shows that the program is already slowing down. This should worry the administration, which had high hopes from the program.

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