More homeowners quitting federal loan aid program

By Alan Zibel
Associated Press / May 18, 2010

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WASHINGTON — The number of homeowners dropping out of the Obama administration’s main mortgage assistance plan is growing and is now almost equal to the number who have received permanent relief — the latest evidence of problems in the $75 billion program.

While officials say the program is helping the housing market turn around, critics say it is merely delaying an inevitable surge in foreclosures.

More than 299,000 homeowners had received permanent loan modifications as of last month, the Treasury Department said. That’s about 25 percent of the 1.2 million who started the program since March 2009. They pay, on average, $516 less each month.

The number who started the process but failed to get modifications rose dramatically in April, however. To complete the program, borrowers must make at least three payments on time. About 277,000, or 23 percent, dropped out during this trial phase, up from 155,000 a month earlier, a 79 percent increase.

Many borrowers are stuck in limbo.

The Treasury acknowledge that delays have been a problem. “Homeowners are waiting. We want them to get answers as rapidly as possible,’’ said Herbert Allison, a Treasury official.

The program is designed to lower borrowers’ monthly payments by reducing mortgage rates to as low as 2 percent and extending loan terms.

But there have been problems from the start. One of the big ones: Initially, many of the participating banks allowed borrowers to state their income verbally and provide proof of their income later. That jammed up the system as many borrowers didn’t provide a complete set of documents, and some complained that their information was lost.

Treasury officials have directed lenders to shift to a new system. Starting with loan modifications that go into effect June 1, they are required to collect two recent pay stubs at the start of the process.