Permanent loan mods inch forward as Obama plan draws fire

Permanently modified home loans under the Obama administration's anti-foreclosure program rose by 4% to about 467,000 in September, according to a government report. But a watchdog said the program had dashed the hopes of many participating borrowers who wound up worse off.

The plan was aimed at lowering mortgage payments to keep millions of distressed borrowers in their homes, using funds from the $700-billion bank bailout program to reward lenders and borrowers for reaching permanent modification agreements. But it has proved less than a robust success.

Of the 1.37 million trial modifications started as of Sept. 30, about 700,000, or 51%, have washed out, the government reported Monday. And roughly 28,000 of about 495,000 so-called permanent modifications have been canceled as well.

What's more, many borrowers participating in the program complain that they are strung along for months by promises of permanent modifications that never come true. Some of these have sued lenders, as this Times story reports.

In a more than 300-page reportMonday, Neil Barofsky, the special inspector general for the bank bailout, described how borrowers had been offered hope in vain.

He said some borrowers have depleted their savings unnecessarily in trying to hang on to their homes. Others have been socked with huge fees and demands for back interest after having permanent modifications denied, he said, while others wind up with battered credit scores and less home equity.

Barofsky said that two other government programs to support housing had proved disappointing as well.

Only 342 households have benefited from a program that pays banks incentives for short sales -- the deals where the borrower satisfies the mortgage dent by selling the home for less than the mortgage amount, Barofsky said. And only 21 homeowners have received help in paying down second mortgages.

Tim Massad, an administration official spearheading the housing stabilization programs, defended them by saying the government has "redefined the loan modification standard for the mortgage industry overall." That has led to more than 3.5 million modifications under its program and others, Massad said.

One eye-catching fact from the loan-modification report: No. 1 mortgage customer-service provider Bank of America Corp. saw the number of its mortgages in permanent modifications actually fall, reporting about 79,000 such loans compared to 78,000 at the end of August.

In totaling up permanent modifications, the government is backing out borrowers who fall 90 days delinquent after receiving permanent modifications, plus the few who manage to sell their homes and any whose loans are moved to another servicer.

Spokesman Rick Simon said the decline in permanent modifications at BofA was artificial, caused by a change in internal procedures that held up the reporting of several thousand loans to the Treasury Department.

"We think we'll be back on the plus side going forward," Simon said. But he added that the trend would be toward "fewer gains" at BofA and the entire mortgage industry as the weak economy and job losses drag some borrowers back into delinquency even after their payments are lowered.

The other major mortgage customer-service providers -- Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc., and GMAC Mortgage -- saw small increases in their number of permanently modified loans.

The banks say they are changing loan terms under their own in-house programs when borrowers can't qualify for modifications under the government 's Home Affordable Modification Program.

Bank of America, for example, said it has completed 700,000 mortgage modifications since January 2008, mostly to loans it acquired as part of its takeover of Calabasas' Countrywide Financial Corp. Of those, about 85,000 were completed as part of the Home Affordable Modification Program.

In an October 2008 settlement with California and other states, Bank of America agreed to reduce loan payments by billions of dollars to Countrywide borrowers who had subprime and pay-option mortgages.

The feds rolled out their loan-modification program the following spring.

--E. Scott Reckard