Backlog of Trial Loan Modifications Shrinks

By:: Kirk Haverkamp | July 21, 2010

The government’s Making Home Affordable anti-foreclosure program is either picking up the pace or losing steam, depending on which end of the process you’re looking at.

More than 50,000 homeowners were approved for long-term mortgage assistance in June, bringing the total to nearly 400,000 since the program began, the Treasury Department reported today. At the same time, another 90,000 were determined not to qualify and exited the program, as lenders worked through a backlog of borrowers in the program’s trial phase.

Few new borrowers coming in

Meanwhile, the number of new borrowers coming into the program has slowed to nearly a trickle. Fewer than 22,000 borrowers were extended offers for trial loan modifications in June, far below the more than 100,000 a month that were begun throughout the second half of 2009.

Under the program, homeowners must successfully complete a three-month trial modification before they can be approved for a long-term modification that will lower their mortgage payments for at least five years.

The figures were reported by the Treasury Department in its monthly Housing Scorecard and report on the Making Home Affordable Program, both of which were released today.

More rejected than approved for permanent loan modifications

To date, more borrowers have been denied long-term assistance under the program than have been approved. Over 520,000 trial loan modifications have been cancelled, including the 90,000 this month. Only 364,000 borrowers remain in active trial modifications.

For the more than half a million whose trial modifications were cancelled, that hasn’t necessarily been the end of the road. Many are being approved for alternate modifications with their loan servicer, often through the Hope Now alliance of mortgage companies and HUD-certified counseling agencies.

Many rejected are offered alternative modifications

Figures compiled through May showed that 45 percent of borrowers who were turned down for permanent modifications and whose loans were handled by the eight largest mortgage servicers were approved for alternate modifications, with another 30 percent awaiting action. Those eight servicers accounted for about 80 percent of all cancelled trial modifications under Making Home Affordable.

Part of the delay in clearing out the backlog of trial modifications has been that servicers have been arranging alternate modifications for borrowers who were not going to be able to qualify for permanent modifications, according to Phyllis Caldwell, chief of the Treasury Home Preservation Office, said.

“Some servicers are offer alternative modifications at the time of cancellation, rather than canceling outright,” Caldwell said, speaking during a conference call with reporters discussing the report.

Other officials said the declining number of new trial modifications offered through Making Home Affordable is due in part to tighter requirements for upfront documentation at the front end of the process.

Anti-foreclosure efforts called successful

Treasury officials say the administration’s efforts to promote loan modifications as an alternative to foreclosure for at-risk homeowners have been generally successful, pointing to 3 million modifications performed since the Making Home Affordable Program was launched in April 2009, including those performed through Hope Now and the FHA’s Loss Mitigation Program. By comparison, they say only 1.25 million homes have been lost to completed foreclosures during that time.

However, many industry observers believe that many of those homeowners will eventually find their way into foreclosure, and that the loan modification efforts of the administration and mortgage industry are only postponing the problem. RealtyTrac, a leading analyst of foreclosure data, recently predicted that 1 million U.S. homes will lost to foreclosure in 2010, and that 3 million homes will be subject to some type of foreclosure action during the year.

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