Loan Modification Program Inadequate, Report Says

Current government programs to help homeowners keep their homes are inadequate to address a coming wave of foreclosures and will only delay foreclosure for many, according to a new report from the bipartisan Congressional Oversight Panel.

Current government programs to help homeowners keep their homes are inadequate to address a coming wave of foreclosures and will only delay foreclosure for many, according to a new report from the bipartisan Congressional Oversight Panel.

The report, which assesses the effectiveness of the administration's Making Home Affordable Program, says that the program is not set up to address some of the major factors that are expected to drive foreclosures in coming months, including scheduled resets on payment option adjustable rate mortgages and interest-only mortgages, and rising unemployment rates, which the report says appears to be one of the biggest factors driving foreclosures.

The report, released on Friday, came out one day after the Treasury Department announced that the Making Home Affordable Program had reached a major milestone one month early, achieving a level of 500,000 trial loan modifications begun by the first of October. However, the report notes that even if the program achieves its goal of modifying 3-4 million mortgages, that will be less than half of the estimated 10-12 million foreclosures predicted to result from the current financial crisis.

The report did say that the benefits of the $42.5 billion foreclosure modification program are likely to outweigh the costs to taxpayers, however. An estimated one mortgage in eight is current in default or foreclosure, according to the report.

Cites concerns with scope, scale and permanence

The report cited three major concerns with the administration's foreclosure avoidance program as it currently stands. First, it said the scope of the program is too narrow, appearing to address the foreclosure problem as it stood six months ago instead of today, noting in particular rising problems with unemployment and mortgage resets the program was not designed to address.

Second, the report says that the scale of the program is inadequate to address the current foreclosure crisis, noting that foreclosure starts are outpacing loan modifications under the program by a 2-1 ratio. It questions whether the program will be able to slow down the foreclosure crisis and moderate its impact on the economy even if it manages to achieve its targets for loan modifications.

Third, the report questions the permanence of the solutions offered under the program, questioning whether the loan modifications will put homeowners into a long-term stable situation. It notes that for most homeowners, their loan modifications will expire after five years, after which their payments will rise. It also points out that reducing mortgage payments for many homeowners will actually result in greater negative equity, which has been associated with increased rates of default.

The bipartisan Congressional Oversight Panel was created to oversee the expenditure of the Troubled Asset Relief Program (TARP) funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 (EESA).