WASHINGTON — President Barack Obama’s plan to fix the foreclosure crisis has been a dud, putting the housing market recovery at risk.
Hopes were overinflated when Obama unveiled the program before an audience of Arizona high school students in February.
Almost a year later, it appears about 750,000 homeowners — a fraction of the 3 million to 4 million projected — might complete the application process, predicts Mark Zandi, chief economist at Moody’s .
The more borrowers who can’t be helped, the more foreclosed properties will flood the market. And that means the nation’s housing market, which strengthened last summer, could soon take another turn for the worse.
A record 2.8 million households were threatened with foreclosure last year, up more than 20 percent from a year earlier, RealtyTrac Inc. reported this week. The foreclosure listing firm expects another record this year.
Home prices, meanwhile, are down 30 percent nationally from the peak in mid-2006, and there is mounting evidence they will fall again over the winter as low-priced foreclosures make up a larger proportion of sales.
“It’s a very serious threat to the housing market, and still one of the most significant risks to the broader recovery,” Zandi said.
The Obama plan aims to help borrowers in financial trouble by making their payments more affordable. Modifications made under the program include a lower interest rate and often a longer repayment period. On average, the monthly payment has been cut by $500.
The homeowners receive temporary modifications, which are supposed to become permanent after borrowers make three payments on time and complete the required paperwork, including proof of income and a letter explaining the reason for their troubles.
However, just 66,500 borrowers, or 7 percent of those who signed up, had completed the program as of December, the Treasury Department said Friday.
Another 49,000, or more than 5 percent, have dropped out of the program entirely — either because they missed payments or were found to be ineligible. Thousands more remain in limbo awaiting an answer.
There’s blame on both sides: Mortgage companies say they have struggled to get back the necessary paperwork, while homeowners and housing counselors say navigating the bureaucratic maze often seems impossible.
But the 102 participating companies are getting wildly different results. While a handful of mortgage companies are “very good at it,” said Michael van Zalingen, director of homeownership services at Neighborhood Housing Services of Chicago, “some either don’t care or can’t figure it out.” The biggest company in the program, Bank of America, has completed modifications for fewer than 2 percent of the 200,000 borrowers it has enrolled.
Another major difficulty is that the program is failing to keep up with soaring job losses. Unemployment, now at 10 percent, is expected to remain elevated all year.
That’s a problem for homeowners like Cindy Rose, 52, of Murietta, Calif. She and her husband have seen their painting business drained by the recession. So they went to their mortgage company, Litton Loan Servicing Inc., for help. In August, they were approved on a trial basis for the Obama plan. The couple’s new payment was about $1,700 a month, down from about $2,650. But a few weeks later, they got a confusing letter in the mail explaining several potential reasons for their rejection.
A Litton spokeswoman declined to comment on the Rose family’s case but said the company “is following the program’s guidelines.”
The couple have since filed for bankruptcy and staved off foreclosure so far. But Rose fears she and her husband, who recently was diagnosed with lung cancer, soon will lose their home of 13 years.
