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Rising US Foreclosures Dim Outlook For Loan Modifications

By Jessica Holzer, Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- U.S. officials on Wednesday are set to defend their effort to help borrowers obtain loan modifications amid rising concerns that the government program is no match for the relentless pace of foreclosures.

Mortgage servicers have had trouble coping with the surge in applications from strapped borrowers and have complained of the program's complexity.

Now, rising job losses are placing loan modifications out of reach for more and more households and pushing other borrowers who may have received loan modifications into re-default.

"I think the program probably will be overwhelmed by the magnitude of the problem," Mark Zandi, Moody's Economy.com chief economist, said.

"It's like using a small cup to remove water from the Titanic," Alys Cohen, a National Consumer Law Center staff attorney, said. The administration, with its recent badgering of mortgage servicers to improve their performance in the program, has "switched from cups to buckets," she added.

The Treasury is set to release its second monthly report card on servicer performance in the program early Wednesday. Later, top U.S. Treasury and Department of Housing and Urban Development officials will defend the program before a U.S. House Subcommittee.

Launched in April, the program provides hefty financial incentives for servicers, borrowers and mortgage investors who agree to loan modifications that meet certain standards. The modified loan must complete a three-month trial period before it is finalized.

The administration aims to offer three to four million homeowners a government loan modification within three years, and officials insist they are on track to meet that goal.

Still, about 4.6 million people will nevertheless lose their homes by the end of next year, Moody's Economy.com predicts, helping to bring the total carnage of the housing bust to 9 million homes lost by the end of 2011.

Some people who are offered loan modifications may not accept them due to confusion about the documents they must sign, Brian Dorpalen, national housing director for the Association of Community Organizations for Reform Now, or Acorn, said. Of those who do sign up for the program, a portion won't survive the trial period or will re-default later down the road.

Housing advocates are pushing the administration to hold servicers' feet to the fire. In direct contravention of the program's rules, servicers are continuing foreclosure proceedings against borrowers who are still under review for a government modification, Dorpalen said.

The administration should require participating servicers to take steps where possible to help borrowers where a loan modification is possible, Cohen argued. Under the current program, "people don't have a clearly-articulated right to obtain one," she said.

David Sisko, a director at Deloitte who advises mortgage servicers, said he expects foreclosures to continue to soar as job losses make it more difficult for servicers to modify loans. The industry is "trying to turn lemons into lemonade," he said.

Lawmakers on Wednesday are likely to press officials on ways they can help people who have lost their jobs stay in their homes. At a recent Senate hearing, a senior HUD official said the administration was exploring ways to help such people.

Moody's Economy.com's Zandi said the administration could consider expanding unemployment insurance to cover mortgage payments. It could also adjust its loan-modification program to make it easier for borrowers to receive loan principal reductions subsidized by the government.

Zandi noted the administration has already set aside $75 billion for foreclosure prevention. "If it's no going to work, take the money and try something else," he said.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@ dowjones.com

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