A year later, reality sets in on loan-modification plan

February 18, 2010 at 12:00a.m.

WASHINGTON (AP) — The new president climbed aboard Air Force One a year ago for a trip to Phoenix to reveal his strategy for attacking the housing crisis. It was a signal moment in the buoyant early days of Barack Obama’s administration.

The plan, Obama told a cheering audience of high school students, would keep as many as 9 million people in their homes by lowering their monthly mortgage payments. The program wouldn’t save every home, Obama cautioned, but few people paid attention. Not with Treasury Secretary Timothy Geithner saying things such as, “You’ll start to see the effects quite quickly.”

Ambition, though, got far ahead of reality.

The numbers show a program that failed to deliver. About 116,000 homeowners have had their loans modified to reduce their monthly payments, or about 12 percent of those who signed up, the Treasury Department said Wednesday. Only about $15 million in incentive money has been paid to more than 100 participating mortgage companies — a tiny fraction of the $75 billion available (that’s 0.02 percent).

Interviews with officials in the Obama and Bush administrations, bank executives and housing experts show the government launched the effort without thinking through many of the details of such a complex program. Banks were ill-prepared, as well. To implement the program, it took months to hire and train thousands of new workers — many of whom had no previous experience in the mortgage industry.

At the same time, hundreds of thousands of foreclosed homes will hit the market this year, depressing prices even more.

“Realistically, we still have massive problems. When exactly are we going to deal with it?” said Christopher Thornberg, a Los Angeles economist who long warned that the housing bubble would burst.

No one is quite sure. An increasing number of people are opting to walk away from mortgages because they owe more on their mortgages than their homes are worth. That could cause home prices, which stabilized last year, to sink again.

Obama’s plan had two main strategies: The government would channel $75 billion to banks to prod them into modifying the terms of mortgages for up to 4 million borrowers by the end of 2012. It also would relax rules to let up to 5 million home- owners refinance at lower rates.

Under the modification plan, borrowers can get their mortgage rates reduced to as low as 2 percent for five years and have the term of their loan extended to as long as 40 years. Borrowers must make three payments on time before the modification becomes permanent.

Since the program started in March:

U1 million people have entered the modification program, and almost 12 percent, or 116,000, have completed the process.

UA third of homeowners who made the three monthly trial payments on time have fallen behind.

UMore than 61,000 homeowners have dropped out, and hundreds of thousands more are expected to do so in the coming months.

UAbout 220,000 homeowners whose homes have plummeted in value have refinanced.