Even after help, homeowners fall behind

WASHINGTON -- One of the biggest challenges to ending the foreclosure crisis is this: A surprising number of homeowners who get their monthly payments reduced fall behind again within a year.

When borrowers get into financial trouble, lenders have several ways to help. They can offer grace periods, longer repayment schedules, lower interest rates or reduced balances.

But nearly 40 percent of homeowners who had their monthly payments cut by 20 percent or more last year were delinquent again within a year, a report Monday from the Office of the Comptroller of the Currency and the Office of Thrift Supervision shows.

With the economy still weak and employers continuing to cut jobs, "even if you've gone through a modification, your situation may deteriorate," said Fred Phillips-Patrick, the thrift office's credit policy director.

That's an ominous sign for the Obama administration's plan to stem the foreclosure crisis. Lenders participating in the program have offered trial loan modifications to 760,000 eligible borrowers since it was launched in March. As of last month, just 31,000 of them had been made permanent, which requires at least three on-time payments and proof of income. Nearly the same number had dropped out of the program or were found to be ineligible.

The meager success rate means the $75 billion program may bring little relief to struggling homeowners. A record 14 percent of homeowners with a mortgage are either behind on their payments or in foreclosure. And that affects many more homeowners because deeply discounted foreclosures are hurting property values in many parts of the country, especially Arizona, California, Florida and Nevada.

Mandy Peacock of AAA Home Rescuers, a private loan modification service in Las Vegas, said part of the problem is a lack of formal prequalification. President Barack Obama's goal was to save 375,000 homeowners from foreclosure through the Home Affordable Mortgage Program, but there's also the potential that those homeowners won't meet requirements and will go back into foreclosure, she said.

"There's a lot of misinformation out there and lack of guidance," Peacock said. "Part of it is there needs to be some professional support for homeowners to get a (financial) package together and presented in a smooth and complete manner. Second, banks give out confusing information. Banks are not communicating clearly with people. There's a never-ending trail of paperwork."

But regulators on Monday pointed to encouraging signs among loans modified from April through June of this year.

About 20 percent of those borrowers had missed at least two out of three payments. That's far better than the track record of loans modified during the same three months a year earlier. About 35 percent of those borrowers were delinquent within three months.

The report also found that lenders completed about 31,000 short sales -- ones in which the sales price is lower than the mortgage balance -- in the July-September quarter. Although that's up 22 percent from the prior quarter, lenders foreclosed on nearly four times as many homes.

Sen. Harry Reid, D-Nev., on Friday sent a letter to Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan, urging them to focus on the problem of negative equity to help thousands of Nevadans who owe more than their homes are worth.

Simply lowering interest rates or deferring mortgage payments won't stop people from walking away when they're $200,000 to $300,000 upside-down on their homes. Reid is requesting a more aggressive principal forgiveness component to Obama's program.

"As we continue to help stem the tide of foreclosures, mortgage servicers must focus on addressing negative equity when modifying mortgages," he said.

Review-Journal writer Hubble Smith contributed to this report.