WASHINGTON — Only about 10,000 homeowners received permanent loan modifications this fall under the Obama administration's mortgage relief plan, more evidence of serious failings in the government's effort to stem the foreclosure crisis.
A watchdog report Wednesday spotlighted the limited success lenders are having in getting borrowers through a trial period lasting up to five months. The biggest challenge: Only one in three homeowners who have signed up for the administration's program have sent back the necessary paperwork.
Elizabeth Warren, chair of the watchdog panel, said the program is "not working" and that it had failed to make a dent in the record level of foreclosures. More than 14 percent of homeowners with a mortgage are either late on their payments or in foreclosure, and that number is expected to keep rising as unemployment remains stubbornly high.
The Treasury Department is expected to release updated figures today, but data through October showed that less than 5 percent of homeowners who completed the trial periods had their mortgage payments permanently lowered to more affordable levels. Worse still, Treasury expects as many as 40 percent of those borrowers to default again within five years.
Under the program, eligible borrowers who are behind or at risk of default can have their mortgage interest rate reduced to as low as 2 percent for five years. They are given 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 financial hardship letter.
The report said the government effort "appears capable of preventing only a fraction of foreclosures" and said that only $2.3 million out of a potential $75 billion government commitment had been spent.
Much of the criticism for the disappointing results is being leveled at banks, many of which received billions in taxpayer bailout dollars. Calls are growing louder on Capitol Hill for the Obama administration to take a tougher approach.
"Somebody needs to define for them what success is, and it's not what's happening," said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer group in Washington. He advocates that the Treasury Department should buy up mortgages directly and restructure them, rather than relying on the industry to do the job.
Housing counselors say mortgage companies have frequently lost paperwork and offered little explanation for denying borrower applications.
Critics say the government erred by making the program voluntary for the lending industry.
But mortgage industry executives say homeowners simply are not complying with the program's requirements, despite their best efforts to reach out.