The Loan Modification Program - Six Months Later

The federal government's Making Home Affordable (MHA) program helps people facing foreclosures. It has two primary programs: the Home Affordable Refinance Program (HARP), designed to help homeowners who are current on their mortgage payments but owe more than their homes are worth, and the Home Affordable Modification Program (HAMP), designed to reduce monthly mortgage payments so homeowners can still keep their homes.

MHA started in March, and as of Sept. 1, 2009, the loan modification program has helped many Americans who are facing foreclosures. In fact, the U.S. Department of Housing and Urban Development, which runs the program, has set a goal of having 500,000 modifications under way by Nov. 1. On Oct. 1, the Treasury Department proudly announced that it has reached a total of 500,000 trial modifications-one month earlier than the initial target. Despite this success, however, many are still in danger of losing their homes.

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According to the October oversight report released by the Congressional Oversight Panel, which is tasked to review the current state of the markets and regulatory system, foreclosure rates have now quadrupled. One in eight mortgages faces foreclosure or default. Experts estimate that before the housing crisis is over, Americans could be facing ten to twelve million foreclosures.

The report, titled, "An Assessment of Foreclosure Mitigation Efforts after Six Months," discusses the effectiveness of the program and the reasons many are still not able to lower their monthly mortgage payments. The panel expresses concern over the program's scope, scale, and permanence:

1. Scope

The program's scope is very limited. Not all kinds of borrowers can take advantage of it. For instance, the program can be very helpful to subprime borrowers who are paying a high interest rate. However, it is not designed to address foreclosures such as those caused by unemployment. Today's unemployment rate continues to rise, and it is now considered to be one of the major causes of foreclosures. The program appears to be addressing the housing market as it existed six months ago instead of today.

2. Scale

In August, over 220,000 mortgages entered into foreclosure, but the government began preliminary modification on only 95,000 mortgages. Foreclosures continue to rise every day, and there is reason for concern whether the government can keep up. The number of foreclosures is greater than the number of loan modifications-a 2-1 ratio. The scale of the program seems not broad enough to address the current foreclosure crisis.

3. Permanence

The solutions offered under the loan modification program do not seem to help homeowners achieve long-term financial stability. The loan modification will lower the monthly payments of many borrowers, but after five years payments will rise. Even if a borrower's loan will be modified today, there is still a possibility that he will face the same mortgage problem in the future. Loan modifications also increase a borrower's negative equity (owing more on the house than it's worth), which is also said to be one of the causes of the increased rates in default. If the borrower still faces foreclosure despite the loan modification, then the loan modification program is only a delay and does not provide a permanent solution.

The rising unemployment, falling home prices, and impending mortgage rate resets will certainly affect the American homeowners. Hence, the government needs to review the scope, scale, and permanence of the modification program to ensure that a real solution is provided to homeowners.

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