President Barack Obama (WDCpix)

Only a year ago, hopes were high that a big push by the government to stop foreclosures would be a great success, living up to its billing as “Help for America’s Homeowners.”

Last January started out with a foreclosure moratorium, allowing time for the Obama Administration to put the final touches on Making Home Affordable — its $75 billion signature program aimed at helping 3 to 4 million homeowners. After bailing out banks and the financial system, the administration turned its efforts to borrowers on the verge of losing their homes. The program rolled out with fanfare in the spring.

[Economy1] But as 2010 begins, it is already clear that Making Home Affordable has fallen far short of its goals, with only 31,382 permanent loan modifications completed by Nov. 30. Last year, lenders were doing far more loan modifications on their own, before the Obama plan was launched. And although foreclosures show no signs of slowing down — the total number of foreclosures is predicted to reach 13 million during the next five years — no one is expecting a dramatic turnaround in helping people keep their homes. The only way the administration will get significant numbers of loan modifications done will be to bring back failed bankruptcy cramdown legislation, or to put billions of dollars into a mass effort to rework loans — neither of which seems politically feasible.

That means 2010 will likely be another year in which only a small number of loans get modified each month, while administration and mortgage servicers continue pointing fingers at each other for the impasse, some industry experts say. The only bright spot ahead for the government’s foreclosure prevention may be that down the road, foreclosures eventually will slow of their own accord. To use the Vietnam analogy, that will allow the Treasury Department to declare victory and get out of the loan modification business for good.

“I don’t hold out a great deal of hope that the administration will do more” to complete more loan modifications, said Patricia McCoy, a University of Connecticut law professor who studies financial services regulation. “There’s just no political will for that.”

As the program falters, a move to blame borrowers for problems with the effort has grown.

When difficulties with Making Home Affordable became apparent early on, servicers began contending that borrowers were refusing to provide income verification and other paperwork to quality for permanent modifications. Under Making Home Affordable, eligible borrowers first receive a three-month trial modification. In order to convert it to a permanent modification, they need to provide servicers with pay stubs and other documentation, as well as making all their trial payments.

Before the program began, servicers voluntarily completed 120,000 permanent loan modifications per month during the first quarter of last year, according to Alan White, a Valparaiso University law professor who studies loan modifications. Once the Obama administration’s program rolled out, those totals dropped to about 70,000 per month, as servicers worked to switch borrowers into Making Home Affordable. According to Treasury Department figures, nearly 700,000 trial modifications under Making Home Affordable were underway by the end of November. But with fewer than 32,000 converted to permanent modifications, it means a net drop of permanent loan modifications since the Obama plan began.

The voluntary plans by servicers, however, were called “extend and pretend” plans by critics, who said servicers simply were setting up repayment plans with late fees and other charges rolled into them, without ever actually reducing a borrower’s debt. Re-default rates on those loan modifications have been high as a result. Making Home Affordable has been more aggressive about lowering a borrower’s monthly payment, and the government is pressing servicers to switch to using its program — one reason why Making Home Affordable permanent loan modifications are lagging behind. In addition, some borrowers simply can’t qualify for the government’s program because they are too far underwater on their mortgages.

But unless a surge of permanent loan modifications suddenly occurred in December, the New Year will begin with fewer loans permanently reworked than during the same period a year ago. Treasury officials said in November that 375,000 trial loan modifications were scheduled to expire by the end of December, but it was unclear how many would be converted into permanent plans. Then, on Dec. 23, the government announced it would order servicers to give borrowers more time to complete trial loan modifications before kicking them out of the program.

Servicers have responded to the lack of progress so far by suggesting that borrowers are refusing to turn in income and other documentation because they probably lied about their incomes to qualify for their current mortgages. Liar Loans, or loans that required no documentation of income or assets, have been cited as a major culprit in the financial collapse, as some borrowers began defaulting on them just a few payments into their mortgages beginning in 2006.

Guy Cecala, publisher of Inside Mortgage Finance, which covers the lending industry, said the mortgage firms and servicers were skeptical from the start that any loan modification plan would work. “No one ever thought seriously that this would put a dent in the problem,” he said.

Now the industry is likely to fight back against any criticism not by doing more loan modifications, but by blaming borrowers, as well as the Obama administration, for a faulty program. All this may add to a backlash and moral hazard charges of helping out homeowners who may have lied to buy bigger homes than they could afford, while other homeowners who may have lost their jobs struggle to meet their mortgage payments, he said.

“I hear people saying all the time, that all the administration is doing is offering help to the people who deserve it the least,” Cecala said.

Housing counselors and attorneys find that argument infuriating. Already struggling to get servicers on board with Making Home Affordable, they now also face dealing with a shift in a public perception toward blaming the borrower.

Diane Thompson, an attorney with the National Consumer Law Center, said the situation has gotten so ridiculous that servicers are simply looking for excuses to deny loan modifications.

“I met with a woman who oversees a counseling program in St. Louis, and she told me that the most common reason for denials now is that the borrower’s hardship isn’t permanent — surely at some point in time the borrower will get a new job,” she said. “And of course servicers continue to lose documents at an astounding rate.  Any counselor I talk to is almost seething with frustration.  I’ve had counselor after counselor in recent weeks tell me, “They’re just stalling.”

“I think there’s a bit of a face-off developing between the administration and servicers.  My impression is that servicers find the program burdensome and so would like to see it fail, but would prefer not to be held accountable for that failure.  And the administration, of course, would prefer to see the program succeed.  Whether this results in a scrapping of the program or a major reworking of it, I have no idea.”

White, of Valparaiso, thinks the situation is even more dire.

“I would give it another month or two to see if they can do any better, but if not, it is definitely time to try something else,” he said of Making Home Afforable loan modifications. “As far as blaming the homeowners, that is really sad.  From all reports I hear from housing counselors and legal aid lawyers, the servicers are losing the documentation.  It is hard to believe that 75 percent of borrowers on temporary mods are making their payments but that they can’t come up with two pay stubs and a hardship statement.  I think we are dealing with a massive failure and breach of contracts by the servicers.”

The administration will handle this by continuing its current tactic of singling out for public condemnation servicers who aren’t doing enough loan modifications. But that approach hasn’t worked so far, and it’s not likely to be any more successful this year, said Kathleen Engel, a Suffolk University law professor and expert on mortgage securitization.

“A shame list may work when country club members don’t pay their dues, but I don’t think it works with servicers and lenders,” Engel said. “If it did, they wouldn’t have been making and financing abusive loans all these years.”

What might work would be a massive, multi-billion dollar effort to get loans modified on a large scale, said Cecala, of Inside Mortgage Finance. But there would be little political support for spending that kind of money on troubled homeowners. Since the Obama administration sat back last year and declined to throw its weight behind mortgage cramdown legislation that ultimately failed, the White House is not expected to suddenly turn around and once again push for legislation to let bankruptcy judges modify mortgages to keep borrowers in their homes.

And not everyone agrees on the right approach to jumpstart the program. McCoy, for example, said she considers loan modifications a “one size fits one” option that can’t be done a mass scale.

As a result, Cecala sees an entirely new direction in 2010 — lenders will enlist debt collection agencies to aggressively go after homeowners who walk away from their underwater mortgages. Or lenders will move to ensure a borrower’s credit remains impaired for a decade or more, should they walk away. In the meantime, the Obama administration will likely talk a good game, and keep criticizing servicers, while only small numbers of homeowners end up with lower payments.

In the end, Cecala said, the only thing that will become clear is that “there’s plenty of blame to go around” for a program that began this time last year with lofty expectations, and then fell painfully short.

Housing Wire reports that advocates are pushing the two mortgage giants to follow the lead of the Federal Deposit Insurance Corp., which is attempting an en mass modification of loans to borrowers from IndyMac. The FDIC this summer took over IndyMac, a subprime lender, in one of the nation’s largest bank failures.

The FDIC effort is being closely watched by the lending industry and by housing advocates. Our story this week explained that while the government is pushing private industry to do loan workouts through efforts like Hope Now, there hasn’t been much real progress made. FDIC Chairwoman Sheila Bair is an advocate of doing more mass restructurings.

According to Housing Wire, Bruce Marks, chief executive officer of the Neighborhood Assistance Corp. of America, which has been battling banks for years, is behind the pressure on Fannie and Freddie. From Housing Wire:

“Look what Sheila Bair’s doing — she’s walking the walk, as well as talking the talk,” Marks told Amercan Banker. “Now we need Secretary Paulson to walk the walk, as well as talk the talk.”

NACA, as we reported, also launched an effort this week in 40 cities to do loan restructurings on a large scale and to pressure servicers and lenders to follow through on them.

Not surprisingly, the lending industry isn’t exactly enthusiastic — since genuine loan restructurings mean lowering the principal and interest rate and taking losses. But with the government increasingly involved in the mortgage markets, it won’t be so easy for Treasury Sec. Henry Paulson Jr. and the Bush administration just to urge private industry to do more workouts as a solution to the mortgage crisis.

With the government in charge of so many mortgages, it either has to do what it’s been urging the private sector to do, or lose all its moral authority on this one.

FDIC seal (Flickr: kenyee)

In addressing the mortgage mess, the approach of pushing lenders to modify mortgages through loan workouts continues to take center stage — despite a growing controversy over whether they get results. As foreclosures continue to rise, a political battle is heating up as well.

The Federal Deposit Insurance Corp., which seized the failed subprime lender IndyMac in July, is taking on the task of restructuring 25,000 of the institution’s mortgages — an effort being closely watched by the industry. FDIC Chairwoman Sheila C. Bair has been an outspoken advocate of mass restructurings, and critical of servicers for failing to do more of them.

Spokesman David Barr said the early response to the FDIC’s efforts has been good, and that the agency hopes to have all the workouts done by the time it tries to sell the bank next month. “We’ve been pleased with the initial response from the first round of letters we’ve sent out,” Barr said.

Illustration by: Matt Mahurin

In the blogosphere, however, skeptics say the FDIC won’t be able to pull off all the workouts, and that the agency will get a first-hand look at how hard it is for the mortgage industry to do workouts in large numbers.

Tanta at Calculated Risk, an influential blog that covers the housing market closely, put it this way:

Do I know where the FDIC is going to get the staff to do all this lickety-split? No. But you see, the FDIC wants to do mods, unlike those lousy private mortgage servicers who just don’t care and are evil. As an empirical test of the belief that attitude trumps experience and headcount, this is a public service. So I think everyone should just quit griping and let the FDIC rip on this one.

Since they’ve promised to use the “maximize value” test here, if they actually manage to get more successful mods done than anyone else has, they will have minimized losses to the FDIC and private investors and we can all congratulate them for that. If, as I fully expect, they don’t do any better at making a silk purse out of a sow’s ear than anyone else can, maybe Sheila Bair will quit pontificating about a subject that remains a lot harder than she thinks it is. That, too, we could all get behind.

Not everyone shares her views. Bruce Marks, chief executive officer of the Neighborhood Assistance Corp. of America, or NACA, a housing advocacy group, said servicers can and should be modifying large numbers of loans. His group plans to launch a nationwide campaign this week to make sure it happens.

NACA has had plenty of experience modifying loans. In July, the group held a five-day event in downtown Washington, encouraging borrowers to show up for loan restructurings. The group expected a few thousand people at the event, but lines quickly formed around the hotel where the group was based. All told, Marks said, NACA handled some 10,000 loan restructurings during that visit.

But so far, only 2,000 of those restructurings have been processed completely by servicers and entered into their computer systems, Marks said, despite having been approved. Other servicers are still delaying final decisions or requiring more documentation.

Some borrowers paying the lower rate negotiated as part of their workout have gotten late notices from lenders. In particular, some Spanish-speaking borrowers have gotten calls from Spanish-speaking representatives of Countrywide Financial Corp., once the nation’s largest subprime lender, telling them they owe the full amount on their loans — not the restructured rate.

Countrywide, which is being bought by Bank of America, did not respond for requests for comment.

Marks said servicers are used to handling cases individually and weren’t prepared to handle the volume of restructurings sent their way. Lenders and servicers are also large, bureaucratic organizations, where it’s common to find one division of the company unaware that another department had already negotiated a restructuring, he said.

None of these problems, however, deter his organization from contending that massive restructurings of subprime loans are the best way to help people save their homes. Starting this week, NACA will launch workshops for loan restructurings in 40 cities, similar to the one held in Washington.

To ensure that the restructurings go through, NACA will supply borrowers with the phone numbers for their congressional representatives; for the CEOs of lenders and servicing companies, and for bank regulators. The group will encourage borrowers to share those numbers with friends, family members and neighbors, and apply pressure with phone calls, letters and visits to push for more mass restructurings, he said.

“We’re getting these done. But has it been a fight to get them done? Yes,” Marks said. “We’re going to force servicers to change the way they do business. They’re acting like they’re paralyzed. This is our way to force this issue.”

That even an organization like NACA, armed with money, staff and expertise, is facing problems getting mass restructurings done is an example of the magnitude of the mortgage crisis itself.

“Let’s face it,” said Kathleen Keest, senior policy counsel with the Center for Responsible Lending, a research group. “We’ve dug ourselves into a huge hole here.”

Cecala, of Inside Mortgage Finance, compares the lending industry’s avoidance of restructurings to that of a city waiting for a hurricane to hit, unprepared and without enough resources — just hoping the damage won’t be too severe.

“It’s sad to say,” he noted, “but things haven’t got bad enough for everyone in the industry to change their view.”