The federal government has set aside $14 billion as a way to modify between 500,000 and 1.5 million underwater loans that could be modified through the program. Under the new “short refinance” program, banks and other creditors that write down mortgages to less that what the property is worth can, in essence, hand off the reduced loan to the government. The process involves refinancing borrowers into loans backed by the Federal Housing Administration, according to the WSJ article.

Some of the concerns regarding the revised program include the burden on the taxpayers based on officials’ estimates that 20% of those loans in the program could default. According to data from CoreLogic, about 11 million U.S. households, or about 23% of homeowners with mortgages, had negative home equity in the first quarter of 2010. (Here in New York State, 7.1% of homeowners have negative equity — far below the national average).

Another concern is the administration’s intention to concentrate solely on loans bundled by Wall Street firms and sold as mortgage-backed securities. Investors are worried that, if the balances are greatly reduced, they would be wiped out. Mortgage servicers — who handle loan payments and decide on loan modifications — would drown in paperwork and sued by investors who lose their money on risky loans. Borrowers who receive a reduction in principal fear that it will negatively affect their credit score.

But government officials say they are receiving positive feedback on the program from mortgage servicers and investments groups that are able to write down loans. Analysts say that the modified program would most likely succeed on bank-owned loans. In addition, the program could provide investors with a vehicle for getting rid of loans that have been modified and are current again.

The Treasury Department says that, of the 1.3 million homeowners who enrolled in the program since March 2009, 530,000 borrowers — more than 40% — have left the program as of last month. The figure outnumbers those who are staying in the program. The Treasury Department estimates that 390,000 homeowners, or 30%, have stuck with the program; the agency further says that those in the program have received permanent loan modifications and are making their payments on time.

In March 2009, in order to stave off the rising tide of foreclosures, the Obama administration pumped in $75 billion in a government program to help struggling homeowners pay their mortgages. Under the program, those with an outstanding principal balance of up to $729,750 are eligible.

The Treasury Department argues that only a few of these borrowers will end up in foreclosure. But with weak job numbers, fewer people buying a home and no other financial incentives from the government to spur home purchases, it will be just the opposite: more foreclosures and a lag in the housing market that could last for months.

It gets worse. Citing complaints from bankers that an applicant’s credit score isn’t good enough, changes are underway in how credit scores are calculated and applied, which will affect millions of homeowners. At the Risk Management Association’s annual conference, Kenneth Phelan, Fannie Mae’s chief risk officer, said that 60-62% of households will own their own homes — lower than the expected 69% before the housing bubble burst.

Someone who undergoes foreclosure but had a solid credit score before the start of the housing crisis could see their score falls more than 15% under the system used by VantageScore, a scoring mechanism involving the nation’s top three credit bureaus: Experian, TransUnion and Equifax.

Under VantageScore, those who pay their bills on time will be considered subprime borrowers, meaning they will have a more difficult time obtaining a loan from a bank. Banks are reluctant to lend money to subprime borrowers because they are afraid the borrowers will be unable to pay them back; many lenders who catered to subprime borrowers have since gone out of business.

In addition to credit scores, banks are taking other factors into consideration such as geography and the overall economy. So, someone who moves to an economically depressed area may have trouble buying a home, even if they have good credit.

Another solution offered by Tony Hughes, senior director of Moody’s credit analytics group, was to lower people’s credit scores during an economic boom and raise them during times of economic distress. In good times, people appeared to have pure credit scores, so they were able to borrow against home equity and pay off credit cards, but when home prices fell, the equity disappeared.

At the bottom of a recession, with a recovery in sight, according to Hughes, credit scores would be raised to reflect the idea that someone buying a home would be paying it off in an improving economy with home values increasing and a lower chance that they would lose their job. A person who lived in a distressed area and paid a loan during the recession could receive extra points.

The tragedy of this housing crisis is that, even those with perfect credit scores will be punished. Economists predict it could take years before people’s credit scores improve. Loan modification is considered the lesser of two evils because it does less damage to your credit score than foreclosure does. Bankruptcy is not good because it will appear on your report for the next seven to nine years.

Treasury data showed that there were 123,000 more borrowers who were dropped from the program in April than those dropped in March, which were 157,000 borrowers. Making Home Affordable was supposed to help distressed homeowners by offering financial incentives to lenders who offer to lower the borrower’s mortgage payments, but now the program is losing borrowers, according to The Post, because they were unable to prove they qualified for help or fell behind on their new lower mortgage payments.

Many housing advocates argue these homeowners are being unfairly dropped from the mortgage aid program for no reason and have no way to address their grievances. Some say they were dropped as the result of the lenders either making errors in paperwork or losing the borrower’s documentation. There are more than 1 million homeowners are currently in the program, but 63% of them are in limbo.

In response to the negative numbers, the Treasury Department said the lenders have helped more homeowners in the month of April move from the federal program to a permanent loan modification, which typically lowers a borrower’s payments by more than $500 a month. In April, there were 300,000 loan mods — a 13% increase over the previous month, according to the Treasury.

The Obama administration underwent a modification of its own by adding a provision in its program to offer financial incentives to lenders who offer to cut the mortgage balances of homeowners who are underwater — that is, owing more than what the home is worth. Despite this initiative, many housing advocates are still unsure if this will put a stop to the foreclosure crisis.

Freddie Mac and Fannie Mae — two government-controlled mortgage owners — say they do not lower the principals on their loans. Rather, they reduce interest rates and extend the terms of the loan when homeowners undergo loan modifications. The reason, they say, is that reducing loan balances means having to write down the value of those mortgages and, in turn, using taxpayer dollars to pay people’s mortgages.

Both entities, which received $127 billion from the Treasury Department since September 2008, are asking for another $19 billion from the government. Many housing experts say the Fannie and Freddie should lower loan balances for homeowners since Treasury has set aside $75 billion for foreclosure prevention that could also be used for interest-rate reductions or principal write-downs. In addition, reducing loan principals will stem the foreclosure crisis.

Some states are now offering free money to homeowners who are either out of work or employed but are having trouble paying their mortgages. Florida, Michigan, California, Arizona, Nevada, North Carolina, South Carolina, Rhode Island, Ohio and Oregon are using federal monies from the Hardest Hit Fund that was established in February. (As of press time, New York has no such plan in place.)

While consumer advocates believe that the government should help out distressed homeowners, housing experts and other homeowners argue that those who already own a home should not have to pay someone else’s mortgage and that the free money will only act as a disincentive for the unemployed to find work.

Those who fall behind in paying their mortgages may find themselves in foreclosure. According to RealtyTrac, there were 930,000 foreclosure filings for the first three months, a 7% increase over the previous three months and 16% more than Q1 2009. It is evident that these homeowners need help — now!

So far, the program has failed to meet its initial goals due to a variety of reasons ranging from delays in borrowers submitting the paperwork to long processing times by lenders. Till February, 170,000 borrowers had completed the modification process and according to the report, many homeowners were not informed that their credit ratings would be affected when they applied for a modification. 

Homeowners whose credit ratings have been hurt could find it difficult to get another loan or get a job. While foreclosures would have an even worse effect on a borrower’s credit score, this could act as a deterrent to some homeowners for entering into loan modifications, further hampering the program from meeting its goals. 

The $75 billion Home Affordable Modification Program was created to provide aid to nearly 4 million homeowners. The program provides financial incentives to mortgage companies and investors to modify home loans and prevent foreclosures.  

Under the program, borrowers are first put into trial modifications for three months to ascertain whether they can make the new payments and to give them time to submit the paperwork before the loan modification becomes permanent.

Additionally, around 90,000 homeowners have lost their mortgage aid under the government’s program. Many of these borrowers failed to submit the necessary documentation proving their eligibility under the program while others did not qualify. Though the government lowered some of the eligibility standards, 500,000 borrowers who passed the three-month threshold of trial modifications have not received permanent loan modifications. 

According to many homeowners and consumer advocates, though they have submitted the required paperwork, lenders have either lost them or not processed them properly. Though the numbers have shown some improvement in February, where the number of borrowers receiving permanent loans modifications went up by 45% from January, more permanent modifications are necessary to prevent further foreclosures.

So far, the government’s Making Home Affordable Program focused on helping homeowners keep their homes and prevent foreclosure through loan modifications or refinancing. However, the program, until now, has been limited in its effectiveness due to the fact that many homeowners failed to qualify for a loan modification or were so much underwater that refinancing was not a viable option.

The new program will instead focus on streamlining and standardizing the short sales process. In a short sale, a homeowner owes more than what their home is currently worth. To avoid foreclosure, the homeowner settles with the mortgage lender to accept less than what they owe on the property. As a result of this agreement, the seller is able to fend off foreclosure, the lender avoids taking on the burden of selling the property and the new buyer gets the property at a reduced price. Additionally, the seller will not be required to pay for the deficiency on the loan.

Even though short sales were beneficial for all parties involved, the lengthy process and lack of financial incentives for mortgage companies made foreclosures a more attractive option. Under the new program, the government will now not only pay the mortgage company but will also pay the distressed homeowner a sum of $1,500 in the form of “relocation assistance.” It remains to be seen how effective these changes will be but, hopefully, they will help prevent more foreclosures.

HARP initially had a goal of helping around four to five million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance and lower their monthly mortgage payments. According to the Treasury Department, so far, the program has helped around 220,000 homeowners. 

While banks usually require homeowners to have at least 20% equity to qualify for refinancing, this proved to be a problem during the current crisis, where homeowners have been faced with falling home prices. HARP was created to help these borrowers whose home values have fallen and who owe more than their homes are worth by taking advantage of the lower mortgage rates and refinancing their homes. 

Earlier, the program targeted borrowers who owe slightly more than their property values. Later, it was expanded to include those with loan balances of up to 25% more than their home values. 

So far, the program has struggled to meet its goals. The program is limited in reach since it only includes loans backed by the federal mortgage agencies, Fannie Mae and Freddie Mac. Homeowners with second mortgages or private mortgage insurance cannot qualify for refinancing and very often, the closing costs and refinancing expenses are not worth the lower interest rates.

Among other news, The National Association of Realtors’ reported today that existing home sales for January fell by 7.2% to a seasonally adjusted annual rate of 5.05 million from a downwardly revised rate of 5.44 million in December. This follows another recent report of new home sales that declined by nearly 11 percent.

The New York Times also reported yesterday that the Obama administration is considering a ban on foreclosures unless they have first been examined for potential loan modification. The current rules recommend but do not require lenders to evaluate defaulters for a modification.