Feds extend lifeline for ailing homeowners

One big reason for the U.S. financial meltdown was bad mortgages - lenders made loans they knew the homebuyers could not afford to pay back. Mark Strassmann reports the federal government has now put out new rules designed to make sure that doesn't happen again.

(MoneyWatch) The federal government is extending a program aimed at helping struggling homeowners stave off foreclosure.

The U.S. Treasury Department, joined by the Department of Housing and Urban Development, said today that the Making Home Affordable Program will run through Dec. 31, 2015. The program, which helps borrowers lower their mortgage payments, had been scheduled to expire at year-end. Many homeowners continue to need financial assistance despite the ongoing rebound in housing prices, Treasury officials said in announcing the extension.

The government launched the initiative, which includes the Home Affordable Modification Program, in April of 2009 as foreclosures surged followed the housing crash. Yet while President Barack Obama and former Treasury Secretary Tim Geithner repeatedly touted HAMP as a way to offer mortgage relief to millions of homeowners, the program failed to live up to expectations. 

Many borrowers complained that lenders and servicers repeatedly lost their applications and related documents. Banks also frequently foreclosed on homeowners even after persuading them to keep paying their mortgages for months or even years.

From the outset, HAMP was hamstrung by a fundamental problem: The lenders and loan servicers that are supposed to work with borrowers often favor foreclosing on a home rather than modifying or financing a loan. Under HAMP, the government paid such firms for each modified loan, but they often could make more money by completing a foreclosure. And although participating lenders and servicers were supposed to follow program rules, they were rarely enforced, while Geithner also responded to criticism of HAMP by claiming that the Treasury Department lacked the authority to force financial firms to comply.

As a result, many homeowners who sought relief under the program were wrongly denied loan modifications, government investigations showed. As of March, 1.2 million homeowners had received a permanent mortgage modification through HAMP. Neil Barofsky, the former inspector general for the Troubled Asset Relief Program, in 2010 said HAMP had fallen "woefully short" of its initial goal of enabling up to 4 million modifications.

The problem wasn't limited to private lenders. The inspector general for the Federal Housing Finance Agency, which oversees Fannie Mae (FNMA) and Freddie Mac (FMCC), in 2010 concluded that the FHFA failed to stop the government-sponsored enterprises from using strong-arm legal tactics to foreclose on homeowners.

Since then, the government has taken steps to repair HAMP, prodding lenders to reduce homeowners' mortgage principal. The Obama administration also last year agreed to a $25 billion settlement with big banks that required lenders to offer mortgage relief to homeowners. 

Foreclosures are declining, although they remain at historically high levels. Sales of foreclosed or bank-owned properties accounted for 21 percent of all home sales in the first quarter, down from 45 percent in the comparable period in 2009, according to foreclosure research firm RealtyTrac.

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