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Obama's Plan to Help Homeowners Is a Bust

It can't keep pace with the rate of foreclosures -- not even close. Why was the industry allowed to police itself?

David and Marilyn Baldwin live in the same modest house in rural Pennsylvania where David grew up. David's brother lives in a house behind them, while his cousin owns a farm visible from the couple's front door. They've lived there for 25 years, but when I went to interview them in April, they were on the verge of losing their home.

A battle with congestive heart failure and diabetes forced David to leave his job as a car salesman in August of 2007. He and Marilyn -- both in their early 60s -- tried to keep up on their mortgage as best they could until David's disability payments started arriving in April of 2008. But once they started receiving the checks, it became clear their existing mortgage was now beyond their means.

"We didn't think that Dave was going to be at a point where he'd have to be on disability," Marilyn said. "We always paid it before, we just can't do it now."

In February of 2009, newly inaugurated President Obama unveiled a foreclosure prevention program called Making Home Affordable, promising to keep "up to 3 to 4 million" borrowers from losing their homes. But like a similar initiative adopted under the Bush administration, the Obama plan is flawed because it relies on the housing industry itself -- namely the industry's debt collectors, known as mortgage servicers -- to fix the problem. And like the Bush plan, it isn't working especially well, as the Obama administration's own numbers now show. While 1.5 million homes have gone into foreclosure in 2009 as of June 30, just 235,247 borrowers have been granted trial loan modifications under the Obama plan since its inception, according to an Aug. 4 U.S. Treasury Department report.

Helping homeowners is not what mortgage servicers do. Making Home Affordable asks mortgage servicers to identify troubled borrowers and fast-track them to relief. But servicers specialize in squeezing borrowers for money, and have never been interested in devising long-term solutions for people in trouble. The poorly paid individuals, some of them offshore, that they hire to contact homeowners are not trained to renegotiate loans. Obama's program, like the Bush plan, is strictly voluntary -- if servicers don't want to participate, they don't have to. As in the Bush plan, servicers who do participate face no penalties for failing to assist qualified borrowers, and no government agency is policing servicers to make sure they live up to the terms of the contract. Meanwhile, they actually benefit from letting homes fall into foreclosure, because foreclosure means they are guaranteed an upfront payment from the sale of the home.

"Nothing has changed," says Daniel Lindsey, an attorney with Legal Assistance Foundation of Metropolitan Chicago who heads the group's home ownership preservation effort.

The Baldwins' loan is handled by CitiMortgage, a mortgage servicer owned by Citigroup Inc., the foundering finance behemoth that has received $45 billion in direct bailout funds from the U.S. government and hundreds of billions in federal guarantees. As a condition for taxpayer support, Citi agreed to implement a major borrower relief effort, and was one of the first companies to adopt Obama's anti-foreclosure plan when it was unveiled earlier this year.

In April of 2008, when the Baldwins realized they were in serious financial trouble, Citi was signed on to the Bush administration's private-sector mortgage fix-it plan, Hope Now. Hope Now was a coalition of banks organized by then-Treasury Secretary Henry Paulson. Members of Hope Now held several splashy press conferences in late 2007 and early 2008 encouraging people who were having trouble paying their mortgages to contact their loan servicers and work out a new arrangement.

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