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Obama's Mortgage Program: FAIL?

Confusion and delays have plagued the administration's loan modification program, causing homeowners to fall behind on mortgage payments, risking foreclosure.

This article was produced by ProPublica, and published by AlterNet under the Creative Commons license.

Since last spring, when President Barack Obama announced his administration's plan to prevent foreclosures, there's been a crush of homeowners seeking help from mortgage servicers. Confusion and delays have plagued the entire program, but the problems have been particularly acute for homeowners seeking a modification before they begin falling behind on their mortgage payments.

Some homeowners, like Regan Sciesinski of Florida, have been waiting as long as nine months with no relief. The Sciesinskis seem to be a prime candidate for a modification through the program. His wife, Stacy, was found to have breast cancer in late 2007, and in the past year, a combination of medical costs and reduced income have made their mortgage payments unaffordable for the couple, who have three children. Their home, in a suburb of Tampa, has also dropped about 25 percent in value since they bought it in 2006. Like millions of other homeowners, they're underwater, stuck with mortgages worth more than the property. Click to see our chart of how the mortgage servicers are performing.

Sciesinski says he first submitted his information to his servicer, Chase Home Finance, in March. He's still waiting. Sciesinski says he and his wife have drained their retirement savings and accepted help from other family members to stay current. "We take our obligation seriously," he says, but now they're facing default and need the modification "because having to move would completely devastate us."

The program was designed to help such homeowners: Borrowers who because of a hardship (a drop in income or jump in expenses) can no longer pay their mortgages. Homeowners who are still current on their payments are eligible, but the Treasury Department requires that servicers screen such borrowers more thoroughly, to prevent homeowners who don't really need a modification from receiving one.

But those higher standards have contributed to the problems borrowers frequently experience with the servicers. As a result, many deserving homeowners aren't getting help. Diane Thompson of the National Consumer Law Center said Treasury could help alleviate the problems by providing clear guidance to servicers on how they should screen out ineligible homeowners.

The overall mortgage mod program involves special incentives to encourage servicers and lenders to modify mortgages before homeowners default. It works by giving incentive payments to both the servicer and the owner of the loan (the lender or investors) to modify the mortgage; they can both receive bonus payments for modifying a loan that is current.

Yet since the beginning of the program, the servicers have been slow to modify on-time loans. In the early months, most of the major servicers, overwhelmed by homeowner requests, gave priority to the modification applications of delinquent borrowers. Not only were those more urgent cases, but they were easier for the servicers to modify: Under Treasury guidelines, servicers can skip verifying income and can instead immediately start trial modifications for borrowers who are more than 60 days behind on their mortgages.

In the past few months, most servicers have been having serious problems converting those trial modifications to permanent ones, primarily because of difficulty obtaining or processing the necessary documents. ( As we've written, the servicers' claims that borrowers are largely to blame for the trouble should be viewed skeptically.). But borrowers who are current on their loans but seeking a modification run into that document burden up front, and it has frequently prevented them from getting even to the three-month trial stage.

To screen such homeowners, servicers are required to evaluate the borrower's total financial condition (income, costs, liquid assets, etc.). As a result, servicers have been requesting documentation from homeowners that can run into the hundreds of pages.