Mortgage foreclosures hit record as prevention program falters

a mortgage foreclosure sign posted in front of a suburban home

Mortgage foreclosure statistics have hit record levels as the foreclosure prevention program falters and the unemployment rate remains high. Flickr photo.

Mortgage foreclosure statistics reached an all-time high in the first quarter of 2010. Meanwhile, the federal foreclosure prevention program appears to be losing momentum. The inventory of homes in foreclosure rose to 4.63 percent from 4.58 percent in the fourth quarter, the Mortgage Bankers Association said Wednesday. The combined share of foreclosures and mortgage delinquencies was 14 percent, or about one in every seven U.S. mortgages. The mortgage foreclosure statistics are expected to peak this year with more than 2 million borrowers losing their homes.

U.S. unemployment rate to blame

A primary cause for the mortgage foreclosure statistics is a high U.S. unemployment rate. Job losses have made it hard for homeowners to pay monthly bills without online cash loans. Jay Brinkmann of the Mortgage Bankers Association told Bloomberg that U.S. unemployment in the second half of 2009 — when people now in foreclosure would have first fallen behind on their payments — reached the highest level since 1983, according to the Bureau of Labor Statistics. The unemployment rate declined to 9.7 percent in the first quarter of this year from 10 percent in the last three months of 2009. Brinkmann said the states with the highest unemployment rates — Ohio, Illinois and Michigan — have the biggest mortgage foreclosure increases.

Foreclosure prevention program ailing

The surge in the mortgage default rate leads some to believe that the Obama administration’s foreclosure prevention program, the Home Affordable Modification Program (HAMP) is failing to work as advertised. The Treasury department said about 1.2 million homeowners have enrolled in the mortgage modification program. More than 299,000 homeowners had received permanent loan modifications as of last month — about a 25 percent success rate. About 277,000 homeowners, or 23 percent of those enrolled, have dropped out during a trial phase that lasts at least three months.

Mortgage modification program methods

Since the $75 billion HAMP program was announced in March 2009, federal officials have chastised lenders for not doing more to help borrowers. HAMP lowers mortgage payments to about a third of borrowers’ income by reducing interest, lengthening terms and deferring principal payments. The Atlantic reports that servicers are using term extension more than other methods. HAMP’s April progress report said 53.4 percent of loans have increased terms to lower the payments borrowers owe. Principal reduction is used on just 28.6 percent of mortgage modifications.

Mortgage modification program flaws

The mortgage default rate is increasing as more mortgage holders drop out of the HAMP program. Ghazale Johnston, a banking executive at Accenture, told banktech.com that a major cause of the HAMP dropouts is a practice that resulted in the plague of sub-prime loans in the first place. Mortgage servicers have relied on stated income, rather than verified income, to put borrowers into trial modifications. Once they verify the income, it’s discovered that the borrower isn’t eligible for the foreclosure prevention program. Other borrowers drop out of HAMP because servicers are bungling the paperwork and can’t complete the transaction. New HAMP rules that take effect June 1 require all borrowers going into a trial modification to be approved based on verified income.

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