Group says it helped 2.2 million keep homes

A government-backed alliance of mortgage lenders said Monday that it kept 2.2 million homeowners out of foreclosure this year, even as a separate report showed that many of those people probably fell back into trouble.

The lender alliance, Hope Now, said it was on course to double the number of loan modifications it completes in 2009. But the group could not estimate how many of the homeowners it had helped fell back into delinquency -- a problem rattling regulators and industry leaders.

Hope Now also said the recession could be a stumbling block to efforts to prevent foreclosures. About 40% of homeowners who call the industry’s hot line have experienced a job loss or a decrease in income.

“Obviously, borrowers who don’t have jobs can’t pay the mortgage,” said John Courson, chief operating officer of the Mortgage Bankers Assn., a member of Hope Now.

More than a year into the foreclosure crisis, industry and government leaders are still struggling to make loan modifications more effective. More than 50% of loans modified this year were delinquent again within six months, according to a joint report Monday from two federal bank regulators, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

There are problems with both industry and government programs. For instance, Hope for Homeowners, run by the Federal Housing Administration, has been criticized as too expensive and onerous to substantially reduce the problem.

“I think we all believe that more efforts can be made by industry and government to help homeowners,” said Tom Deutsch, deputy executive director of the American Securitization Forum. “Ultimately the macroeconomic conditions have made it a much more challenging environment.”

The Treasury Department faces pressure to include loan modification programs in its request to Congress to release the second half of the $700-billion financial rescue package. The Obama administration should consider appointing a foreclosure prevention czar, said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. Loan modification programs “have not worked well, but I think they have the potential to do a substantial amount,” he said.

There have been some successes. The number of loan modifications initiated in the third quarter increased 13% from the previous quarter, according to the report from the bank regulators. Hope Now said its members were now more likely to perform more-substantial loan modifications. And several lenders, including Citigroup and JPMorgan Chase & Co., have announced their own programs.

“It’s complicated. Nothing is easy, but we are seeing better, improved results,” said Faith Schwartz, executive director of Hope Now.

The industry is planning more programs to streamline the loan-modification process next year and increase efforts to contact hard-to-reach homeowners, she said. Hope Now will release detailed data next year on the types of modifications being performed to better judge what works best and expand its efforts to help homeowners, Schwartz said.

Consumer advocates continue to push for more-aggressive loan-modification programs. For example, many distressed homeowners are unable to refinance into better loans because their home is worth less than what they owe. But many lenders are reluctant to lower the principal owed.

Bank of America Corp. included principal reductions in a loan-modification program it initiated this year, and mortgage servicer Ocwen Financial performed thousands of principal reductions this year, accounting for 70% of the industry’s efforts, according to a recent Credit Suisse report.

About 23% of Ocwen’s loan modifications include principal reductions, helping the company achieve a lower re-default rate, said Paul Koches, Ocwen’s general counsel. After six months, Ocwen’s modified loans have a re-default rate of about 25%, significantly better than the industry average, Koches said. “We view principal reductions as a last resort when we approach a modification,” he said, but sometimes it’s a necessary component.

Under the Hope for Homeowners program, the government initially required lenders to reduce the principal to 10% less than the home’s value. Last month it revised that to 3.5%.

Many industry and government officials are looking to a program developed by the Federal Deposit Insurance Corp. in the summer for delinquent customers of failed Pasadena thrift IndyMac Bank as a potential model. Under that program, payments can be lowered to 38% of gross income.

But there may be problems with that model too, according to a Nov. 20 Standard & Poor’s report. There “are no assurances restructuring loans under this program will prevent future delinquencies or eventual foreclosures on the property,” the report said. “And if the housing market continues to deteriorate and unemployment rates continue to climb, will the government roll out other, even more generous, restructuring programs?”