NEW YORK (CNNMoney.com) -- Under fire for the low number of people receiving long-term mortgage help, the Treasury Department on Thursday announced new guidelines that will require applicants to provide all paperwork before getting a trial modification.
The new policy will make it harder for troubled homeowners to start the process, but it should make it easier for them to qualify for permanent assistance under President's Obama foreclosure prevention plan.
The administration's $75 billion housing effort has been plagued by paperwork problems since it launched last April.
Borrowers complain that their loan servicers constantly ask for additional documents and lose their forms. Servicers, meanwhile, say that borrowers are not handing in all that's needed.
The new rules, which start June 1, will effectively shift the paperwork burden to the start of the process.
"They aim to make it easier and quicker to provide permanent modifications," said Treasury Assistant Secretary Herb Allison. "These changes also will enable servicers to process more efficiently and handle more volume effectively so we can help more people more rapidly."
Distressed borrowers will have to fill out a three-page request form that asks them to explain their hardship and list their income and expenses. They will also have to sign an IRS 4506-T form that allows servicers to pull their tax returns. Both forms are available on the Making Home Affordable program's Web site.
Also, applicants will have to verify their income. For those earning a salary, two recent pay stubs will be sufficient. Other earnings, such as income from self-employment, benefits, or rental properties, must still be documented.
Servicers must acknowledge receipt within 10 business days and, if the file is complete, let the borrower know within 30 days if he or she is approved for the trial modification. If the documentation is incomplete, the servicer must tell the borrower what is outstanding.
Those who are approved for trial adjustments and make three timely payments will be automatically converted to long-term modifications.
Servicers and housing experts applauded the move, saying that borrowers will now have a better sense of their chances for permanent help.
"It will not lead to more modifications, but it will lead to more certainty," said Howard Glaser, head of The Glaser Group, a financial services analytics firm.
Wells Fargo, which initially required applicants to verify income ahead of the trial period, plans to adopt the new guidelines as early as March 1. While the new rules may lead initially to a drop in the number of borrowers entering the trial program, they will be more likely to attain a permanent modification, said Kevin Waetke, a bank spokesman.
Under the original plan, borrowers were supposed to submit their documents before entering a three-month trial period. The trial was a time that borrowers had to prove their could make the requirement payments.
The program, however, was slow to start as servicers were deluged by applications. In order to get more people into trial modifications, the administration started allowing servicers to approve borrowers' applications as long as they met the minimum requirements and to track down the necessary documents during the trial period.
The problem then shifted to converting those in the trial modifications to permanent assistance. Borrowers were relieved to have lower payments but frustrated to be stuck in the trial period for months on end.
"It set expectations that weren't realistic," said John Snyder, manager of foreclosure programs at NeighborWorks America.
Servicers attributed the slow pace to the fact that they didn't have all the needed forms. The Treasury Department responded by lengthening the trial period to five months and lightening the documentation requirements.
Coming under fire once again, the administration in late November ramped up pressure on servicers to convert borrowers to permanent modifications.
As for the end of the year, some 66,500 people have received permanent adjustments, with another 787,200 homeowners in trial modifications.
The administration also reiterated that servicers must review all those currently in trial modifications and determine whether they have been timely with their payments and have handed in their paperwork.
Those who haven't handed in any documents or have missed payments will be denied permanent modifications, according to the Treasury guidance. These borrowers must be considered for other foreclosure prevention alternatives, such as servicers' own programs or short sales.
In the case of those who are on time with their payments but have submitted only some documents, servicers must attempt to obtain the required paperwork. If they cannot, then the borrower will be kicked out of the program.
Borrowers have the right to appeal denials.
Treasury's directive should give servicers clearer directions about what to do with those borrowers still in their trial period, said Edward Pinto, former chief credit officer for Fannie Mae (FNM, Fortune 500) in the late 1980s. This will help clear the backlog of homeowners in the modification pipeline.
Still, some industry experts are concerned about those who are in limbo.
Some 450,000 people could be at risk of being denied permanent help because of paperwork problems, according to Richard Neiman, the New York banking superintendent who serves on the State Foreclosure Prevention Working Group. He urged Treasury officials last week to reduce the documents requirements and to make it easier for borrowers to submit forms.
Neiman said Thursday that he's pleased the Treasury Department is allowing servicers to conditionally approve people who haven't handed in their hardship affidavits or Form 4506-T tax forms. But he still thinks more should be done to make it easier for borrowers to get their paperwork in.
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