Borrowers flunking out of trial mortgage modifications

NEW YORK (CNNMoney.com) -- The number of troubled homeowners falling out of President Obama's foreclosure rescue plan soared in April.

More than 122,000 borrowers had their trial mortgage modifications canceled in April, bringing the total to 277,640 since the program began about a year ago, according to federal statistics released Monday. Meanwhile, only about 68,000 homeowners were converted from these trials to permanent modifications last month.

Under the program, known as HAMP, eligible troubled borrowers are put into trial modifications to determine whether they can keep up with the lowered payments and to give loan servicers time to verify income and hardship.

A total of 295,348 people have received permanent long-term help under the loan modification plan, but another 3,744 who were converted to permanent status were later cut from the program anyway.

Modifications are usually canceled if the borrower fails to make the adjusted payments, or if during the trial period, does not meet the program's criteria or hand in the required income verification paperwork.

Administration officials said they were not surprised to see the number of canceled trial modifications spike. That's because borrowers had been allowed to enroll in the trial program by simply stating their income. But they are being dropped if they cannot prove the figures they provided.

"As those decisions get made, it's certainly expected that there would be some that fall out of HAMP," said Phyllis Caldwell, chief of Treasury's Homeownership Preservation Office.

So far, some 24.6% of trial modifications have become permanent, up from 19.8% a month ago.

Some 637,353 troubled borrowers remain in trial modifications, officials said. The pace of people entering the program has slowed as servicers begin implementing new requirements to collect documents at the outset.

New statistics released by Treasury provide additional insight into just how well servicers are doing in converting trial modifications to permanent status.

The six servicers who verified borrowers' income before placing them in trials have transferred more than half to long-term adjustments, with HomEq Servicing and Ocwen Financial Corp. (OCN) leading the way with 83% converted.

Those using stated income, however, have yet to hit the halfway mark. The largest loan servicers are trailing most of the pack with Bank of America (BAC, Fortune 500) at 25%, Wells Fargo (WFC, Fortune 500) at 25%, JPMorgan Chase (JPM, Fortune 500) at 22% and Citigroup (C, Fortune 500) at 21%.

Borrowers also languished in trial modifications at certain servicers. Some 76% of those in the trial phase at Saxon Mortgage Services and 72% at JPMorgan Chase have remained at that stage for at least six months. Servicers, who met with Treasury and Housing Department officials last week, told the administration they would clear the backlog by the end of June.

Big changes to the program are coming down the pike in the wake of criticism that the administration must do more to help troubled borrowers.

Starting June 1, homeowners will have to provide all their income verification documents before they are put into trial modifications. This will make it harder for troubled homeowners to start the process, but it should make it easier for them to qualify for permanent assistance.

Separately, the administration plans to roll out its new program for the unemployed on July 1. Eligible borrowers could enter a forbearance program, which either suspends their monthly payments entirely or reduces them to less than 31% of their pre-tax household income.

Administration officials also plan to provide more details on the performance of the eight largest servicers in July. It will report the average time borrowers spend in the trial phase, the servicers' handling of calls and problems and a review of whether borrowers were appropriately evaluated. This is another step in the government's effort to put pressure on servicers to perform.

Later in the year, two more initiatives will begin. One will encourage servicers to lower loan balances for delinquent borrowers when that is more advantageous to mortgage investors than reducing interest rates.

Principal reduction would be available for eligible borrowers who owe more than 115% of their home's current value. The balance would be forgiven as long as the homeowner makes timely payments for three years.

The other initiative will allow some borrowers who are current on their mortgages but have seen their property values drop, to refinance into Federal Housing Administration loans worth no more than 97.75% of their home's price. The program is set to start in the fall.

If the borrower has a second lien, the total mortgage debt could not exceed 115% of the property's value. Homeowners, however, must meet FHA's qualifications and have a credit score of at least 500. Their new monthly payments would be no more than 31% of their monthly income.