Foreclosure prevention program losing its punch

NEW YORK (CNNMoney.com) -- The president's signature foreclosure rescue plan is losing its punch, according to a federal report released Friday.

Only 36,695 troubled homeowners received long-term mortgage modifications in July under the Obama administration's Home Affordable Modification Program, known as HAMP. This brings the total to 434,717 borrowers who have successfully made it out of the trial phase.

A month ago, 51,205 delinquent borrowers were given long-term assistance.

The number of people falling out of the program, however, is on the rise. Some 12,912 homeowners had their permanent modifications canceled in July, 272 of whom paid off their loans.

Obama officials acknowledge that the foreclosure rescue program will not help every troubled homeowner and that it may be a while before the housing market stabilizes. They are shifting their focus to initiatives that are targeted to those who have been hit by the recession and declining home prices.

"While there has been some stabilization in the housing market, it remains clear that we have more work ahead," said Raphael Bostic, assistant housing secretary. "We know that we must continue to provide support to underwater borrowers, unemployed homeowners, and to the nation's hardest hit neighborhoods."

Foreclosure prevention programs have taken on renewed importance with the housing market on shaky ground again. A spike in foreclosures, combined with weak housing sales, could send home prices plummeting again.

In July, foreclosures were up 3.6% from the month before but down 9.7% from the year earlier period, according to RealtyTrac.

The latest report comes two weeks after the government had to revise its June redefault figures sharply higher, after analysts called the initial numbers misleading.

The revision showed that nearly 20% of homeowners were at least two months delinquent nine months after receiving a permanent modification. The initial figure showed that 7.7% had fallen behind.

The government did not provide redefault statistics for July in the current report. Officials said the data would be released quarterly.

Analysts at Barclay's Capital said last month said 60% of homeowners may ultimately redefault.

Some 96,025 people in trial modifications were canceled in July, bringing the total to 616,839 since the program began in the spring of 2009.

Homeowners usually are kicked out of the trial program because they do not make the required payments, meet the qualifications or submit the needed paperwork. Going forward, loan servicers will gather the necessary documents and review homeowners' eligibility before entering them in trial modifications.

Once their trials are canceled, about 45.4% of homeowners receive alternate modifications, often one from their loan servicer. Some 9.8% had foreclosure proceedings started against them and 1.8% lost their home in foreclosure.

Only 255,934 troubled borrowers remain in the trial phase, some 24,577 of whom entered the program in July. Nearly 118,000 have been in trials for at least six months, though loan servicers should address these homeowners in the next month, administration officials said.

Launched with great fanfare, the president's foreclosure prevention plan calls for servicers to reduce eligible troubled homeowners' monthly payments to no more than 31% of their pre-tax income. However, it has come under persistent fire for being slow to launch and for not helping enough people.

Meanwhile, the government is set to roll out yet another fix for the housing market. Borrowers can start applying for the FHA Short Refinance option starting Sept. 7.

The program allows those who owe more than their homes are worth to refinance into a Federal Housing Administration-backed loan provided they are current on their mortgages and their lender agrees to write off at least 10% of their principal balance. The initiative is open to those who do not currently have an FHA loan and who have a credit score of 500 or more.

In recent months, the administration has stressed the wide range of housing programs it has underway, including initiatives to keep interest rates low and to provide tax credits to first-time homebuyers.