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Loan Mod Backlogs Continue Despite Servicers' Pledges to Improve

Loan servicers in the federal mortgage modification program continue to have large backlogs, but the administration has not responded with penalties. Many homeowners continue to be stuck in trial modifications.

Update (8/12/2010): The Treasury Department released updated dataon the performance of permanent modifications in early August after it discovered errors, which made the default rate appear lower than it really is. The new, corrected data, however, still showed a relatively low default rate. This post has been updated to reflect that new data.

Two months ago, representatives of banks and other mortgage servicers participating in the administration's mortgage modification program visited the Treasury Department and made a commitment: they would drastically reduce the number of homeowners stuck in trial modifications by the end of June.

That hasn't happened. New data released today shows that about 166,000 homeowners have waited six or more months in plans that only temporarily reduce payments. That's about one-third of the current trials, but the trial period is supposed to last only three months.

For those homeowners who finally do get an answer, it's usually a denial. The number of homeowners being dropped from the program has continued to rise. While about 398,000 homeowners have received a final modification through the program, far more, 521,000, have been dropped.

See our interactive breakdown of the data. It shows which mortgage servicers are primarily responsible for the continued logjam.

JPMorgan Chase continues to have the biggest backlog, with about 46,000 homeowners in limbo. Chase's problem is not new -- we reported back in February that Chase had the worst backlog. The prolonged trials hurt homeowners by damaging their credit, increasing the balance of their mortgage, and preventing them from saving for the possibility of foreclosure. Chase declined to comment on the reason for its poor performance.

During a conference call with reporters Tuesday, Treasury official Phyllis Caldwell acknowledged the failure by servicers like Chase to live up to their pledge to clear their backlogs. When pressed whether the servicers would face penalties for breaking the program's guidelines, Caldwell said Treasury was "looking at every remedy we have."

Back in February, Treasury made the same vague reference to possible penalties. Despite frequent threats, Treasury has yet to actually penalize a servicer. The Government Accountability Office reported last month (PDF) that Treasury had not even established standards for how it might penalize servicers who break the program's rules.

The GAO also reported that the servicers frequently make errors calculating homeowners' income: it interviewed 10 servicers and found that at least half had discovered through internal reviews that their employees had miscalculated the income on at least 20 percent of the sampled modifications. As we've been reporting since the program launched, homeowners often encounter problems with their servicer -- lost documents, delays, and mistakes that can lead to foreclosure.

With relatively few homeowners having received permanent modifications through the government's program, administration officials have been stressing in recent months that many homeowners will still eventually receive a private offer of a modification from their servicer. But those offers will not necessarily comply with the program's guidelines, which require that the payments be set at a certain low rate: 31 percent of the homeowner's monthly gross income. Modifications outside the program have been outpacing modifications under the government plan by about two to one (PDF) in recent months.

Alys Cohen of the National Consumer Law Center said she thought servicer errors meant that homeowners were being wrongly steered into servicers' modification plans when they qualified for the government program. “We don't believe it's because more people qualify for the proprietary modifications than [the government program],” she said.

For homeowners who do receive a permanent modification under the government program, early results indicate the lower payment level may be sustainable. Treasury released data showing that only about 10 percent of borrowers who had been in a modification for six months or longer were more than two payments behind. The average homeowner in the program saves about $510 on monthly payments.

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