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Our Guide to Obama’s Floundering Foreclosure Programs

The Obama administration's efforts to address the foreclosure crisis have resulted in struggling programs, recycled ideas and little chance of significant improvement.

More than 6 million Americans are behind on their mortgage payments or facing foreclosure. Housing prices have continued to drop, and many neighborhoods across the U.S. are filled with foreclosed homes.

What exactly has the administration done in the face of such historic need? We've put together a guide to the administration's major efforts to help homeowners, laying out the promise of each and how they've actually performed.

It's a sobering list. Obama himself has called his approach to the foreclosure crisis one of his biggest mistakes dealing with the recession. Overall, the foreclosure programs have failed to reach more than a fraction of the homeowners they were designed to help.

Here are the depressing details:

Programs That Have Been Enacted

Plan: Help millions of homeowners by encouraging servicers to lower mortgage payments

Obama launched his "homeowner bailout," Making Home Affordable, in the spring of 2009, with the aim of helping at least 3 million to 4 million homeowners avoid foreclosure. The program gives banks and other mortgage servicers modest incentives to adjust the terms of mortgages so that homeowners who can't afford their current monthly payments can stay in their homes.

Reality: Mistakes, lost documents, lax oversight; billions remain unspent

As we've detailed, the program has been marked by deep dysfunction. Mortgage servicers mishandled cases, made errors and lost documents, while government watchdogs looked on and did almost nothing. In one case, a government auditor found that mortgage servicer GMAC had made errors on 80 percent of audited cases — but kept the mistakes secret. GMAC said it didn't reverse a single foreclosure action as a result of the sobering audit results.

Meanwhile, as of August, only about 816,000 homeowners had received loan modifications through the program, or fewer than one in four of those who applied. The government is on track to spend only about $7 billion of the $45.6 billion in bailout funds set aside to help homeowners. As a result, nearly $30 billion meant to address the foreclosure crisis may instead be used to pay down the deficit.

Plan: Allow millions of homeowners to refinance their mortgages at lower interest rates

Launched in 2009, the Home Affordable Refinance Program was designed to allow some homeowners to take advantage of this year's historically low interest rates and refinance their loans. The administration estimated "up to 4 [million] to 5 million" homeowners would be able to take part. In his jobs speech in early September, Obama promised to work with federal agencies to make this option available to more people.

Reality: May not help the hardest-hit, and a government regulator stands in the way of change

As of June 2011, just 838,000 homeowners had refinanced through the program. While Obama promised to increase the number of homeowners in the program, the government regulator who oversees Fannie Mae and Freddie Mac may make this difficult. While refinancing is good for homeowners, it means more risk for taxpayer-owned Fannie and Freddie, which own or guarantee 5 million mortgages that are higher than the value of the home.

Meanwhile, even if Obama succeeds in giving more homeowners access to the program, refinancing may not do much to address the underlying crisis. "Anything that is called a ‘refinancing' program is just a joke," a member of the National Association of Consumer Bankruptcy Attorneys told iWatch News.

Plan: Loan money to jobless homeowners so they can avoid foreclosure

The $1 billion Emergency Homeowners' Loan Program, introduced last year, aimed to reach 30,000 families. It offered interest-free federal loans of up to $50,000 to qualifying homeowners who had lost income because of unemployment or a medical condition.

Reality: Slow start, few people qualified; at least half of money left unused

The program, which got off the ground only in June, had a deadline of Sept. 30 for giving out money to eligible homeowners before the unused funds were to be returned to the Treasury. As CNN Money reported, its success was hampered by delays and a tangle of stringent requirements. A spokesman from the Housing Department, which ran the program, said earlier this week that at best the program would only succeed in loaning out half the allotted money. Only 10,000 to 15,000 of the roughly 100,000 applicants qualified for the loans.

Plan: Give money to states to experiment with programs for homeowners

In February 2010, the government promised $7.6 billion to finance innovative programs to deal with foreclosures in states hit hardest by the crisis.

In Arizona, for instance, where nearly half of homeowners with mortgages owe more than their homes are worth, the state Housing Department launched a loan reduction program that the agency hoped would aid 3,500 to 4,000 homeowners.

Reality: A small fraction of the money has been used

As of July, only $478 million of the government's $7.6 billion had been actually loaned, used or spent, and some states that implemented new programs have struggled with their enrollment levels.

For instance, as The New York Times reported yesterday, in the first year of the Arizona program, the state approved only three homeowners for the reduction. The problem? Banks have declined to participate, even though the state was willing to pay half the cost — and taxpayer-owned Fannie Mae and Freddie Mac have also been an obstacle.

The Road Not Taken

Undelivered promise: Giving bankruptcy judges the power to lower mortgage payments

During his campaign, Obama promised to change bankruptcy laws to give judges the authority to lower mortgage payments — a tactic called "cramdown." Democrats pushed for the change after Obama's election, but his economic advisers privately dismissed the plan, and Obama's promised support never came. With the administration silent, and banks fighting hard against the change, the measure was voted down.

Popular idea: Reducing the amount people owe on 'underwater' mortgages

With millions of homeowners owing more on their mortgages than their homes are worth, one popular proposal for dealing with the financial crisis is principal reduction, or asking banks to adjust the total amount owed on a mortgage based on the post-bubble value of a home. The idea is controversial, since some economists argue it would create an incentive for borrowers to take out riskier loans in the future.

But it is also seen as a way to address one of key underlying factors of the housing crisis: that American mortgage-holders owe an estimated $700 billion to $800 billion more than their homes are actually worth.

Because the American people ultimately own or guarantee the majority of the country's home loans through taxpayer-owned Fannie Mae or Freddie Mac, a government-approved program of principal reduction could have an enormous impact, even without buy-in from other mortgage servicers.

But the federal regulator who oversees Fannie Mae and Freddie Mac has refused to consider principal reduction because it would be bad for Fannie and Freddie's bottom line. (They are still $141 billion in the red after a taxpayer bailout.) Proponents of principal reduction argue that Fannie Mae and Freddie Mac will have to deal with the decline in home values eventually — and by keeping losses off their books at the moment, they are costing Americans their homes.

Back to the Drawing Board — With Few Options Left

In July, President Obama noted that his administration had not made enough progress on dealing with the foreclosure crisis. "We're going back to the drawing board," he said. But the administration's new proposals for tackling the crisis are modest. Part of the problem is that an estimated $30 billion in unused bailout money from the previous foreclosure programs cannot be used to fund new programs.

Proposed plan: Turning foreclosed homes into rental properties

Over the summer, the administration put out a call for proposals about how to turn foreclosed houses into rental properties, a way of simultaneously dealing with the glut of foreclosed properties and addressing the steeply rising prices of rental units. No version of the plan has been implemented yet, and the idea itself has gotten mixed reviews.

Proposed plan: Dedicating $15 billion to refurbish foreclosed and vacant properties

As part of his jobs bill, President Obama would spend $15 billion to refurbish vacant and foreclosed homes or businesses, a way to help neighborhoods blighted by foreclosure while creating more construction jobs. Obama is pressing Congress to pass the bill quickly, but this seems unlikely to happen.

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