Responding to complaints that too many borrowers are stuck in trial adjustments, administration officials said they would more closely monitor loan servicers' handling of modification applications.
In cases in which they have all the needed documentation, top loan servicers will be required to report the status of each modification and their plan to reach a decision. Also, these servicers must say how they will communicate decisions to borrowers.
Those failing to meet their obligations could face penalties and sanctions.
To help borrowers through the process, the administration is providing more information on the documents they need to submit to be considered for a permanent modification. Federal, state and local officials will increase outreach to delinquent homeowners.
"We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones," said Phyllis Caldwell, the new head of Treasury's Homeownership Preservation Office.
The administration's move is its latest attempt to revitalize its $75 billion loan modification plan, which many fear will fall far short of its goal to help up to 4 million delinquent homeowners.
Stuck in trial modificationsA growing number of borrowers are complaining that they are not receiving long-term assistance. Some 650,000 homeowners are currently in this preliminary phase, but only a small fraction have received permanent assistance.
About 375,000 people should be eligible to receive long-term relief by year's end, said Treasury officials. The administration is set to release its first report on the conversions next week.
As of Sept. 1, only 1,711, or 1.26%, of all trial adjustments were made permanent after three months, reported the Congressional Oversight Panel, which monitors the government's use of bailout funds.
The administration's steps indicate its foreclosure rescue plan is in trouble, said Alan White, a law professor at Valparaiso University who studies loan modifications. He would hope to see 50,000 to 100,000 people receiving permanent modifications by now, but is concerned the figure will be much lower.
"If we don't see a big increase in the permanent modification numbers, then there's something seriously wrong with this program," said White, referring to next week's report. "I can only assume the number is appallingly low."
Gathering paperworkIncreasing oversight of the servicers' modification efforts should help, White said.
Under the president's plan, delinquent borrowers are put into trial modifications for several months to make sure they can handle the new payments and to give them time to submit their financial paperwork.
Borrowers that qualify for long-term modifications can keep making the lower payments for five years. At that point, the interest rate will be set at the rate at the time of the adjustment, currently about 5%.
Loan servicers, however, say they are having trouble getting the necessary documents from borrowers, while homeowners maintain that their financial institutions are repeatedly losing the paperwork.
And once homeowners send in their forms, servicers may find these borrowers don't have enough income or have too much equity or savings to qualify. It also may be more profitable for the bank to foreclose on the home than to modify the mortgage.
Once the modification becomes permanent, servicers, investors and homeowners are eligible to receive thousands of dollars in incentive payments.
Foreclosures: ‘Tide may be turning’Mortgage aid requests soar
