Mortgage relief program is still too slow, many say

— -- USA-ECONOMY/MORTGAGES (UPDATE 2):UPDATE 2-US home loan demand at 3-month high as rates fall

Just 12% of eligible mortgages have been modified under a $75 billion federal program to rework home loans into more affordable monthly payments, according to a Treasury Department report Wednesday.

A total of 360,165 mortgage modifications are in a three-month trial period, and another 571,354 offers for modifications have been made to struggling homeowners, the report says.

The goal of the program, announced in March, is to keep up to 4 million borrowers in their homes, an unprecedented federal effort aimed at stemming the foreclosures that are undermining the housing market.

Treasury officials say they don't have reliable data yet on how many mortgages have moved out of the trial period, either becoming permanent or winding up in default.

Some economists say the administration's goals aren't realistic given the current pace of modification activity.

"It's still a slow ramping up," says Mark Zandi, at Moody's Economy.com. "It's much improved from earlier in the summer and servicers are better staffed. But it's slow going compared to the serious delinquencies and foreclosures that continue to surge."

Among major lenders, those in the lead include J.P. Morgan Chase, which has started trial modifications on 25% of eligible mortgages that are 60 or more days delinquent. CitiMortgage started trial modifications on 23% of eligible mortgages.

Those trailing the pack include Wachovia, which has modified just 2% of eligible mortgages, Bank of America, which has modified 7%, and Wells Fargo, at 11%.

During a House Financial Services subcommittee hearing Wednesday, legislators took lenders to task for the slow progress and criticized the program.

Several legislators said they may need to reconsider legislation that would empowers bankruptcy judges to modify mortgages if progress on existing programs doesn't improve.

"I am disappointed in the pace of this program… the servicers are not going a very good job," said Rep. Barney Frank, D-Mass.

But mortgage servicers defended their progress, saying they are doing modifications on their own that don't get counted in the federal government's tally. And they say they have added staff and are ramping up to modify more mortgages under the government plan.

Wells Fargo has added 4,600 people this year, bringing the total to 12,000 employees involved in mortgage modification-related issues. They say they've had a 64% increase the past 30 days in trial modifications under the federal plan.

"We're very focused on ramping up the program," says Mike Heid, co-president, Wells Fargo Home Mortgage. "We're very committed."

Bank of America says they've doubled the number of customers with a trial modification in one month. They're not proceeding with foreclosure sales for customers who may be eligible for a modification, and they say they've already helped 400,000 customers since 2008 through their own loan modification programs, including more than 170,000 completed loan modifications the first seven months of 2009.

Michael Barr, assistant secretary for financial institutions with the Treasury, also said Wednesday that progress in implementing the program has been substantial but much more needs to be done .

Treasury says 48 mortgage companies are now involved in the program, up from 38 in July.

Nevertheless, housing advocates say getting approved for a modification is a time-consuming, bureaucratic nightmare. Many borrowers are also wary of signing up because they are worried their payment will rise after the three-month trial period.

In other housing news Wednesday, the Mortgage Bankers Association said applications for mortgages surged last week as consumers sought to take advantage of the lowest interest rates in months.

The MBA said interest rates on 30-year fixed-rate mortgages tumbled to a 3-month low, spurring a surge in demand for home refinancing loans. Applications to buy a home also climbed, to the highest level since early January.

The trend bodes well for the hard-hit U.S. housing market.

The MBA said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Sept. 4 increased 17%, to its highest level since the week ended May 29.

Cameron Findlay, chief economist at LendingTree.com in Charlotte, said while higher loan demand is positive, the housing market still faces many obstacles, particularly in move-up purchases.

"It is hard to make an argument with lower wages, less hours and higher unemployment that people will be upsizing into their dream home," he said.

The Labor Department last week said the unemployment rate reached a 26-year high 9.7% in August.

While low mortgage rates, high affordability and the government's $8,000 tax credit for first-time home buyers — part of the stimulus bill — have helped pave the way for some stabilization, move-up buyers have been mostly absent.

With the tax credit set to expire in several months and distressed properties making up a high proportion of sales, the recent uptick in activity may mask an uncertain long-term outlook.

"The inventory of existing U.S. homes for sale remains elevated," Findlay said.

Furthermore, a wave of upcoming interest rate resets on adjustable-rate mortgages may hurt the market, he said.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.02% in the most recent week, down 0.13 percentage point from the previous week, lowest since the week ended May 22.

However, the rate remained above the all-time low 4.61% set in the week ended March 27. The survey has been conducted weekly since 1990. Rates were well below the year-ago level average of 6.06%.

Fixed 15-year mortgage rates averaged 4.45% in the latest week, down from 4.57% the previous week. Rates on one-year ARMs edged down to an average 6.69% from 6.71%.

"Application activity in the recent past has been entirely predictable, ... picking up as rates fall, and more people waiting on the sidelines when rates increase," said Bob Walters, chief economist at Quicken Loans in Livonia, Mich.

The MBA's seasonally adjusted purchase index rose 9.5%, largest gain since early April, with the index at its highest since the week ended Jan. 2.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 7.0%.

The Mortgage Bankers' seasonally adjusted index of refinancing applications increased 22.5%, biggest jump since mid-March, with the index at its highest since the week ended May 29.

The refinance share of applications increased to 59.8% from 56.5% the previous week, but remained significantly lower than the peak of 85.3% the week ended Jan. 9. The adjustable-rate mortgage share of activity increased to 5.8% from 5.6% the prior week.

The housing market has suffered the worst downturn since the Great Depression of the 1930s and its impact has rippled through the economy.

Housing, however, has been showing some signs of stabilizing, with sales rising and home price declines moderating in many regions of the country. Home prices in some areas have risen.

Some analysts, however, say prices may fall again, with a new wave of foreclosures in the pipeline.