The US government’s effort to help people who are in danger of losing their homes is falling, with more than one-third of the 1.24 million borrowers enrolling in the US$75-billion mortgage modification programme offered by the government have dropped out.
This surpasses the number of people who have managed to reduce their mortgage payment to keep their homes.
About 155,000 borrowers left the programme in May alone, bringing a total of 436,000 people who have dropped out on the programme since it started in March last year.
Approximately 340,000 homeowners who have received permanent loan modifications programme and managed to keep their payments on time.
The Obama administration said the US housing market is significantly better compared with last year since President Barack Obama entered office. They adds that those who rejected the government’s programme will get help in other ways.
However, several analysts expect that the majority in the US will still end up in foreclosure and this could slow the broader economic recovery.
The primary reason why many borrowers have dropped out the programme is the pressure that banks received from the government to approve application without insisting first their proof of income. When banks later collect the information, many borrowers were disqualified or dropped out.
US Treasury officials now require banks to collect two recent proof of income. And borrowers must give Internal Revenue Service permission to provide their latest tax returns to lender.
However, requiring home borrowers to provide such documents has turned them away from the programme. Nearly 30,000 homeowners enrolled in the programme in May. A sharp turnaround from last summer when over 100,000 borrowers signed up in the programme each month.
As more people turned their back away from the government’s mortgage scheme, a new wave of foreclosure issue could occur, which could weaken the housing market and halt the broader US economic recovery.
Even after homeowners managed to modify their loans, many of them are still stuck in too many debts, including car loans, credit cards and home equity loans.
“The majority of these modifications aren’t going to be successful,” said Wayne Yamano, Vice-president of John Burns Real Estate Consulting. “Even after the permanent modification, you’re still looking at a very high debt burden.”
So far, about 6,400 home borrowers have dropped out after the loan modification was made permanent. Most of the borrowers defaulted on their modified loans, but some either sold or refinanced their homes.