Mortgage modification programs have failed, lawmakers told
Look to new programs from FHA and FDIC to reduce foreclosures nationwide

Mindful that the foreclosure crisis may be at the root of Wall Street's meltdown, the House Financial Services Committee today reviewed new evidence that the housing industry's efforts to modify struggling homeowners' mortgages aren't working.

A study by Valparaiso University law professor Alan M. White, a member of the Federal Reserve Board's consumer advisory council, found that banks working with distressed homeowners to modify their mortgages had failed to reduce the principal balance in 98% of the 4,300 cases studied. Nearly half the loan modifications did not even reduce the monthly payment amount.

The result was that thousands of the modifications made between July 2007 and June 2008 did not prevent foreclosures.

Mr. White faulted "groupthink in the mortgage industry" that "still seems to be very wary of principal write-downs" for the problem.

The findings prompted congressional concerns that a new federal program due to start Oct. 1 might not help homeowners refinance their troubled mortgages into sustainable U.S.-insured loans as promised.

"Loan servicing is insufficient to solve the problem," said Rep. Maxine Waters, a California Democrat. "The market-servicing industry is under-regulated. Indeed it is almost unregulated."

The Federal Housing Administration program due to start in two weeks would implement a law signed by President George W. Bush in August. It seeks to provide mortgage refinancing to about 400,000 homeowners by insuring up to $300 billion in mortgages.

A consumer group testified that the biggest obstacle to the success of the HOPE for Homeowners program is that industry participation is voluntary.

"We believe that structural barriers inherent in the mortgage-servicing industry will hamper the effectiveness of any voluntary programs," Tara Twomey of the National Consumer Law Center told the panel, citing Mr. White's findings.

Ms. Twomey also noted that it may "be well into 2009 before the program is operating at full speed." That could be problematic in a state like California, which is seeing an average of 700 foreclosure auctions a day.

Federal Deposit Insurance Corp. chairman Sheila Bair said her agency, which is conservator for the assets of the former IndyMac Bank, which was closed in July, could help lawmaker reach their goals. The FDIC has mailed more than 7,400 mortgage modification proposals to IndyMac borrowers. Of these, 1,200 borrowers have accepted the offers, which cut their monthly payments by an average of $430 apiece, Ms. Bair said.

"Our hope is that the program we announced at IndyMac Federal will serve as a catalyst to promote more loan modifications for troubled borrowers across the country," she said.