US gets tough as lenders fail to help homeowners

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The Independent Online

US Banks and mortgage companies which are failing to help struggling borrowers refinance into more affordable home loans could be fined, under a drive aimed at cutting the foreclosure rate in the world's most important housing market.

Amid concern that soaring repossessions could undermine the nascent economic recovery, the Obama administration yesterday promised much tighter regulation of the mortgage industry's efforts to aid borrowers.

And it threatened "consequences" for any mortgage firm that fell behind in its obligations under a $75bn (£46bn) government programme funnelling support to borrowers. These consequences "could include penalties and sanctions", it said.

The US Treasury unveiled its Home Affordable Modification Programme earlier this year, claiming it would keep between 3 and 4 million Americans in their homes by subsidising mortgage firms which arrange lower monthly payments for struggling borrowers. But only 650,000 people have begun even trial modifications, and just "tens of thousands" have finished the process by formally converting to affordable new mortgages.

The disappointing performance of the loan modification scheme has frustrated the administration, which has repeatedly ratcheted up pressure on mortgage firms and launched efforts to name and shame the big banks that are making the fewest refinancings. Mortgage firms say there have been problems finding new loans that homeowners could afford, and the scheme has also been plagued by a lack of public awareness and difficulties getting borrowers to submit the right paperwork.

All the while, the housing market has remained fragile, and economists worry that continuing high levels of foreclosures could lead to a glut of unsold houses that once again pushes down prices. That could set off a second round of the credit crisis, since many credit derivatives traded on world markets are based on US mortgages and the value of house prices.

Phyllis Caldwell, head of the Treasury's Homeownership Preservation Office, said yesterday that regulatory staff would fan out across mortgage service firms to monitor their work under the modification scheme, including daily reporting back to the Treasury. She said some 350,000 borrowers could be settled into new mortgages by the end of the month, at which point her office will publish a list of the firms which are falling behind.

The $75bn allocated to the mortgage scheme was carved out of the Troubled Asset Relief Programme, the Wall Street bailout fund approved last year. Mortgage firms receive a bonus when a customer converts to a new loan.

House sales and prices have bottomed out this year, but foreclosure rates continue to be at all-time highs. About 14 per cent of US homeowners with mortgages were either behind on payments or in foreclosure at the end of September, a record level for the ninth straight quarter, according to the Mortgage Bankers Association.