Underwater Homeowners: Little Help From the Government

Fewer than 5,000 homeowners have taken advantage of an Obama administration program that aids “underwater” homeowners, reflecting banks’ resistance to offer such principal write-downs.

The administration in March 2010 unveiled a multi-part effort designed to encourage banks to slash principal balances for borrowers whose homes have plunged in value due to the housing bust. It attracted lots of attention at the time. But the program has failed to gain traction.

About 10.9 million U.S. households, or nearly 23% of those with a mortgage, are “underwater” – meaning they owe more on their properties than their homes are worth, according to CoreLogic Inc. Treasury Department statistics released recently show that only 4,911 homeowners are participating in the principal-reduction program, which aids borrowers who owe at least 15% more than their properties are worth.

But those homeowners who managed to get their loan balances reduced are seeing substantial principal reductions: The median write-down was about $69,500, or a reduction of more than 32%.

This program and others are part of Treasury’s Home Affordable Modification Program, or HAMP, which was announced in early 2009, but has fallen far short of initial expectations. As of May, it has helped about 633,500 U.S. homeowners avoid losing their homes through permanent loan modifications, compared with an initial goal of helping 3 million to 4 million borrowers.

Banks have largely resisted slicing homeowners’ loan balances. Only 2.8% of loan modifications – including government and private-sector programs – made in the first quarter involved a reduction in the total principal amount owed, according to a report by bank regulators.