WASHINGTON - A government watchdog Thursday strongly criticized the Obama administration's loan assistance effort, saying the government rushed the program's creation last year and set up hundreds of thousands of homeowners for failure.
The program, widely viewed as a disappointment, is designed to lower borrowers' monthly payments by reducing mortgage rates to as low as 2 percent for five years and extending loan terms up to 40 years.
But getting banks and homeowners to complete the process has been tough, and to date only 170,000 homeowners have completed the process out of 1.1 million who began it over the past year.
Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, told House lawmakers the Treasury Department took a "ready, fire, aim kind of approach" when creating the $75-billion program last year. That lack of planning, he said, has resulted in "constant changes" that have bewildered the more than 100 participating mortgage companies.
Another mistake, Barofsky said, was the Treasury's decision last year to allow borrowers to enter the program without providing written proof of income. That, he said, led to a huge backlog of homeowners waiting to see whether they qualify.
"It may have actually harmed the people this program was intended to help," Barofsky said, by putting homeowners into "hopeless modifications with little chances to succeed."
The Treasury Department reversed course earlier this year and said homeowners seeking relief would be required to provide proof of their incomes up front. Also, mortgage companies will have to evaluate all borrowers who have missed at least two payments to see if they are eligible. They also must not foreclose until homeowners are found ineligible or don't respond to outreach efforts. Borrowers will be able to get a decision on their application within 30 days.
And according to The Washington Post, borrowers who are in bankruptcy will now be eligible for the program.
Meanwhile, Citigroup has become the latest lender to commit to the government's program to modify second mortgages. The program offers lenders who made "piggyback" loans - second mortgages that allowed consumers to make a small or no down payment - incentives to lower payments or eliminate the loans entirely.