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Originally published Friday, March 4, 2011 at 5:00 PM

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House members spar over efforts to avert foreclosures

U. S. Treasury officials urged lawmakers to preserve programs aimed at preventing housing foreclosures.

Los Angeles Times

WASHINGTON — Republicans and Democrats on Capitol Hill agree the Obama administration's foreclosure-prevention efforts have been ineffective, but the parties are at odds on whether Congress should kill the programs.

Rep. Patrick McHenry, R-N.C., said at a House hearing Wednesday that the Treasury Department's Home Affordable Modification Program should end because it was doing "active harm" to at-risk borrowers by allowing banks to string them along.

Under the program, a struggling homeowner can make temporarily reduced mortgage payments as part of a trial loan modification while the lender determines whether the modification can be permanent.

But if a permanent modification is rejected, the borrower is required to make up the difference in payments and pay late fees, putting the homeowner deeper in debt, McHenry said.

Democrats said the programs should be fixed, not terminated.

"The question really is: Who do you punish if the program isn't perfect?" said Rep. Al Green, D-Texas. "Do you punish the people who can benefit from the program by eliminating it?"

Republicans have introduced bills to shut down the Home Affordable Modification Program and three other foreclosure prevention initiatives.

The House Financial Services Committee is expected to approve the bills Thursday, and the full House could approve them this week as well.

Senate passage unlikely

Republicans have long targeted the modification program, but bills to kill it and the other initiatives to stem foreclosures are unlikely to pass the Senate.

Still, Republicans could try to include such legislation in any budget deal they strike with Democrats and the White House.

Neil Barofsky, the special inspector general for the Troubled Asset Relief Program (TARP), joined in the criticism at the hearing, calling Treasury's handling of the modification effort "somewhat shameful" because more changes had not been made.

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"Failed trial modifications often leave borrowers with more principal outstanding on their loans, less home equity, depleted savings and worse credit scores," Barofsky said.

But he said he did not support killing the program.

Barofsky was asked to testify because the government's anti-foreclosure programs are funded by TARP, although most of its $700 billion budget went to pay for bank bailouts.

The modification program was set up in late 2009 to make incentive payments to banks that agree to permanently reduce interest rates and otherwise ease terms on troubled loans.

Treasury officials initially said the program was intended to help 3 million to 4 million homeowners avoid foreclosure. But as of Jan. 31, just 1.5 million trial modifications had begun, with only about 600,000 modifications made permanent, the Treasury Department reported Wednesday.

The department said the rate of conversions from trial modifications to permanent modifications had increased markedly since June, when the program was changed to require borrowers to document their income before they can be offered a trial modification.

"It is a prudent use of taxpayer dollars and, in light of the very difficult market we are still in, we feel very strongly these programs should continue," Treasury Assistant Secretary Timothy Massad, who oversees TARP, told reporters.

Problems acknowledged

Massad conceded there had been problems with the modification program, including inadequate performance by mortgage servicers and an initial overestimation by Obama administration officials of how many borrowers would be eligible.

Consumer advocates and political groups allied with Democrats also called Wednesday for continuing the modification effort and the other programs.

"Proposals in the House to cut off help to distressed homeowners and communities amount to punishing families — again — for the abuses of lenders and servicers," the Americans for Financial Reform, a coalition that strongly backed last year's financial regulatory overhaul, said in a statement.

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