NEW YORK (CNNMoney.com) -- Hundreds of thousands of troubled homeowners who are making lower mortgage payments on a trial basis are at risk of being kicked out of President Obama's foreclosure-prevention program.

Companies that service the mortgages have until Jan. 31 to review all trial modifications that have been underway for several months under the Home Affordable Modification Program (HAMP), according to a Treasury Department guideline issued late last month. The Treasury Dept. said it would issue new guidelines next week, but wouldn't give details.

The goal is to clear up the backlog of borrowers stuck in trial modifications, in which a homeowner's monthly payments are lowered to no more than 31% of pre-tax income.

Some homeowners have spent seven or eight months waiting to hear if they qualify for a permanent adjustment to their mortgages.

This directive, however, has some bank regulators concerned.

"About 450,000 homeowners currently have HAMP trial modifications and have demonstrated a willingness and ability to make timely payments for at least three months," said Richard Neiman, superintendent of the New York State Banking Department.

"Now, unfortunately and very alarmingly, these same homeowners face the prospect of foreclosure strictly on account of documentation issues," he said.

Paperwork has proved a major stumbling block for the president's foreclosure-prevention program. Homeowners complain that their servicers continuously lose the documents they send in, while financial institutions argue that borrowers have not been sending in their paperwork.

Aware of the problem, Treasury officials said they plan to issue new guidance to servicers next week that will help expedite the conversion of borrowers in the trial period to permanent modification. It may also lighten the documentation requirements.

Under fire for the low number of people receiving long-term help, the Treasury Department in late November ramped up pressure on servicers to convert borrowers to permanent modifications.

Some 66,500 people have received permanent adjustments, with another 787,200 homeowners in trial modifications.

Under the president's plan, delinquent borrowers are put into trial modifications for several months to make sure they can handle the new payments and to give them time to submit their financial paperwork.

Once the modification becomes permanent, servicers, investors and homeowners are eligible to receive thousands of dollars in incentive payments.

Overall, about three-quarters of people are making their payments on time, according to the Treasury Department.

Treasury officials already lightened the documentation requirements in the fall in hopes of speeding up the conversion process. But more needs to be done, Neiman said.

For instance, Treasury should accelerate its implementation of a standardized documentation form and the creation of a Web portal that will allow homeowners to track the receipt of the paperwork, he said. Also, it should allow servicers more flexibility in accepting alternative documents.

If this isn't done, a lot of homeowners could soon face foreclosure, he said.

"This is a real concern to borrowers, particularly borrowers who've continued to make payments for three, four, five, even seven months,"

(from CNNMoney)

NEW YORK (CNNMoney.com) -- Intense pressure from the Obama administration spurred loan servicers to ramp up the amount of permanent modifications they offered to troubled borrowers.

The number of long-term adjustments completed under the president's foreclosure prevention plan rose to 66,465 at the end of December, or 7.4% of all trial modifications started, up from 31,382 a month earlier.

Meanwhile, the number of delinquent homeowners in trial modifications rose to 787,231, up from 697,026 a month earlier.

"Treasury is committed to working with servicers and borrowers to sustain this improved pace," said Phyllis Caldwell, chief of Treasury's Homeownership Preservation Office.

Administration officials increased pressure on servicers in November after the slow pace of conversions to permanent modifications raised concerns that the $75 billion plan will fall far short of its goal to help up to 4 million delinquent homeowners.

The administration ramped up its oversight of loan servicers' conversion operations, sending in SWAT teams to break up any logjams and requiring banks to submit updates twice daily on their efforts. Officials also called financial executives to Washington to urge them to quicken the conversion rate.

Housing experts, however, remain concerned that the rate of foreclosures still outpaces the help homeowners are receiving under the program. A record three million homeowners received at least one foreclosure filing in 2009, according to a RealtyTrac report released Thursday.

"We have a lot more to do if we're going to address the foreclosure crisis," said David Berenbaum, chief program officer for the National Community Reinvestment Coalition. "The servicers will have to step up to the plate."

One prominent forecasting group, Moody's Economy.com, said this week that it expects the Obama program to save only 400,000 to 1 million borrowers from foreclosure.

A lot of borrowers are too far underwater or don't have enough income to qualify for a permanent modification, said Celia Chen, senior director at Economy.com. Others will not be able to provide all the documentation needed.

Administration officials said they continue to review the program to make sure it is helping those in need, Chen said she doesn't think there's anything the government can do to keep these borrowers in their homes.

And once these homeowners go into foreclosure, it will hurt the housing market, she said.

"As more of these loans fail to make it to permanent modifications, a lot will go back on the market as foreclosures and that will depress home prices," said Chen, who expects home prices to fall another 10% by the third quarter of this year.

Under the president's plan, delinquent borrowers are put into trial modifications for several months to make sure they can handle the new payments and to give them time to submit their financial paperwork. Once the modification becomes permanent, servicers, investors and homeowners are eligible to receive thousands of dollars in incentive payments.

Overall, about three-quarters of people are making their payments on time, said Michael Barr, Treasury assistant secretary.

At Wells Fargo, for instance, a quarter of the 74,000 borrowers who had made three trial payments on time did not turn in all the required documents. Another 25% turned out not to be eligible for modification after their documents were reviewed. The remaining are expected to receive permanent modifications.

Loan servicers efforts continue to vary widely. Citigroup (C, Fortune 500) led the pack by placing 47% of its eligible delinquent borrowers in trial modifications, while Saxon Mortgage, a subsidiary of Morgan Stanley (MS, Fortune 500), came in at 46%. Among the other major servicers, JPMorgan Chase (JPM, Fortune 500) put 36% of eligible homeowners in trial modifications, while Wells Fargo (WFC, Fortune 500) put 34% in. Bank of America (BAC, Fortune 500) continued to trail the pack with 19%.

In terms of longer-term assistance, Wells Fargo led the pack among the nation's largest servicers with 2.41% of its eligible delinquent borrowers in permanent modifications. Citi placed 2.1% and Chase 1.68%.

Bank of America, by far the nation's largest servicer, said it has implemented "extraordinary efforts" over the past two months to boost its conversion statistics. The servicer, which had converted only 98 homeowners by the end of November, increased that number to 3,183 a month later. That means only .3% of its eligible homeowners are in permanent modifications.

Asked repeatedly about the laggards during a conference call with reporters, Treasury officials declined to say what measures they would take to force servicers to improve

According to Realty Trac Inc, due to high unemployment and low home values, foreclosed homes in the U.S will reach 3 million this year.

In 2009, Realty Trac reported 2.82 million homes were foreclosed. Rick Sharga, senior vice president of Realty Trac, predicts more than 4.5 million filings are expected this year, which includes default or auction notices and bank seizures.

"This will be the peak year, and the main reasons are unemployment and house prices that have stabilized way below mortgage amounts," Kenneth Rosen, chairman of the University of California's Fisher Center for Real Estate and Urban Economics in Berkeley, said in an interview.

The government and lenders have come up with programs to help people stay in their homes, but have not had an outcome officials hoped for. In December unemployment reached at high of 10 percent.

Under President Obama's program to help prevent foreclosure, only 31,382 mortgages or 1 percent have been permanently modified. Lest than half of the 3.2 million homeowners that were estimated as eligible for mortgage relief have actually qualified for help.

According to Megan Reilly, "Modifications will not be the solution for all homeowners and will not solve the housing crisis alone."

Walt Molony, a spokesman for the National Association of Realtors, reported in an interview, home prices have dropped 13 percent in 2009, and had dropped 9.5 percent in 2008. Home values are down 26 percent from its peak during July 2006.

The housing market is weighed down by a "a massive supply of delinquent loans" that will end up in foreclosure this year, James Saccacio, Realty Trac's chief executive officer, said in a statement today.

According to Rosen, the end of the government first time home buyer tax credit may add to the housing woes. In 2009 a total of 2,824,674 properties received at least one foreclosure filing.

Source: CAMREO