The Making Home Affordable program created by the current administrated has made matters worse for homeowners and the economy.

Homeowners have been dragged along with lender’s extend-and-pretend temporary loan modifications, pouring money into loans that are ultimately foreclosed on by lenders. Money wasted in trial modifications would have been saved for moving expenses and rental deposits.

Additionally, most homeowners are unaware that requesting a modification (even if all payments have been current) will damage their credit for up to two years.

Modification programs are only delaying the pain of the desperately needed real estate owned (REO) market purge.

Banks have been abusing the temporary loan modifications as a tool to keep foreclosure losses and bad loans off their loss-accounting books.

This shadow inventory of eventual REOs coupled with the lender’s refusal to agree to short sales that would move property directly onto the market leads to prices inflated by artificial inventory scarcity.

All this conduct has the nasty side effect of encouraging builders and developers to create inventory for a market that is overly-inflated, speculator-driven and headed for another severe price depression.

While on the one hand, the Treasury Department assures the public that the Making Home Affordable is successful in providing needed relief, a new program called the Foreclosure Alternatives Program will provide incentives for lenders to accept short sales and deeds in lieu of foreclosure. As of mid-December, nearly 760,000 homeowners had received trial modifications and only 31,000 received permanent modifications. The Treasury Department’s goal is to see three to four million permanent modifications by 2012 — an unreasonable goal considering the miserable results of the Making Home Affordable program.

2008 saw more than 1.7 million Americans with delinquent payments lose their homes through foreclosures, short sales or deeds in lieu according to Moody’s Last year an additional two million U.S. homes became REO properties. Projections from indicate that 2010 will be the worst year yet for foreclosures, with numbers reaching 2.4 million nationally.

The key piece missing from all of these foreclosure prevention plans? Cramdowns — a reduction of the principle balance on the loan. Without cramdowns, homeowners who have lost all equity with no hope of retrieving it for a decade or more have no incentive to stay in their underwater residences.

first tuesday take: Banks, like every other business trying to survive in this economic climate, are unconcerned with the plight of the American and the Californian homeowner. Banks are solely concerned with what affects their bottom line – which includes reporting (or not reporting) huge lost value in their mortgage portfolios.

Lenders are taking advantage of their current alliance with a government that fully backs extend-and-pretend modification practices. It serves their purpose to escape stating the market value of their mortgage loan portfolio, avoiding the financially devastating consequences of insolvency they can only avoid with the present mark-to-management pricing of their loan portfolio.

The federal government has invested taxpayer money in these lenders, and has no desire to force them to show their cards and foreclose on their shadow inventory, allowing transparency of value to shine in. Likewise, in its quest for job creation, the federal government wants to keep REO inventory off the market and is using subsidies to get the new home inventories out of the market in order to encourage new builders to continue building homes, a bow to a construction industry which stockpiled more new housing in the 2004 to 2006 period than will be needed for four or five years into the future.

The federal government needs to wake up and get out of bed with lenders and builders. Without judicial cramdowns incentivizing lender-originated principal reduction, the real estate market and the economy will double-dip within months after the tax credits end in April 2010. The Federal Reserve Bank will raise mortgage interest rates and the next wave of foreclosures will hit as ever more adjustable rate mortgages (ARMs) and modifications reset.

Brokers and agents must continue doing what they do best: set the values that properties are worth in this market in spite of seller resistance, and locate a match for buyers with properties that have equity and can actually close escrow. Remember that speculators will keep REO resales overpriced for months to come, but they stay involved at their own peril.

Re: “U.S. Loan Effort Is Seen as Adding to Housing Woes,” from The New York Times