Over 40% leave Obama mortgage-aid program

WASHINGTON - More than 40 percent of homeowners seeking help from the Obama administration's flagship effort to rescue those at risk of foreclosure have dropped out of the program, a report Tuesday showed.

The accounting suggests foreclosures could rise in the second half of 2010 and weaken an ailing housing market.

Separately on Tuesday, the Commerce Department said the start of construction on new homes fell 5 percent in June from May to an annual rate of 549,000. Driving the decline was a 20 percent drop in condominium and apartment building. Construction of single-family homes, the largest part of the market, was down just 0.7 percent.

About 530,000 borrowers have fallen out of the program as of last month, the Treasury Department said. That came from a total of nearly 1.3 million homeowners who had enrolled since March 2009.

Treasury officials say few of these borrowers will wind up in foreclosure. But many analysts are concerned that a new wave of foreclosures could greatly impact the struggling housing industry.

An additional 390,000 homeowners, 30 percent of those who started the program, have received permanent loan modifications and are making payments on time.

A major reason so many have fallen out of the program is that the Obama administration initially pressured banks to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.

Many borrowers complain of a bureaucratic nightmare. They say banks often lose their documents and then claim borrowers did not send back the paperwork. Bankers say borrowers weren't sending back the necessary paperwork.

The Obama plan was designed to help people in financial trouble by lowering their monthly mortgage payments. Homeowners who qualify can receive an interest rate as low as 2 percent for five years and a longer repayment period. The average monthly payment has been cut by about $500 on average.