Only a trickle of underwater homeowners take bite of aid

A government program intended to help hundreds of thousands of underwater homeowners is off to a slow start.

Since its September launch, only 38 homeowners have refinanced mortgages through the FHA Short Refinance program, backed with $11 billion in federal funds. TheFederal Housing Administration has said the program could eventually help 500,000 to 1.5 million borrowers.

The program requires mortgage owners to forgive at least 10% of a borrower's unpaid principal so that the loan can be refinanced into an FHA loan at a lower interest rate. The goal: keep homeowners out of foreclosure even if they owe more on their homes than they are worth.

Foreclosures depress home values, weakening the economy. About 10.8 million homeowners, 23% of those with mortgages, are underwater, according to researcher CoreLogic.

But the industry has yet to embrace the program, says FHA Commissioner David Stevens. He says the numbers are "lower than we would like." As of Jan. 28, 223 applications were pending, he says.

The results indicate "a pretty clear rejection," says Alan White, associate professor of law at Valparaiso University.

A big hurdle is that the program requires principal reductions on loans that homeowners have kept current. "Banks aren't eager" to reduce the principal on such loans, says Laurie Goodman, a senior managing director at Amherst Securities.

Principal was reduced on just 4.5% of the loans modified in the third quarter, government data indicate. Most modifications involved lower interest rates or longer loan terms.

Another obstacle is that Fannie Mae and Freddie Mac, which own or guarantee half of the nation's home loans, don't make principal reductions. The Obama administration wants the mortgage giants, which were taken over by the government in 2008, to participate in the FHA program, Stevens says. But their regulator, the Federal Housing Finance Agency, says that the question of principal reductions has been "under review," spokeswoman Corinne Russell says.

Bank of America, the largest mortgage servicer, says it'll take part in the FHA program if Freddie and Fannie do. They own half the loans that BofA services, BofA's Dan Frahm says. Without their loans, the number of eligible customers would be "extremely limited," he says.

The FHA program is one of several government attempts to curb foreclosures. Its main effort, the Home Affordable Modification Program, was dubbed a "failure" last month by Neil Barofsky, the special inspector general for the government's bank bailouts. As of Dec. 31, HAMP had 522,000 permanent loan modifications underway. Started two years ago, HAMP was projected to help at least 3 million homeowners.