Loan modification: Needed help or an exercise in frustration?

How well is the government's loan modification working? Find out in this four-part WalletPop special report, which begins with this overview and continues with three profiles of those trying to get help, which can be found here, here and here.

If the goal of the federal government's loan modification program was to frustrate applicants, then it certainly is succeeding. But if its goal was to prevent foreclosures, the effort may simply be postponing that eventuality for many.

With an estimated 3.1 million mortgages at least two months delinquent, through the end of October, just 650,994 homeowners had received adjustments through the Home Affordable Modification Program (HAMP) -- a notable uptick from past reports and a measurable step toward the Obama administration's goal of helping 4 million by 2012.

But from the halls of Congress to Internet message boards, anger rises about mixed messages, delays and denials without explanation and, most tangibly, the sharp decline in converting short-term loan adjustments into something more meaningful.

Judy Lederman of Scarsdale, NY, has been turned down twice.

"I'm a single mom who got laid off 1 1/2 years ago and I've been freelancing but had to dip into my savings to pay the mortgage," Lederman told WalletPop. "I have an ARM interest-only (loan) on my single family home that's set to flip in June and the banks wouldn't refi me because of my income situation but they refused to help me with loan mod because they say I have to stop paying my mortgage first.

"The system stinks."

Many of those desperate for relief interviewed by WalletPop described being stuck in a vortex. They receive a letter from their lender offering them a modification but when they call they are told they do not qualify; or they initiate contact and are told they cannot apply as long as they are current on their loan but, after falling behind in payments, they are told they no longer qualify because they are in arrears. Damned if you do, damned if you don't.

"Customer service has been quite poor and it leaves people in a double state of bewilderment and fear," said Cy Richardson, vice president of housing and community development with the National Urban League. HAMP, he said, is "a very important tool in our toolkit" as the league co-hosts an Economic Empowerment Tour in major cities across the country and ramps up its foreclosure mitigation counseling under an $8 million economic recovery grant.

Alan M. White, professor at Valparaiso University School of Law, said that even for consumers who manage to find their way through the application process, a larger problem looms: the failure to convert three-month trial modifications to permanent ones.

"The banks and Treasury are trumpeting the large number of temporary HAMP modifications implemented in the past six months," White told WalletPop. "The failure is in converting the three-month trial modifications to permanent modifications."

According to White's recent analysis of loans detailed in a Wells Fargo Bank investors' report, permanent modifications fell by half from their peak in February, and the vast majority actually increased homeowner debt.

When he testified before the House Committee on Commercial and Administrative Law this summer, White called it "kicking the can down the road."

These days, virtually every client that Orlando, Florida credit attorney Walter F. Benenati sees wants to modify a loan, but so far, only one has received a permanent modification.

Banks are "putting people in a six-month forbearance. At the end of the six months, they are under no obligation to do anything, to do a loan modification," Benenati told WalletPop. "What I feel is they are just wringing the towel dry."

Borrowers told WalletPop they find the definition of modification varies widely. Missed payments may simply be tacked onto the end of a loan, extending its life. interest rates may be lowered for a limited period of time, but then adjust higher than they were before the modification. Adding taxes and interest can increase payments markedly at a time when reducing monthly expenses is paramount.

More than a quarter of those given the temporary adjustments have re-defaulted within three months.

The costs of temporary modifications that fail -- or fail to convert to more permanent reductions -- are great, to struggling homeowners, to the taxpayers who finance HAMP and to neighborhoods already rife with foreclosures.

At its inception, HAMP was aimed at the then-current crisis: sub-prime loans, with their adjustable rates and balloon payments. Today, with unemployment stubbornly persisting, holders of more traditional fixed-interest loans need help, too. That has left some advocating vociferously for more lenders to reduce principal through modifications, even if it displeases their investors.

"If millions of homeowners lose out, thousands of investors are going to lose out too," Marc Morial, president of the National Urban League, told WalletPop. "It would be better to take a haircut now."