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updated 5/17/2010 3:53:35 PM ET 2010-05-17T19:53:35

The number of homeowners dropping out of the Obama administration's main mortgage assistance plan is growing, and is now almost equal to the number who have received permanent relief.

The Treasury Department's report on Monday was the latest evidence of problems in the administration's $75 billion program. While officials insist the program is helping the housing market turn around, critics say it is merely delaying an inevitable surge in foreclosures.

More than 299,000 homeowners had received permanent loan modifications as of last month, Treasury said. That's about 25 percent of the 1.2 million who started the program since its March 2009 launch. They are paying, on average, $516 less each month.

However, the number of people who started the process but failed to get their mortgages permanently modified rose dramatically in April.

To complete the program, borrowers must make at least three payments on time. About 277,000 homeowners, or 23 percent of those enrolled, have dropped out during this trial phase. That's up from about 155,000 a month earlier, or a 79 percent increase.

Many borrowers are still stuck in limbo, unable to complete the process and caught up in an often-bewildering bureaucracy.

"These mortgage companies have to get it together," said Henrietta Thompson, housing coordinator with United Family Services in Charlotte, N.C. "We're not getting anything done."

Treasury officials acknowledge that long delays have been a problem.

"Homeowners are waiting. We want them to get answers as rapidly as possible," said Herbert Allison, an assistant Treasury secretary.

After a one-year struggle with JPMorgan Chase & Co., Giselle Embry, 56, of Escondido, Calif. was finally able to get a loan modification through the program.

"They kept calling me and asking me to send the same things," she said. "I felt like they just wanted to run me around until I got so frustrated that I gave up."

Embry fell behind on her mortgage. An illness forced her to go on disability for six months and her hours as a career adviser were shortened because of state budget cuts. Her new loan payment is $622 a month, more than half of her initial payment.

A Chase spokeswoman declined to comment on Embry's case. She said the bank has hired 9,000 workers to handle foreclosure cases, opened 51 centers around the country where borrowers can meet with bank officials and held foreclosure prevention events around the country.

The program is designed to lower borrowers' monthly payments by reducing mortgage rates to as low as 2 percent for five years and extending loan terms to as long as 40 years. Mortgage companies, also known as loan servicers, get up taxpayer incentives to reduce borrowers' monthly payments.

But there have been problems from the start. One of the big ones: Initially, many of the participating banks allowed borrowers to state their income verbally and provide proof of their income later. That jammed up the system as many borrowers didn't provide a complete set of documents, and some complained that their information was lost.

The mortgage companies that required homeowners to provide proof of their incomes have had a much better track record. HomEq Servicing Inc. and Ocwen Financial Corp. were able to convert more than 80 percent of their participating borrowers to permanent status, according to the Treasury Department.

By contrast, the four largest banks in the program have been far less successful. Bank of America Corp. and Wells Fargo & Co. have successfully processed about 25 percent of their applications. JPMorgan Chase and Citigroup Inc. have been able to convert 22 percent and 21 percent, respectively, of their applicants to permanent status.

Treasury officials have directed lenders to shift to a new system. Starting with loan modifications that go into effect June 1, they are required to collect two recent pay stubs at the start of the process.

Many borrowers who don't get help will end up losing their homes. That can happen through foreclosure. Another option is a short sale, which is when banks agree to let borrowers sell their homes for a reduced price if they owe more than it's worth.

To encourage more of those sales, the Obama administration is giving $3,000 for moving expenses to homeowners who complete such a sale or agree to turn over the deed of the property to the lender.

Mortgage companies will now have to set their minimum bid before the house is listed for sale. If the offer is above that, the lender must accept it. That's a big change from current practice. Lenders generally don't calculate how much money they are willing to accept until they have an offer in hand, causing long delays.

The new program will boost short sales this year, but 80 percent of distressed sales this year are still likely to be foreclosures, estimates Celia Chen, senior director of Moody's Economy.com.

Housing analysts are also closely watching the number of borrowers who drop out after completing the program. So far, 3,744 borrowers, or 1.3 percent, have done so. That's up from about 2,900 a month earlier. Most of those borrowers likely defaulted on their modified loans, but a handful either refinanced or sold their homes.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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