More than half of all homeowners who had their loans modified to make the payments more affordable in the first half of the year are already in default again, banking regulators said Monday.
The new data raise questions about whether government money may be better spent on creating jobs, rather than averting foreclosures, said John Reich, director of the federal Office of Thrift Supervision office at a housing industry forum sponsored by his agency.
"I do have concerns about allocating federal resources" Reich said.
However, many experts claim the bulk of loan modifications don't actually provide much financial relief for borrowers.
The government's data don't include enough detail about the types of the loan modifications that were made, said Sheila Bair, chairman of the Federal Deposit Insurance Corp. "The quality of the (modifications) are not what they should be," she said.
The U.S. economic picture has darkened over the past month. One in 10 Americans with a mortgage is either behind or in foreclosure, and more than 500,000 jobs were lost in November.
Unemployment stands at 6.7 percent, and the worldwide credit markets have only improved modestly from the freeze that led Congress to approve a $700 billion bailout before the election.
Monday's discussion focused on how broad the government's intervention should be, rather than whether the government should play any role at all. The U.S. is on track for 2.25 million foreclosures this year.
"We need a bottom-up approach, in my view, by modifying people's mortgages and helping them stay in their homes," said New Jersey Gov. Jon Corzine.
Corzine called for a three to six month halt to foreclosures while the government works out a more aggressive plan.
Mark Zandi, chief economist at Moody's Economy.com, said the public is likely to be more sympathetic to efforts to assist troubled borrowers, because the link between the foreclosure crisis and the sinking economy is increasingly clear in the midst of most Americans.
"It's now in every corner of the country," Zandi said. "I think that people understand that this is a broader issue."
During an interview that aired Sunday on NBC's "Meet the Press," President-elect Barack Obama declined to say how large an economic stimulus plan he envisions. He said his blueprint for recovery will include help for homeowners facing foreclosure on their mortgages if President George W. Bush has not already acted when Obama takes office next month.
For nearly a year, some consumer advocates, lawmakers and think tanks have advocated a dramatic government response. The effort, they say, should be similar to created the Home Owners' Loan Corp. in 1933 to help borrowers refinance troubled home loans during the Great Depression.
The Bush administration has focused mainly on voluntary industry efforts to modify loans, and those have not stopped the surge in foreclosures.