The Treasury reported Monday that nearly one in four homeowners who were offered lower payments under the Obama administration’s 15-month-old effort have been weeded out of the program. Many people were removed from the trials because they failed to make payments, didn’t provide all the financial documents needed to qualify or were found to be ineligible.

Homeowners are first offered trial modifications under the program, which provides incentive payments to loan servicers, investors and the homeowners. If borrowers make the payments and satisfy other criteria, those trials are made permanent, ensuring a cut in payments for five years.

While awaiting answers, some borrowers keep making payments, exhausting their savings in what may be a futile effort to save their homes. They also incur fees from the banks and delay taking action that might give them a fresh start in a more affordable home.

Some borrowers had unrealistic expectations about loan-relief programs, which were never designed to prevent all foreclosures. Another big problem is that banks often take six to 12 months to determine whether applicants are eligible.

“I had to learn the hard way and deplete my savings doing it,” said Mia Parry, a manager at a mortgage brokerage in Scottsdale, Ariz., who has spent nearly two years seeking a loan modification. She now wishes she had put her home on the market.

Most struggling borrowers do benefit from seeking help, said Aaron Horvath, a senior vice president at Springboard Inc., a nonprofit counseling service based in Riverside, Calif.

Some win modifications, cutting monthly payments by hundreds of dollars. Others who ultimately can’t get modifications at least are allowed to stay in their homes for months, making either no payments or reduced payments.

But “if you’re draining your savings” in a vain effort to hang onto a home, he said, you may end up worse off.

Eager for quick results, the Obama administration last year prodded banks to start people on trials without first obtaining documents proving they were eligible. That has led to many crushed hopes. The Treasury earlier this year changed its rules and told banks to start trials only after getting documents that proved borrowers qualified.

The Treasury said in a monthly report on the government’s $50 billion Home Affordable Modification Program, or HAMP, that about 1.2 million trial modifications had been started under the plan, and about 281,000 borrowers had washed out by the end of April.  Read more….