More than 40 percent of homeowners seeking help from the Obama administration's flagship effort to rescue those at risk of foreclosure have dropped out of the program.



The latest report on the program suggests foreclosures could rise in the second half of the year and weaken an ailing housing market.



About 530,000 borrowers have fallen out of the program as of last month, the Treasury Department said Tuesday. Nearly 1.3 million homeowners had enrolled since March 2009.



Treasury officials say few of these borrowers will wind up in foreclosure. But many analysts are concerned that a new wave of foreclosures could greatly impact the struggling housing industry.



Another 390,000 homeowners, or 30 percent of those who started the program, have received permanent loan modifications and are making payments on time.



A major reason so many have fallen out of the program is the Obama administration initially pressured banks to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.



Many borrowers complain of a bureaucratic nightmare. They say banks often lose their documents and then claim borrowers did not send back the necessary paperwork.



The banking industry said borrowers weren't sending back the necessary paperwork.



The Obama plan was designed to help people in financial trouble by lowering their monthly mortgage payments. Homeowners who qualify can receive an interest rate as low as 2 percent for five years and a longer repayment period. The average monthly payment has been cut by about $500 on average.



The homeowners receive temporary modifications. These are supposed to become permanent after borrowers make three payments on time and complete the required paperwork. That includes proof of income and a letter explaining the reason for their troubles. In practice, though, the process has taken far longer.



The more than 100 participating mortgage companies get taxpayer incentives to reduce payments. But as of mid-May only $132 million has been spent out of a potential $75 billion, according to the Government Accountability Office.



Though the program has been widely criticized for making only a small dent in the foreclosure crisis, administration officials defend their efforts.



They say that the foreclosure prevention program has spurred changes in the mortgage industry, prodding lenders to make more significant cuts to borrowers' monthly payments than before the government effort started.



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