More than half of the 1.3 million homeowners initially helped by the Obama administration's marquee foreclosure prevention program have since dropped out, the Treasury Department said on Wednesday.

About 53,000 borrowers dropped out of the Home Affordable Modification Program, or HAMP, in August, putting the total number of dropouts at roughly 683,000.

That is about 51 percent of the roughly 1.3 million borrowers who started in the program since its March 2009 inception.

The dropout rate was also up from a 48.1 percent rate through July and underlined the continuing distress felt by homeowners facing falling prices and rising foreclosure rates.

A record number of U.S. homeowners lost houses to their banks in August as lenders worked through the backlog of distressed mortgages, real estate data company RealtyTrac said last week.

New default notices decreased at the same time, suggesting that lenders managed the flow of troubled loans and foreclosed properties hitting the market to limit price declines, the company said.

High unemployment, wage cuts, negative home equity and restrictive lending practices persist, however, pointing to ongoing housing market pain.

The Obama administration has set aside $50 billion of the $700 billion bank rescue plan for HAMP. The program has been widely criticized as ineffective, as less than $300 million has been spent so far on loan modifications.

We understand that the foreclosure crisis can be highly localized and some regions have seen severe home price declines and faced severe unemployment, said Treasury Assistant Secretary for Financial Stability Herb Allison.

As a result, we have announced more than $4 billion for states hit hardest by this crisis, said Allison, who announced earlier Wednesday that he was stepping down.

(Reporting by Corbett B. Daly; Editing by Dan Grebler)

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