TARP Special Inspector General Calls HAMP Disappointing
More than a year after the creation of the Home AffordablernModification Program (HAMP) “disappointing results have raised questions aboutrnprogram effectiveness” according to a new report by the Special InspectorrnGeneral for the Troubled Asset Relief Program (SIGTARP.) The report was sent to Treasury SecretaryrnTimothy Geithner last week over the signature of SIGTARP Neil M. Barofsky.
The report, which is the first of several which will bernissued, addresses HAMP's status and whether the program has met participationrngoals thus far and what conditions the Treasury Department has faced and willrnface in the future in implementing the program. rnIn conducting the audit, SIGTARP reviewed HAMP program policies,rnprocedures, and marketing materials from Treasury and other government agenciesrninvolved in the program as well as materials from a sample of five participatingrnservicers. Officials from that servicerrnsample were also interviewed. The focusrnof the audit, however, was the Treasury Department and not the operations ofrnthe servicers, 110 of which had signed on to participate in the program by thernend of January.
The SIGTARP report outlines several broad reasons for HAMP'srndisappointing results to date. First,rnprogram rules had not been fully developed before the program started andrnTreasury has had to revise those guidelines repeatedly, causing confusion andrndelay. The Department's decision tornallow servicers to start modifications before receiving supportingrndocumentation created a large backlog of trial modifications and many of thosernwill never become permanent. Third,rnTreasury has not adequately promoted the program. SIGTARP called the absence of televised publicrnservice announcements “inexplicable.”
The HAMP program was designed to assist borrowers who are delinquentrnin mortgage payments to obtain modifications to those loans which would placernthe maximum payment amount at 31 percent of monthly income, hopefullyrnpermitting borrowers to return to performing status. The main vehicle for these modifications hasrnbeen a reduction in interest rate although a few borrowers have also had the termrnof their loan extended and an even smaller number have seen reductions in thernprincipal balance.
The SIGTARP report said that, while Treasury had a “laudablernaspiration” that the program would actually help 3 to 4 million homeownersrnavoid foreclosure it also has stated that the goal is not tied to how manyrnhomeowners actually obtain relief and avoid foreclosure but rather on how manyrnwill receive offers for a trial modification. rn”Measuring trial modification offers, or even actual trialrnmodifications for that matter,” the report says, “is simply not particularlyrnmeaningful.” Instead, it recommendsrnthat a new goal be developed and tracked; how many people are helped to avoidrnforeclosure and stay in their homes through permanent modifications. “Transparency and accountability demandrnthat Treasury establish goals that are meaningful, and that it report itsrnprogress in meeting such meaningful goals on a monthly basis. Continuing to frame HAMPs success around thernnumber of 'offers' extended is simply not sufficient.”
Treasury itself refers to the 168,708 permanent modificationsrnachieved as “disappointing” and one official's estimate of a total ofrn1.5 to 2 million such modifications over the four years the program is designedrnto run, may be only a small fraction of the total number of foreclosures thatrnwill actually occur during that period. rnIt is that estimate, the report says, and not the still often quoted 3-to-4-millionrnfigure that “should inform the debate on whether HAMP is worth thernresources being expended or whether the program needs to be revamped tornactually help more borrowers.”
A second stated goal, to involve servicers representingrncoverage of 90 percent of all privately owned mortgages was very nearly reachedrnby the time HAMP issued its first public status report in July, 2009. At that point, 38 servicers had signed on tornthe program, a number which covered 85 percent of the target market. By the end of January the 110 participatingrnservicers represent 89 percent coverage.
Borrower participation, however, has been anotherrnmatter. The first trial modificationsrnwere started in April, 2009 and through July 2009, 235,247 borrowers hadrnentered the program. Treasury, unhappyrnwith the numbers, issued a series of changes to accelerate the pace ofrnenrollment including announcement of individual servicer performance, therndevelopment of program metrics and a review by Freddie Mac of a sample of modifications. A goal of one-half million trialrnmodifications by November 1 was also set. rnThat goal was in fact, exceeded but, when the first public disclosure ofrnpermanent modifications was announced it was only 31,000. Treasury has since announced further effortsrnto increase these conversions both through increased pressure on and monitoringrnof servicers, engagement with local groups to increase outreach, andrnstreamlining of the documentation process. rnHowever, a big problem still appears to be failure to providerndocumentation on the part of borrowers and lack of communication betweenrnborrower and servicer.
Since October, conversions to permanent status havernincreased monthly, going from 3,000 to 52,000. rnThe report, however, quotes a Treasury official as saying even therncurrent “modest pace” of conversions is not sustainable and thernnumber of trial cancellations will likely increase.
SIGTARP identified two significant hurdles in converting thernsubstantial backlog of trial modifications into permanent status. Originally servicers were permitted to startrna borrower into a trial program with only a stated income or verbal financialrninformation. In December, HAMP reportedrnthat 18 servicers including four out of the five largest were using statedrnincome, scheduling documentation for collection during the trial period. This has caused significant time and effortrnon the part of servicers both in collecting data and in identifying andrnremoving ineligible borrowers from trials after they submitted inaccuraterninformation. “Although use ofrnverbal financial information certainly helped Treasury meet its interim targetrnof achieving 500,000 trial modifications by November 2009; because of thisrndiversion of resources, allowing verbal modifications was arguablyrncounterproductive to attaining permanent modifications” This policy wasrnended effective April 1, 2010.
A second problem was caused by a trial period payment policyrnthat will also end in April. Under thernoriginal rules, after the borrower made the first payment on his modifiedrnmortgage he then had the full length of the trial period to make furtherrnrequired payments. Thus the remainingrntwo payments (or three payments in the case of non-defaulted borrowers with arnfour month trail) could be made on the last day of the trial. This effectively hid borrowers who werernunable or unwilling to keep up new payments and it has been found that about 25rnpercent of homeowners in trial have not kept payments current. Many homeowners may have used this policy torndeliberately game the system and live rent free during the trial. As of April 15, borrowers must make theirrntrial period payments every month to be considered current.
Recent data indicates HAMP might confront additionalrndifficulties in bringing new borrowers into the trial program. Since October, new trials have only averagedrnabout 96,000 per month and January and February had significantly lower ratesrnthan November and December. It is alsornclear that a significant number of borrowers will fall out of the trial withoutrncompleting it. The report quotes onernTreasury official as estimating that only 50 to 66 percent of trialrnmodifications will become permanent and another as saying that a 75 percentrnconversion rate would make it “quite a successful program.”
The remainder of SIGTARP's findings and recommendations inrnits first report will be covered in a second article on Monday.
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