Congressional Oversight Panel Blasts HAMP

The CongressionalrnOversight Panel (Cop) took aim at both the Treasury Department and loan servicersrnin a report issued Tuesday on the performance – or lack thereof – of the HomernAffordable Modification Program (HAMP). rnThe Panel even had a little blame left over to throw at Fannie Mae andrnFreddie Mac.  </p

COP issued its lastrnreport in April and at that time raised serious concerns about the timeliness,rnaccountability, and sustainability of Treasury’s efforts, saying thatrnadministrators were still struggling to get the program running but that, evenrnwhen it was operational, it would probably fail to reach the overwhelming majorityrnof homeowners in trouble.  Since then,rnthe current report says, Treasury’s modest changes “have not resolved thernPanel’s core concerns.”</p

It now looks, thernreport says, as though HAMP will prevent only 700,000 to 800,000 foreclosures, far below the Administration’s target of 3 to 4 million and a far cry from preventing the 8 to 13rnmillion foreclosures expected by the end of 2012. Even setting the program’srngoals was poorly handled by Treasury.  Initially the Department stated a goal of helpingrn3 to 4 million homeowners avoid foreclosure and remain in their homes but then therngoal became more nebulous.  Was that thernnumber of permanent modifications or was it trial modifications started or evenrntrial modifications offered? rnSubsequently even that last goal was ratcheted down in number. </p

HAMPs initialrnpremise, COP said, was straightforward. rnBecause foreclosures allow the investor only a small recovery, lendersrnshould generally prefer to avoid that step. rnHAMP was designed to further incentivize lenders to modify the loan ratherrnforeclose by offering payments to all parties to modify through a reduction inrnmonthly payments.  “Yet despite thernapparent strength of HAMP’s economic logic, the program has failed to help thernvast majority of homeowners facing foreclosure.”  </p

HAMP did not takerninto account the complexity of the mortgage relationship.  Rather than a one to one borrower/lenderrnsituation, most mortgages involve a servicer whose interests may collide withrnthat of both of the other parties.  Thernreport, without using the term, points to the misaligned incentives that havernbeen named by various regulators a dozen times in recent weeks as a major problemrnin averting foreclosures.  Thosernmisaligned incentives mean that servicers can make more money and get it fasterrnthrough a foreclosure than through any kind of intervention orrnmodification.  HAMPs attempts to correctrnthis market distortion by offering payments to servicers, the report says,rnappear to have fallen short, in part because servicers were not required tornparticipate in the program.  Thernservicers could be pressured by Treasury to sign up for the program, the reportrnsays, but could not be pressured to actually do the modifications.  The existence of second mortgages alsornstymied foreclosures where the holders found they could profit from blockingrnthe modification of the senior lien.</p

HAMP failed torncollect and analyze data that would explain its shortcomings and does not evenrnhave a method for collecting data related to some of the program add-ons.  HAMP was also faulted for its failure to holdrnloan servicers accountable for lost paperwork or refusal to do modifications.  They have, the report said not gone muchrnbeyond reluctantly clawing back some incentives when the servicers failed tornperform. Related to this is Treasury’s decision to outsource much of thernresponsibility for its own servicers’ actions to Freddie Mac and FanniernMae.  Both companies have criticalrnbusiness relationships with those servicers and have been too eager to protectrnthose relationships.  Freddie Mac wasrnspecifically called out in the report for its unwillingness to enforce some ofrnits contractual rights related to foreclosure out of a stated concern it wouldrnnegatively impact its relationships with servicers who are also valued as thernsource of loans.  The report said thatrnTreasury should prevent such conflicts of interest and make sure servicers arernpenalized where appropriate. </p

Little canrnapparently be done to correct the past mistakes.  According to the report Treasuries Authorityrnto restructure HAMP ended on December 3. rnHowever, COP says that some problems can still be mitigated.  For instance, applying for a modificationrnwould be easier if on-line applications were permitted and Treasury shouldrncarefully examine the program’s history to pin down the factors that definernsuccessful loan modifications for future reference.  Some success can be reclaimed if Treasury,rngoing forward, carefully monitors and, if necessary intervenes, in cases wherernborrowers fall behind with payments on their modified mortgages.  “Preventing redefaults is an extremelyrnpowerful way of magnifying HAMPS impact.”</p

Finally, Treasuryrnshould accept that HAMP will not reach its goals.  The Department continues to state that thern$30 billion allocated to HAMP from the Troubled Asset Relief Program will bernspent when it appears that only $12 billion and maybe even as little as $4rnbillion will actually be expended. rn”Had Treasury acknowledged this reality before its crisis authorityrnexpired, it could have made material changes to HAMP or reallocated the moneyrnto a more effective program.  Now thatrnoption is gone.”</p

The report concludesrn”Treasury’s reluctance to acknowledge HAMP’s shortcomings has had realrnconsequences.  Absent a dramatic andrnunexpected increase in HAMP enrollment, many billions of dollars set aside forrnforeclosure mitigation may well be left unused. rnAs a result an untold number of borrowers may go without help – all becausernTreasury failed to acknowledge HAMP’s shortcomings in time.”

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