Troubled Asset Relief Program
Home Affordable Modification Program Continues to Face Implementation Challenges Gao ID: GAO-10-556T March 25, 2010Mortgage loan defaults and foreclosures are key factors behind the current economic downturn. In response, Congress passed and the President signed the Emergency Economic Stabilization Act of 2008, which authorized the Department of the Treasury to establish the Troubled Asset Relief Program (TARP). Under TARP, Treasury created the Home Affordable Modification Program (HAMP) as its cornerstone effort to meet the act's goal of protecting home values and preserving homeownership. This statement focuses on (1) HAMP's program activities to date, (2) status of GAO's July 2009 recommendations to strengthen HAMP's transparency and accountability, (3) preliminary findings from GAO's current work evaluating servicers' implementation of HAMP, and (4) additional challenges HAMP faces going forward. GAO obtained information from 10 HAMP servicers of various sizes that accounted for 71 percent of the TARP funds allocated to participating servicers. GAO reviewed their policies and procedures, interviewed management and quality assurance staff, and observed a sample of phone calls between borrowers and servicers. GAO is also reviewing samples of loan files for borrowers offered and denied HAMP trial modifications. Finally, GAO spoke with officials at Treasury and its financial agents--Fannie Mae and Freddie Mac--and is analyzing program information and data from these sources.
When Treasury announced the program in March 2009, it estimated that HAMP could help 3 to 4 million borrowers. Through February 2010, including both the portion funded by TARP and the portion funded by Fannie Mae and Freddie Mac: (1) about 1.1 million borrowers had begun trial modifications; of which (2) about 800,000 were in active trial modifications, and (3) fewer than 200,000 permanent modifications had been made. As of early March 2010, the TARP-funded portion of the program had 113 participating servicers, and about $36.9 billion of the $50 billion in TARP funds for HAMP had been allocated to these servicers. A typical TARP-funded modification could result in a monthly mortgage payment reduction of about $520. Treasury has taken some steps, but has not fully addressed concerns that GAO raised in its July 2009 report on HAMP's transparency and accountability. For example, Treasury has yet to finalize some key components of its internal controls over the first-lien program, including establishing metrics and benchmarks for servicers' performance. In addition, Treasury has not finalized remedial actions, or penalties, for servicers not in compliance with HAMP guidelines. According to Treasury, these remedies will be completed in April 2010. Lastly, GAO reported that Treasury's projection that 3 to 4 million borrowers could be helped by HAMP was based on several uncertain assumptions and might be overly optimistic, and GAO recommended that Treasury update this estimate, but the Department has not yet done so. Preliminary results of GAO's ongoing work show inconsistencies in some aspects of program implementation. Although one of HAMP's goals was to ensure that mortgage modifications were standardized, Treasury has not issued specific guidelines for all program areas, allowing inconsistencies in how servicers treat borrowers. For example, the 10 servicers GAO contacted had 7 different sets of criteria for determining whether borrowers who were not yet 60 days delinquent qualified for HAMP. Also, some servicers were not systematically tracking all HAMP complaints and, in some cases, tracked only resolutions to certain types of complaints, such as written complaints addressed to the company president. GAO also found that servicers faced challenges implementing HAMP because of the number of changes to the program, some of which have required servicers to readjust their business practices, update their systems, and retrain staff. HAMP is likely to face additional challenges going forward, including successfully converting trial modifications, addressing the needs of borrowers who have substantial negative equity, limiting redefaults for those who receive modifications, and achieving program stability. While GAO's study is not yet completed, GAO shared preliminary findings with Treasury to allow it to address these issues in a timely manner.
GAO-10-556T, Troubled Asset Relief Program: Home Affordable Modification Program Continues to Face Implementation Challenges
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Testimony:
Before the Committee on Oversight and Government Reform, House of
Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Thursday, March 25, 2010:
Troubled Asset Relief Program:
Home Affordable Modification Program Continues to Face Implementation
Challenges:
Statement of Gene L. Dodaro:
Acting Comptroller General of the United States:
GAO-10-556T:
GAO Highlights:
Highlights of GAO-10-556T, a testimony to the Committee on Oversight
and Government Reform, House of Representatives:
Why GAO Did This Study:
Mortgage loan defaults and foreclosures are key factors behind the
current economic downturn. In response, Congress passed and the
President signed the Emergency Economic Stabilization Act of 2008,
which authorized the Department of the Treasury to establish the
Troubled Asset Relief Program (TARP). Under TARP, Treasury created the
Home Affordable Modification Program (HAMP) as its cornerstone effort
to meet the act's goal of protecting home values and preserving
homeownership. This statement focuses on (1) HAMP's program activities
to date, (2) status of GAO's July 2009 recommendations to strengthen
HAMP's transparency and accountability, (3) preliminary findings from
GAO's current work evaluating servicers' implementation of HAMP, and
(4) additional challenges HAMP faces going forward.
GAO obtained information from 10 HAMP servicers of various sizes that
accounted for 71 percent of the TARP funds allocated to participating
servicers. GAO reviewed their policies and procedures, interviewed
management and quality assurance staff, and observed a sample of phone
calls between borrowers and servicers. GAO is also reviewing samples of
loan files for borrowers offered and denied HAMP trial modifications.
Finally, GAO spoke with officials at Treasury and its financial
agents--Fannie Mae and Freddie Mac--and is analyzing program
information and data from these sources.
What GAO Found:
When Treasury announced the program in March 2009, it estimated that
HAMP could help 3 to 4 million borrowers. Through February 2010,
including both the portion funded by TARP and the portion funded by
Fannie Mae and Freddie Mac:
* about 1.1 million borrowers had begun trial modifications; of which:
* about 800,000 were in active trial modifications, and:
* fewer than 200,000 permanent modifications had been made.
As of early March 2010, the TARP-funded portion of the program had 113
participating servicers, and about $36.9 billion of the $50 billion in
TARP funds for HAMP had been allocated to these servicers. A typical
TARP-funded modification could result in a monthly mortgage payment
reduction of about $520.
Treasury has taken some steps, but has not fully addressed concerns
that GAO raised in its July 2009 report on HAMP's transparency and
accountability. For example, Treasury has yet to finalize some key
components of its internal controls over the first-lien program,
including establishing metrics and benchmarks for servicers'
performance. In addition, Treasury has not finalized remedial actions,
or penalties, for servicers not in compliance with HAMP guidelines.
According to Treasury, these remedies will be completed in April 2010.
Lastly, GAO reported that Treasury's projection that 3 to 4 million
borrowers could be helped by HAMP was based on several uncertain
assumptions and might be overly optimistic, and GAO recommended that
Treasury update this estimate, but the Department has not yet done so.
Preliminary results of GAO's ongoing work show inconsistencies in some
aspects of program implementation. Although one of HAMP's goals was to
ensure that mortgage modifications were standardized, Treasury has not
issued specific guidelines for all program areas, allowing
inconsistencies in how servicers treat borrowers. For example, the 10
servicers GAO contacted had 7 different sets of criteria for
determining whether borrowers who were not yet 60 days delinquent
qualified for HAMP. Also, some servicers were not systematically
tracking all HAMP complaints and, in some cases, tracked only
resolutions to certain types of complaints, such as written complaints
addressed to the company president. GAO also found that servicers faced
challenges implementing HAMP because of the number of changes to the
program, some of which have required servicers to readjust their
business practices, update their systems, and retrain staff.
HAMP is likely to face additional challenges going forward, including
successfully converting trial modifications, addressing the needs of
borrowers who have substantial negative equity, limiting redefaults for
those who receive modifications, and achieving program stability. While
GAO's study is not yet completed, GAO shared preliminary findings with
Treasury to allow it to address these issues in a timely manner.
View [hyperlink, http://www.gao.gov/products/GAO-10-556T] or key
components. For more information, contact Mathew Scire at (202) 512-
8678 or sciremj@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss our work on the Home
Affordable Modification Program (HAMP), which the Department of the
Treasury (Treasury) has implemented under the Troubled Asset Relief
Program (TARP). Dramatic increases in home mortgage defaults and
foreclosures have been at the root of the current economic crisis. In
response to the turmoil in the financial markets, the Emergency
Economic Stabilization Act of 2008 (the act) authorized Treasury to
establish TARP and to purchase and insure up to $700 billion in
troubled assets from financial institutions through TARP.[Footnote 1]
Treasury's initial focus in implementing TARP was to stabilize the
financial markets and increase lending to businesses and consumers,
but the authorities granted to Treasury under the act were also to be
used to preserve homeownership, protect home values, and maximize
assistance for homeowners with respect to foreclosure mitigation
efforts. On February 18, 2009, Treasury announced the framework for
HAMP, a program that would use up to $50 billion of TARP funds to help
at-risk homeowners avoid potential foreclosure, primarily by reducing
their monthly mortgage payments.
My statement today is based on our July 23, 2009, report on HAMP and
our current work evaluating Treasury's ongoing implementation of the
program.[Footnote 2] Specifically, this statement focuses on (1) HAMP
program activities to date, (2) the status of the recommendations we
made in our July 2009 report to strengthen the transparency and
accountability of HAMP, (3) preliminary findings from our current work
evaluating servicers' implementation of HAMP, and (4) additional
challenges HAMP faces going forward. Our current work evaluates
servicers' practices in informing borrowers about HAMP, the extent to
which servicers have been consistently evaluating borrowers for HAMP
participation, and the processes that have been put into place for
borrowers to file HAMP complaints. To examine these questions, we
spoke with and obtained information from 10 HAMP servicers of various
sizes that collectively represented 71 percent of the TARP funds
allocated to participating servicers and visited 6 of them. We
reviewed their policies and procedures, interviewed management and
quality assurance staff, and observed a sample of phone calls between
borrowers and their servicers. We are also reviewing samples of loan
files from each servicer for borrowers who were offered and denied
HAMP trial modifications. Finally, we spoke with officials at Treasury
and its financial agents--Fannie Mae and Freddie Mac--to understand
how they were ensuring compliance with HAMP guidelines and their
processes for resolving HAMP complaints. We are coordinating our work
with other oversight entities that TARP created--the Congressional
Oversight Panel (COP) and the Office of the Special Inspector General
for TARP (SIGTARP).
The work on which this testimony is based was performed in accordance
with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our finding and
conclusions based on our audit objectives. We believe that the
evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Background:
National default and foreclosure rates rose sharply from 2005 through
2009 to the highest level in 29 years (fig. 1). Default rates climbed
from 1.09 percent to 5.09 percent, and foreclosure start rates--
representing the percentage of loans that entered the foreclosure
process each quarter--grew almost threefold, from 0.42 percent to 1.2
percent. Put another way, over half a million mortgages entered the
foreclosure process in the fourth quarter of 2009, compared with about
174,000 in the fourth quarter of 2005. Finally, foreclosure inventory
rates rose over 350 percent over the 4-year period, increasing from
0.99 percent to 4.58 percent, with most of that growth occurring after
the second quarter of 2007. As a result, over 2 million loans were in
the foreclosure inventory as of the end of 2009. Foreclosure starts
declined in the last quarter of 2009, but the number of defaults
continued to climb.
Figure 1: National Default and Foreclosure Trends, 1979-2009:
[Refer to PDF for image: multiple line graph]
This figure contains two multiple line graphs depicting the following
data:
The following periods of economic recession are indicated on the
graphs:
1980;
1982-83;
1991;
2001-2002;
Late 2007-2009.
Q1 1979:
Default: 0.47%;
Foreclosure Starts: 0.17%;
Foreclosure Inventory: 0.31%.
Q1 1980:
Default: 0.54%;
Foreclosure Starts: 0.14%;
Foreclosure Inventory: 0.32%.
Q1 1981:
Default: 0.66%;
Foreclosure Starts: 0.18%;
Foreclosure Inventory: 0.44%.
Q1 1982:
Default: 0.72%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.53%.
Q1 1983:
Default: 0.86%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.71%.
Q1 1984:
Default: 0.89%;
Foreclosure Starts: 0.2%;
Foreclosure Inventory: 0.68%.
Q1 1985:
Default: 0.98%;
Foreclosure Starts: 0.25%;
Foreclosure Inventory: 0.79%.
Q1 1986:
Default: 1.01%;
Foreclosure Starts: 0.25%;
Foreclosure Inventory: 0.87%.
Q1 1987:
Default: 1.04%;
Foreclosure Starts: 0.28%;
Foreclosure Inventory: 1.09%.
Q1 1988:
Default: 0.89%;
Foreclosure Starts: 0.29%;
Foreclosure Inventory: 1.07%.
Q1 1989:
Default: 0.83%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 0.95%.
Q1 1990:
Default: 0.7%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.97%.
Q1 1991:
Default: 0.78%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.97%.
Q1 1992:
Default: 0.8%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.04%.
Q1 1993:
Default: 0.77%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 1%.
Q1 1994:
Default: 0.75%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 0.94%.
Q1 1995:
Default: 0.7%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.86%.
Q1 1996:
Default: 0.68%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 0.95%.
Q1 1997:
Default: 0.55%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.08%.
Q1 1998:
Default: 0.6%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 1.17%.
Q1 1999:
Default: 0.6%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.22%.
Q1 2000:
Default: 0.55%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.17%.
Q1 2001:
Default: 0.66%;
Foreclosure Starts: 0.4%;
Foreclosure Inventory: 1.24%.
Q1 2002:
Default: 0.8%;
Foreclosure Starts: 0.45%;
Foreclosure Inventory: 1.51%.
Q1 2003:
Default: 0.83%;
Foreclosure Starts: 0.41%;
Foreclosure Inventory: 1.43%.
Q1 2004:
Default: 0.85%;
Foreclosure Starts: 0.46%;
Foreclosure Inventory: 1.29%.
Q1 2005:
Default: 0.81%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 1.08%.
Q1 2006:
Default: 0.95%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.98%.
Q1 2007:
Default: 0.95%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.28%.
Q1 2008:
Default: 1.56%;
Foreclosure Starts: 1.01%;
Foreclosure Inventory: 2.47%.
Q2 2008:
Default: 1.75%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 2.75%.
Q3 2008:
Default: 2.2%;
Foreclosure Starts: 1.07%;
Foreclosure Inventory: 2.97%.
Q4 2008:
Default: 3%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 3.3%.
Q1 2009:
Default: 3.39%;
Foreclosure Starts: 1.37%;
Foreclosure Inventory: 3.85%.
Q2 2009:
Default: 3.67%;
Foreclosure Starts: 1.36%;
Foreclosure Inventory: 4.3%.
Q3 2009:
Default: 4.38%;
Foreclosure Starts: 1.42%;
Foreclosure Inventory: 4.47%.
Q4 2009:
Default: 5.09%;
Foreclosure Starts: 1.2%;
Foreclosure Inventory: 4.59%.
[End of graph]
Q2 2005 through Q2 3008:
Q2 2005:
Default: 0.83%;
Foreclosure Starts: 0.38%;
Foreclosure Inventory: 1%.
Q3 2005:
Default: 0.85%;
Foreclosure Starts: 0.41%;
Foreclosure Inventory: 0.97%.
Q4 2005:
Default: 1.09%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.99%.
Q1 2006:
Default: 0.95%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.98%.
Q2 2006:
Default: 0.9%;
Foreclosure Starts: 0.4%;
Foreclosure Inventory: 0.99%.
Q3 2006:
Default: 0.95%;
Foreclosure Starts: 0.47%;
Foreclosure Inventory: 1.05%.
Q4 2006:
Default: 1.02%;
Foreclosure Starts: 0.57%;
Foreclosure Inventory: 1.19%.
Q1 2007:
Default: 0.95%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.28%.
Q2 2007:
Default: 1.07%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.4%.
Q3 2007:
Default: 1.26%;
Foreclosure Starts: 0.78%;
Foreclosure Inventory: 1.67%.
Q4 2007:
Default: 1.58%;
Foreclosure Starts: 0.88%;
Foreclosure Inventory: 2.04%.
Q1 2008:
Default: 1.56%;
Foreclosure Starts: 1.01%;
Foreclosure Inventory: 2.47%.
Q2 2008:
Default: 1.75%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 2.75%.
Q3 2008:
Default: 2.2%;
Foreclosure Starts: 1.07%;
Foreclosure Inventory: 2.97%.
Q4 2008:
Default: 3%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 3.3%.
Q1 2009:
Default: 3.39%;
Foreclosure Starts: 1.37%;
Foreclosure Inventory: 3.85%.
Q2 2009:
Default: 3.67%;
Foreclosure Starts: 1.36%;
Foreclosure Inventory: 4.3%.
Q3 2009:
Default: 4.38%;
Foreclosure Starts: 1.42%;
Foreclosure Inventory: 4.47%.
Q4 2009:
Default: 5.09%;
Foreclosure Starts: 1.2%;
Foreclosure Inventory: 4.59%.
Source: GAO analysis of MBA data, National Bureau of Economic Research.
[End of figure]
Foreclosure is a legal process that a mortgage lender initiates
against a homeowner who has missed a certain number of payments. The
foreclosure process has several possible outcomes but generally means
that the homeowner loses the property, typically because it is sold to
repay the outstanding debt or repossessed by the lender. The
foreclosure process is usually governed by state law and varies widely
by state. Foreclosure processes generally fall into one of two
categories--judicial foreclosures, which proceed through courts, and
nonjudicial foreclosures, which do not involve court proceedings. The
legal fees, foregone interest, property taxes, repayment of former
homeowners' delinquent obligations, and selling expenses can make
foreclosure extremely costly to lenders. Options to avoid foreclosure
include forbearance plans, short sales, deeds in lieu of foreclosure,
and loan modifications. With forbearance plans and loan modifications,
the borrower retains ownership of the property. With short sales and
deeds in lieu of foreclosure, the borrower does not.
In March 2009, Treasury issued the first HAMP guidelines for modifying
first lien mortgages in an effort to help homeowners avoid
foreclosure. The goal of the first-lien mortgage modification program
is to reduce the monthly payments of struggling homeowners to more
affordable levels--specifically 31 percent of household income.
According to Treasury, HAMP was intended to offer reduced monthly
payments to up to 3 to 4 million homeowners. Under the first-lien
modification program, Treasury shares the cost of reducing the
borrower's monthly mortgage payments with mortgage holders/investors
and provides various financial incentives to servicers, borrowers, and
mortgage holders/investors for loans modified under the program for 5
years. To be eligible for a first-lien loan modification:
* the property must be owner occupied and the borrower's primary
residence;
* the property must be a single-family property (1 to 4 units) with a
maximum unpaid principal balance on the unmodified first-lien mortgage
that is equal to or less than $729,750 for a 1-unit property;
* the loan must have been originated on or before January 1, 2009; and:
* the monthly first-lien mortgage payment must be more than 31 percent
of the homeowner's gross monthly income.
Borrowers have until December 31, 2012, to be accepted into the first-
lien modification program. HAMP also includes other subprograms that,
for example, offer incentives to modify or pay off second-lien loans
of borrowers whose first mortgages were modified under HAMP and to
pursue foreclosure alternatives when a HAMP modification cannot be
offered.
The HAMP first-lien modification program has four main features:
1. Cost sharing - Mortgage holders/investors will be required to take
the first loss in reducing the borrower's monthly payments to no more
than 38 percent of the borrower's income. Treasury will then use TARP
funds to match further reductions on a dollar-for-dollar basis, down
to the target of 31 percent of the borrower's gross monthly income.
The modified monthly payment is fixed for 5 years or until the loan is
paid off, whichever is earlier, as long as the borrower remains in
good standing with the program. After 5 years, the payment may
increase by 1 percent a year to a cap of the Freddie Mac rate for 30-
year fixed rate loans as of the date that the modification agreement
is prepared.
2. Standardized net present value (NPV) test - The NPV test compares
expected cash flows from a modified loan to the same loan with no
modification. If the expected cash flow with a modification is greater
than the expected cash flow without a modification, the loan servicer
is required to modify the loan. According to Treasury, the NPV test
increases mortgage holder/investor confidence and helps ensure that
borrowers are treated consistently under the program by providing a
transparent and externally derived objective standard for all loan
servicers to follow.
3. Standardized waterfall - Servicers must follow a sequential
modification process to reduce payments to 31 percent of gross monthly
income. Servicers must first capitalize accrued interest and expenses
paid to third parties. Next, interest rates must be reduced to the
higher of 2 percent or a level that achieves the 31 percent debt-to-
income target. If the debt-to-income ratio is still over 31 percent,
servicers must then extend the amortization period of the loan up to
40 years. Finally, if the debt-to-income ratio is still over 31
percent, the servicer must forbear--defer--principal until the payment
is reduced to the 31 percent target.[Footnote 3] Servicers may also
forgive mortgage principal at any step of the process to achieve the
target monthly payment ratio of 31 percent.
4. Incentive payment structure - Treasury will use HAMP funds to
provide both one-time and ongoing ("pay-for-success") incentives to
loan servicers, mortgage holders/investors, and borrowers to increase
the likelihood that the program will produce successful modifications
over the long term and help cover the servicers' and investors' costs
of modifying a loan.
Prior to HAMP, many servicers offered their own loan modification
programs, but the vast majority of these loan modifications increased
or did not change the borrower's monthly mortgage payment. Rather, the
focus of these programs was on bringing delinquent loans current by
adding past due interest, advances for taxes or insurance, and other
fees to the loan balance. Some of these loan modifications changed the
interest rate or remaining term of the loan but typically focused on
reducing payments to 38 rather than 31 percent of the borrower's gross
monthly income. For example, FDIC's IndyMac Federal Bank loan
modification program, on which HAMP is partially based, initially
reduced payments to 38 percent of the borrower's gross monthly income
before subsequently revising the payment target to 31 percent. Many
servicers continue to offer non-HAMP loan modifications for borrowers
who do not qualify for HAMP. Appendix I provides examples of non-HAMP
loan modification programs and an overview of other federal
foreclosure prevention programs.
The HAMP Loan Modification Program Has Made Limited Progress to Date:
Treasury first announced HAMP in February 2009 and issued the first
implementation guidelines in March 2009. Since then, Treasury has
issued 11 supplemental directives for the HAMP program, 8 of them for
the first-lien modification program (fig. 2). The early supplemental
directives tended to focus on basic implementation issues, but the
later directives resulted in significant changes to the program--for
example, requiring servicers to send written denial notices to
borrowers, streamlining the process used by servicers for evaluating
borrowers, and requiring that servicers verify borrowers' income
before initiating trial modifications.
As of March 9, 2010, 113 servicers had signed HAMP Servicer
Participation Agreements to modify loans not owned or guaranteed by
the government sponsored enterprises (GSE) Fannie Mae and Freddie Mac.
[Footnote 4] Roughly $36.9 billion in TARP funds have been allocated
to these servicers for modification of non-GSE loans. These servicers
include national financial institutions such as Bank of America, Wells
Fargo, and JP Morgan Chase and national servicing organizations such
as GMAC Mortgage and Ocwen. Fannie Mae and Freddie Mac required all
servicers of loans that they owned or guaranteed to participate in the
GSE HAMP program.
Figure 2: Timeline of HAMP Program Announcements:
[Refer to PDF for image: timeline]
April 2009:
* Additional guidance for adoption and implementation of the first-
lien program.
* Collection and reporting of race, ethnicity, and gender of borrowers
involved in potential loan modifications under the HAMP.
July 2009:
* Trial period and modification setup requirements and submitting loan-
level data for processing during the HAMP trial period.
* HPDP incentives program details, including information on
eligibility, calculating HPDP incentives, timetables for potential
payments, and compliance.
August 2009:
* Second Lien Modification Program introduction and implementation
guidance.
September 2009:
* Collection and reporting requirements of certain data elements.
October 2009:
* Streamlined HAMP borrower evaluation process.
November 2009:
* Requirement to send written notice to borrowers denied HAMP.
* Guidance for the adoption and implementation of the Foreclosures
Alternative Program.
January 2010:
* Requires servicers to verify borrower eligibility prior to offering
a HAMP trial modification and additional guidance regarding the
resolution of active HAMP trial modifications.
Source: Treasury.
[End of figure]
Treasury reported that through February 2010 servicers had offered
nearly 1.4 million HAMP trial modifications to borrowers of GSE and
non-GSE loans, and roughly 1.1 million of these had begun HAMP trial
modifications.[Footnote 5] Of the trial modifications begun, about 0.8
million were in active trial modifications, fewer than 0.2 million
were in active permanent modifications, and the remaining had been
canceled. As shown in figure 3, the number of trial modifications
started generally increased until October 2009 but then decreased. In
part, the decrease in new trial modifications may be the result of a
shift in focus on the part of Treasury and the servicers from starting
new modifications to making existing trial modifications permanent. In
July 2009, Treasury announced a goal of 500,000 trial modifications
started by November 1, 2009. In November, however, Treasury announced
a campaign to increase the number of conversions to permanent
modifications. Although the first trial modifications started nearly a
year ago, servicers are completing permanent modifications at a rate
slower than Treasury expected, with 32 percent of loans that have been
in trial for three months or more approved for conversion. Servicers
we spoke with cited several challenges in making trial modifications
permanent, including obtaining all the required documentation and
borrowers who missed trial period payments.
Figure 3: GSE and non-GSE HAMP Trial and Permanent Modifications Made
Each Month:
[Refer to PDF for image: multiple line graph]
Date: May and Prior, 2009;
Trial modification started: 53,791;
Permanent modification started: 0.
Date: June 2009;
Trial modification started: 99,919;
Permanent modification started: 0.
Date: July 2009;
Trial modification started: 118,055;
Permanent modification started: 0.
Treasury announces goal of 500,000 trials by November 1, 2009.
Date: August 2009;
Trial modification started: 144,706;
Permanent modification started: 0.
Date: September 2009;
Trial modification started: 134,499;
Permanent modification started: 1,711.
Date: October 2009;
Trial modification started: 157,150;
Permanent modification started: 3,470.
Date: November 2009;
Trial modification started: 110,081;
Permanent modification started: 26,201.
Start of Treasury's Conversion Campaign.
Date: December 2009;
Trial modification started: 109,538;
Permanent modification started: 35,083.
Date: January 2010;
Trial modification started: 80,477;
Permanent modification started: 49,832.
Date: February 2010;
Trial modification started: 85,848;
Permanent modification started: 53,910.
Source: Cumulative figures taken from January 2010 HAMP Servicer
Performance Report, monthly figures are GAO calculated using
cumulative figures.
[End of figure]
To date, Treasury has reported limited information on the number of
borrowers who have been denied trial modifications under HAMP. The 10
HAMP servicers that we spoke with reported a wide range of denial
rates. The reasons for denying trial modifications varied by servicer--
for example, one servicer reported high proportions of investors
prohibiting HAMP modifications and another servicer reported
insufficient or excessive borrower income as the most common reasons
for denial.
Additionally, Treasury has provided limited data on the performance of
HAMP modifications, both trial and permanent. According to program
administrators, servicers are not required to report trial period
payments on a monthly basis, and these payments may not be reported
until the trial modification becomes official. Thus, it is difficult
to determine the number of borrowers in trial modifications who may be
delinquent in their trial payments. Limited information is available
on the performance of permanent modifications because few trials have
become permanent. According to Treasury, through the end of February
2010, 1,473 of the 170,207 permanent modifications made had defaulted.
HAMP payments are contingent upon trial modifications becoming
permanent, and given the small number of permanent modifications to
date, Treasury has made relatively few incentive payments to
investors, servicers, and borrowers. According to Treasury, through
the end of February 2010, a total of $58 million had been disbursed to
servicers and investors. Roughly 78 percent of these payments went to
servicers and 22 percent to investors. As of March 1, 2010, no
incentive payments had been made on borrowers' behalf because no
borrowers had reached the first anniversary of their trial
modification, as the program requires before making the incentive
payment.
Overall, non-GSE borrowers participating in HAMP had their monthly
mortgage payments reduced by about 19 percentage points of their total
debt payments. The mortgage interest rates on their loans were reduced
by approximately 5.5 percentage points (from 7.5 percent to 2.0
percent on average) and for nearly half of these borrowers had seen
their loan terms extended to 40 years (an increase of 13 years beyond
the original remaining term of the loan). To show the payments that
Treasury might make for a typical modification, we developed an
example of first-lien cost-sharing and incentive payments based on
median loan and borrower characteristics of non-GSE borrowers entering
trial modifications through February 17, 2010. For a borrower with a
loan of about $222,000 who is paying 44 percent of his gross monthly
income toward monthly housing payments, a HAMP modification would
reduce the monthly housing payment by $520, from $1,760 to $1,240.
Over 5 years, Treasury would pay an investor $10,500 for the
difference in mortgage payments and other incentives, a servicer
$4,500, and a borrower $5,000. In total, the borrower would receive
$36,200 in the form of reduced payments and incentives. Appendix II
elaborates on this example.
Further Actions Needed by Treasury to Improve HAMP's Transparency and
Accountability:
In our July 2009 report on HAMP, we noted that Treasury's projection
that 3 to 4 million borrowers could be offered loan modifications was
based on several uncertain assumptions and might be overly optimistic.
Specifically, we reported that some of the key assumptions and
calculations regarding the number of borrowers whose loans would be
successfully modified under HAMP using TARP funds were necessarily
based on limited analyses and data. According to Treasury, projections
for the number of non-GSE borrowers who will participate in HAMP are
updated quarterly through the revised allocation of TARP funds for
HAMP servicers. Nonetheless, according to Treasury's Web site,
Treasury continues to expect that HAMP will offer reduced monthly
payments to up to 3 to 4 million borrowers.
We also reported that while HAMP is the cornerstone effort under TARP
to meet the act's goals of preserving homeownership and protecting
home values, a number of HAMP programs remained largely undefined.
Since that time, additional details of the Home Price Decline
Protection (HPDP) incentives, second-lien modification program, and
foreclosure alternatives program have been announced, but the number
of homeowners who can be helped under these programs remains unclear.
In July, we noted that Treasury had not estimated the number of
additional modifications that would be made as a result of HPDP
incentive payments, even though the potential exists for the incentive
payments to use up to $10 billion in TARP funds. To date, Treasury has
not prepared any such estimate. In addition, while Treasury has
attempted to improve the targeting of these incentive payments by
incorporating the size of the unpaid principal balance and the loan-to-
value ratio in the payment calculations, HPDP incentives continue to
be available for loans that would have passed the NPV test without
them. Similarly, although the second-lien and foreclosure alternatives
programs were included in the March 2009 program guidelines, no funds
have yet been disbursed under either of these programs to date.
According to Treasury, as of March 1--over a year after the first
announcement of HAMP--details of the second-lien program had not yet
been finalized, and only two servicers had signed an agreement to
participate in the program.
Finally, we reported in July that Treasury had not finalized a
comprehensive system of internal control for HAMP. We noted that
important parts of a comprehensive system of internal control include,
among other things, implementing a system for determining compliance,
having sufficient numbers of staffing with the right skills, and
establishing and reviewing performance measures and indicators
[Footnote 6]. According to Treasury, it was working with its financial
agents to implement such a system and we continue to assess Treasury's
efforts in this area. [Footnote 7] While the Chief of the Homeownership
Preservation Office (HPO)--the office within Treasury that is
responsible for administering HAMP--consulted with staff and reduced
staffing levels from 36 to 29 full-time positions, Treasury has not
yet formally assessed whether HPO has staff with the skills needed to
govern the program effectively. In addition, Treasury has not yet
finalized remedies, or penalites, for servicers who are not in
compliance with HAMP guidelines. According to Treasury, these remedies
will be complete in April 2010 and a HAMP compliance committee has
been established to review issues related to servicers' compliance
with program guidelines and to enforce appropriate remedies.
Furthermore, while Treasury has put in place some performance metrics
for HAMP, it has not developed benchmarks to measure these metrics
against, limiting its ability to determine the success of the program.
We continue to assess Treasury's efforts to establish a comprehensive
system of internal control as part of ongoing oversight of the
implementation of TARP and annual audit of TARP's financial
statements. Appendix III provides more detail on the recommendations
we made in July and Treasury's responses to them.
Servicers Reported Facing Challenges in Implementing HAMP, and Program
Implementation Was Sometimes Inconsistent:
The servicers we interviewed told us that a major challenge they faced
in implementing the HAMP first-lien modification program was the
number of changes to the program. Each major program change often
required servicers to adjust their business practices, update their
systems, and retrain their servicing staff. An example of a
significant program change that servicers brought to our attention was
Treasury's recent requirement that borrowers fully document their
income before they can be evaluated for a trial modification.
According to servicers we contacted, Treasury told servicers in July
2009 that it was a "best practice" to use stated income information to
evaluate borrowers for trial modifications in order to offer
modifications more quickly. As a result, some servicers that had been
requiring fully documented income before offering a trial modification
switched to using stated income, a change that involved altering
business processes, including updating company policies and retraining
employees. However, as Treasury became concerned about the number of
trial modifications that were not converting to permanent
modifications due to difficulty obtaining income documentation from
borrowers after the trial period began, Treasury subsequently reversed
the policy. In January 2010, Treasury announced that effective June 1,
2010, servicers would be required to evaluate borrowers for trial
modifications based on fully documented income. Servicers that
switched to or had been using stated income will again have to alter
their processes and policies to meet the new standards.
Servicers also told us that the instability of Treasury's NPV model
presented another implementation challenge. Although the NPV test is a
key element in evaluating borrowers for HAMP, servicers told us that
they experienced problems accessing and using the NPV model on
Treasury's Web portal. According to Treasury, servicers were allowed
to use their own NPV models until September 1, but some servicers told
us that the lack of a Treasury model made it difficult for them to
begin offering trial modifications. One servicer told us that in the
first few months of the program, it was otherwise ready to start
making trial modifications but it was unable to effectively use
Treasury's Web-based NPV model. As a result, it had to keep borrower
applications on hold for several months.
In addition, although one of HAMP's goals is to create clear,
consistent, and uniform guidance for loan modifications across the
industry, we found inconsistencies and wide variations among the HAMP
servicers that we contacted with respect to communication with
borrowers about HAMP, the criteria used to evaluate borrowers for
imminent default, and the tracking of HAMP complaints.
* Communications with borrowers - Although Treasury guidelines state
that servicers must provide borrowers with information designed to
help them understand the modification process and must respond to HAMP
inquiries in a timely and appropriate manner, the HAMP servicers we
contacted differed widely in the timeliness and content of their
initial communications with borrowers about HAMP. For example, while
some servicers contacted borrowers about HAMP as soon as payment was
30 days delinquent, other servicers did not inform borrowers about
HAMP until payments were at least 60 days delinquent. Treasury has not
developed standards to evaluate servicers' performance in
communicating with borrowers or penalties for servicers that do not
meet Treasury's requirements.
We reviewed the Web sites of the 20 HAMP servicers with the largest
program allocations and found that 3 did not provide any information
about HAMP and that 3 others had posted inaccurate information about
the program. The inaccuracies included statements implying that the
program had not yet started and that only loans owned by Fannie Mae or
Freddie Mac were eligible for HAMP. After we notified Treasury of
these issues, two of the servicers updated their Web sites to include
accurate program information. However, one continued to contain
inaccurate information, and three continued to have minimal
information about the program, but, according to Treasury, the level
of information cannot be mandated.
* Criteria for imminent default - According to HAMP guidelines,
borrowers in danger of imminently defaulting on their mortgages may be
eligible for HAMP modifications. Although Treasury's goal is to create
uniform guidance for loan modifications across the industry, Treasury
has not provided specific guidance on how to evaluate non-GSE
borrowers for imminent default, leading to inconsistent practices
among servicers. Among the 10 servicers we contacted, there were 7
different sets of criteria for determining imminent default. While
some servicers do not impose any requirements beyond the basic HAMP
eligibility criteria, others do. For example, four servicers aligned
their imminent default criteria for their non-GSE portfolios with the
imminent default criteria that the GSEs required for their loans prior
to March 1, 2010. These criteria required borrowers to have cash
reserves equal to less than 3 months' worth of monthly housing
payments and a ratio of disposable net income to monthly housing
payments (debt coverage ratio) of less than 1.20. One servicer had
begun using the new GSE criteria for its non-GSE loans, which impose a
maximum cash reserves limit of $25,000 and have no debt coverage ratio
requirement, for its non-GSE loans.[Footnote 8] In addition, four
servicers implemented additional criteria for imminent default:
- including a sliding scale for the borrower's front-end debt-to-
income ratio (e.g., borrowers in the highest income category had to
have a front-end debt-to-income ratio of at least 40 percent);
- an increase in expenses or decrease in income that is more than a
certain percentage of income;
- a ratio of the remaining loan balance to the current house value
that is above a certain percentage; and:
- a "hardship" situation lasting more than 12 months.
As a result of the differences in criteria used to assess imminent
default, borrowers with the same financial situation and loan terms
could be approved for a HAMP loan modification by one servicer and
denied by another.
* Tracking of HAMP complaints - While Treasury has directed HAMP
servicers to have procedures and systems in place to respond to HAMP
inquiries and complaints and to ensure fair and timely resolutions,
some servicers are not systematically tracking HAMP complaints or
their resolutions. For example, according to Treasury a compliance
review conducted by Freddie Mac in fall 2009 cited a servicer for not
tracking, monitoring, or reporting HAMP-specific complaints. In the
absence of an effective tracking system, the compliance agent could
not determine whether the complaints had been resolved. Similarly,
several of the servicers we interviewed indicated that they tracked
resolutions only to certain types of complaints. For example, several
servicers told us that they tracked only written HAMP complaints and
that they handled these written complaints differently depending on
the addressee. In one case, letters that were addressed to the
president of the company were directed to an "escalation team" that
tracked the resolution of the complaint, and required weekly updates
to the borrower until the complaint was resolved. In comparison,
complaint letters that were not addressed to a company executive were
routed through a business unit without specific response time
requirements.
We have shared our preliminary observations about inconsistencies in
servicers' implementation of HAMP with Treasury so that these
inconsistencies can be addressed in a timely manner. As we continue
our work evaluating servicers' implementation of the program, we plan
to develop specific recommendations for Treasury as they are needed
and appropriate to ensure that HAMP borrowers are treated consistently.
HAMP Faces Additional Challenges Going Forward:
While HAMP has offered some relief to over a million borrowers
struggling to make their mortgage payments, the program may face
several additional challenges going forward. These include problems
converting trial to permanent modifications, the growing issue of
negative equity, redefaults among borrowers with modifications, and
program stability and management.
* Conversions - Treasury has taken some steps to address the challenge
of converting trial modifications to permanent modifications, but
conversions may continue to be an issue. During December 2009 and
January 2010, Treasury held a HAMP Conversion Campaign to help
borrowers who were in HAMP trial modifications convert to permanent
modifications. This effort included a temporary review period lasting
through January 31 which did not allow canceling trial modifications
for any reason other than failure to meet HAMP property requirements
and a requirement that the eight largest servicers submit conversion
action plans. Since the announcement of the Conversion Campaign, the
number of new conversions each month has increased from roughly 26,000
in November to roughly 35,000 in December and nearly 50,000 in
January. However, as noted above, relatively few trial modifications
have been made permanent.
* Negative Equity - As we reported in July 2009, HAMP may not address
the growing number of foreclosures among borrowers with negative
equity in their homes (so-called "underwater" borrowers).[Footnote 9]
While HAMP's overriding policy objective is to make mortgages more
affordable for struggling homeowners, factors other than affordability
may influence a borrower's decision to default, including the degree
to which the borrower is underwater. As we reported in July, many
states with high foreclosure rates also have high proportions of
mortgages with negative equity. To help address this issue, in
February 2010 Treasury announced the Housing Finance Agency Innovation
Fund for the Hardest-Hit Housing Markets program, which will allocate
$1.5 billion in HAMP funds to five states that have suffered an
average home price drop of at least 20 percent from the state's price
peak, based on a seasonally adjusted home price index. However, the
details of this program and the extent to which it will be able to
address defaults and foreclosures among this group of borrowers still
remain to be seen.
* Redefaults - Some borrowers who receive a permanent HAMP
modification are likely to redefault on their modified mortgages.
Because few permanent modifications have been made to date, the
redefault rate for HAMP remains to be seen, but HAMP alone may not
address the needs of all borrowers. In particular, while HAMP lowers
borrowers' monthly first-lien payments to 31 percent of their gross
monthly income, some borrowers may have high amounts of other debt,
such as monthly payments on second mortgages or cars. These borrowers
may have difficulty making even modified payments. In our July report,
we noted that while Treasury requires borrowers with high levels of
total debt to agree to obtained counseling, Treasury was not tracking
whether borrowers obtain this counseling. We therefore recommended
that Treasury consider methods of monitoring whether or not borrowers
were obtaining the required counseling. Treasury officials told us
that they considered methods of monitoring compliance but concluded
that the processes would be too burdensome. As a result, it remains
difficult to determine whether this program feature is likely to meet
its purpose of reducing redefaults among high debt-burdened borrowers.
We continue to believe that Treasury should seek cost-efficient
methods to assess the extent to which the counseling requirement is
reducing redefaults. Furthermore, the second-lien program, which could
help reduce borrowers' total debt, has yet to be fully specified and,
to date, only two servicers have signed up for this program.
* Program Stability and Management - HAMP continues to undergo
significant program changes, including the recently announced shift to
upfront income verification and the implementation of the second-lien
modification program, the foreclosure alternatives program, and the
Hardest-Hit Housing Markets program. Treasury will be challenged to
successfully implement these programs while also continuing to put in
place the controls and resources needed to continue the first-lien
modification program.
Given the magnitude of the investment of public funds in HAMP and the
fact that the program represents direct outlays of taxpayer dollars
rather than investments that may yield a return (as in other TARP
programs), it is imperative that Treasury continue to improve HAMP's
transparency and accountability. As we have noted, HAMP is Treasury's
cornerstone effort under TARP to meet the act's purposes of preserving
homeownership and protecting home values. As the number of delinquent
loans and foreclosures continues to climb and home values continue to
fall in many areas of the country, Treasury will need to ensure that
borrowers receive consistent access to and treatment from servicers.
Treasury also needs to make sure that it has the information,
controls, and resources to successfully implement a still-developing
program. We will continue to evaluate the implementation of HAMP as
part of our ongoing oversight of the activities and performance of
TARP.
Mr. Chairman and Members of the Committee, I appreciate this
opportunity to discuss this critically important program and would be
happy to answer any that you may have. Thank you.
Contact:
For further information on this testimony, please contact Richard J.
Hillman at (202) 512-8678 or hillmanr@gao.gov, Thomas J. McCool at
(202) 512-2642 or mccoolt@gao.gov, or Mathew J. Scirč at (202) 512-
8678 or sciremj@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this statement. GAO staff who made major contributions to this
statement are listed in appendix IV.
[End of section]
Appendix I: Examples of Other Foreclosure Prevention Programs:
Institution: GSEs (Fannie Mae and Freddie Mac);
Program or effort: Home Affordable Refinance Program;
Selected program characteristics:
* Borrowers with loans owned or guaranteed by Fannie Mae or Freddie
Mac can refinance into a fixed rate loan at the current market rate;
* Eligible borrowers are current on their loans, the owner occupant of
a one-to four-unit property, and have a loan-to-value ratio (LTV) of
less than 125 percent;
* Between February 2009 and February 2010, over 4 million borrowers
were refinanced through HARP.
Institution: Federal Housing Administration (FHA);
Program or effort: Hope for Homeowners;
Selected program characteristics:
* Borrowers can refinance into an affordable loan insured by FHA;
* Eligible borrowers are those who, among other factors, have a
monthly mortgage debt-to-income ratio above 31 percent;
* Servicers provided incentive payments; lenders required to write
down the existing mortgage amount depending on the borrower's monthly
mortgage debt-to-income ratio and total household debt;
* Borrowers must agree to share both the equity created at the
beginning of their new Hope for Homeowners mortgage and any future
appreciation in the value of their home;
* Between October 2008 and January 2010, 96 loans were refinanced
under Hope for Homeowners.
Institution: Federal Deposit Insurance Corporation;
Program or effort: IndyMac Loan Modification Program;
Selected program characteristics:
* Eligible borrowers can get monthly mortgage payments reduced to 31
percent of gross monthly income.
Institution: Private-sector financial institutions;
Program or effort: Private-sector foreclosure prevention programs;
Selected program characteristics:
* Programs vary, but include modification programs aimed at reducing
monthly payments;
* For example, one bank has a program to modify pay option adjustable
rate mortgages. Another bank modifies loans to decrease monthly
payments to between 31 and 40 percent of the borrower's monthly gross
income.
Source: Publicly available information from agencies and organizations
listed above.
[End of table]
[End of section]
Appendix II: Example of Treasury Payments for a Typical Modification
over 5 Years:
[Refer to PDF for image: illustration]
Loan origination:
Monthly loan payment: $1,760;
Debt to income ratio: 44%;
Loan to value ratio: 90%;
Term (months): 360;
Interest rate (fixed): 7.5%;
Total unpaid balance: $222,000;
Notes: House value of $246,667.
Two years later (borrower 60 days delinquent):
Monthly loan payment: $1,760;
Debt to income ratio: 44%;
Loan to value ratio: 114%;
Term (months): 338;
Interest rate (fixed): 7.5%;
Total unpaid balance: $222,194;
Notes: House value decreases 20%.
Loan modification:
Monthly loan payment: $1,240; $520 monthly payment reduction (Treasury
pays $140; Investor forgoes $380);
Debt to income ratio: 31%;
Loan to value ratio: 114%;
Term (months): 480;
Interest rate (fixed): 2.0%;
Total unpaid balance: $225,194;
Notes: Reduction in payment of 30%.
First five years after loan modification:
Treasury payments:
Payment for Monthly Reduction (from 38% to 31%):
Incentive recipient: Investor: $8,400.
Servicer Incentive:
Incentive recipient: Servicer: $1,000.
Current Borrower Bonus:
Incentive recipient: Investor: $1,500;
Incentive recipient: Servicer: $500.
Pay for Performance Success ($1,000/year for 5 years):
Incentive recipient: Borrower: $5,000.
Pay for Success ($1,000/year for 3 years):
Incentive recipient: Servicer: $3,000.
Home Price Decline Protection (HPDP):
Incentive recipient: Investor: $600.
Total:
Incentive recipient: Investor: $10,500;
Incentive recipient: Servicer: $4,500.
Incentive recipient: Borrower: $5,000.
Borrower benefits:
Pay for Performance Success ($1,000/year for 5 years): $5,000;
Treasury Payments on Behalf of Borrower for Monthly Payment Reduction:
$8,400;
Investor Payments on Behalf of Borrower for Monthly Payment Reduction:
$22,800;
Total: $36,200.
Source: GAO.
[End of section]
Appendix III: Treasury's Actions in Response to GAO's July 2009 HAMP
Recommendations:
GAO recommendation:
Consider methods of monitoring whether borrowers with total household
debt of more than 55 percent of their income who have been told that
they must obtain HUD-approved housing counseling do so, and assessing
how this counseling affects the performance of modified loans to see
if the requirement is having its intended effect of limiting
redefaults;
Treasury actions to date:
* According to Treasury, it considered options for monitoring what
proportion of borrowers is obtaining counseling, but determined that
it would be too burdensome to implement.
* Treasury does not plan to assess the effectiveness of counseling in
limiting redefaults because it believes that the benefits of
counseling on the performance of loan modifications is well documented
and the assessment of the benefits to HAMP borrowers is not needed.
GAO recommendation:
Reevaluate the basis and design of the HPDP program to ensure that
HAMP funds are being used efficiently to maximize the number of
borrowers who are helped under HAMP and to maximize overall benefits
of utilizing taxpayer dollars;
Treasury actions to date:
* On July 31, 2009, Treasury announced detailed guidance on HPDP that
included changes to the program's design that, according to Treasury,
improve the targeting of incentive payments to mortgages that are at
greater risk because of home price declines.
* Treasury does not plan to limit HPDP incentives to modifications
that would otherwise not be made without the incentives, due to
concerns about potential manipulation of inputs by servicers to
maximize incentive payments and the additional burden of re-running
the NPV test for many loans.
GAO recommendation:
Institute a system to routinely review and update key assumptions and
projections about the housing market and the behavior of mortgage-
holders, borrowers, and servicers that underlie Treasury's projection
of the number of borrowers whose loans are likely to be modified under
HAMP and revise the projection as necessary in order to assess the
program's effectiveness and structure;
Treasury actions to date:
* According to Treasury, on a quarterly basis it is updating its
projections on the number of first-lien modifications expected when it
revises the amount of TARP funds allocated to each servicer under HAMP.
* Treasury is gathering data on servicer performance in HAMP and
housing market conditions in order to improve and build upon the
assumptions underlying its projections about mortgage market behavior.
GAO recommendation:
Place a high priority on fully staffing vacant positions in the
Homeownership Preservation Office (HPO)--including filling the
position of Chief Homeownership Preservation Officer with a permanent
placement--and evaluate HPO's staffing levels and competencies to
determine whether they are sufficient and appropriate to effectively
fulfill its HAMP governance responsibilities;
Treasury actions to date:
* A permanent Chief Homeownership Preservation Officer was hired on
November 9, 2009.
* According to Treasury, staffing levels for HPO have been revised
from 36 full-time equivalent positions to 29.
* According to Treasury, as of March 2010, HPO had filled 27 of the
total of 29 full time positions.
GAO recommendation:
Expeditiously finalize a comprehensive system of internal control over
HAMP, including policies, procedures, and guidance for program
activities, to ensure that the interests of both the government and
taxpayer are protected and that the program objectives and
requirements are being met once loan modifications and incentive
payments begin;
Treasury actions to date:
* According to Treasury, it will work with Fannie Mae and Freddie Mac
to build and refine the internal controls within these financial
agents' operations as new program components are implemented.
* Treasury expects to finalize a list of remedies for servicers not in
compliance with HAMP guidelines by April 2010.
GAO recommendation:
Expeditiously develop a means of systematically assessing servicers'
capacity to meet program requirements during program admission so that
Treasury can understand and address any risks associated with
individual servicers' abilities to fulfill program requirements,
including those related to data reporting and collection;
Treasury actions to date:
* According to Treasury, a servicer self-evaluation form, which
provides information on the servicer's capacity to implement HAMP, has
been implemented beginning with servicers who started signing Servicer
Participation Agreements in December 2009.
Source: GAO and analysis of Treasury information.
[End of table]
[End of section]
Appendix IV: Contacts and Staff Acknowledgments:
GAO Contacts:
Mathew J. Scirč (202) 512-8678 or sciremj@gao.gov:
Thomas J. McCool (202) 512-2642 or mccoolt@gao.gov:
Richard J. Hillman (202) 512-8678 or hillmanr@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above, Lynda Downing, Harry Medina,
John Karikari (Lead Assistant Directors); and Tania Calhoun, Emily
Chalmers, Heather Latta, Rachel DeMarcus, Karine McClosky, Marc
Molino, Mary Osorno, Winnie Tsen, and Jim Vitarello made important
contributions to this testimony.
[End of section]
Footnotes:
[1] Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C.
§§ 5201 et seq. The Helping Families Save Their Homes Act of 2009,
Pub. L. No. 111-22, Div. A, 123 Stat. 1632 (2009) amended the act to
reduce the maximum allowable amount of outstanding troubled assets by
almost $1.3 billion, from $700 billion to $698.741 billion.
[2] GAO, Troubled Asset Relief Program: Treasury Actions Needed to
Make the Home Affordable Modification Program More Transparent and
Accountable, [hyperlink, http://www.gao.gov/products/GAO-09-837]
(Washington, D.C.: July 23, 2009).
[3] The principal forbearance amount is non-interest bearing and non-
amortizing and cannot accrue interest under the guidelines or be
amortized over the loan term. Rather, the amount of principal
forbearance will result in a balloon payment fully due and payable
upon the borrower's transfer of the property, payoff of the interest
bearing unpaid principal balance, or maturity of the mortgage loan.
[4] Under HAMP, Fannie Mae and Freddie Mac are expected to provide up
to $25 billion in funding to encourage servicers to modify loans owned
or guaranteed by the two GSEs. According to Treasury, up to $50
billion in TARP funds will be used primarily to encourage the
modification of mortgages that financial institutions own and hold in
their own portfolios and mortgages held in private-label
securitization trusts (non-GSE loans).
[5] Roughly 43 percent of borrowers who were either in trial or
permanent modifications as of February 17, 2010, had non-GSE loans and
therefore fell under the TARP-funded portion of HAMP.
[6] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999).
[7] Fannie Mae and Freddie Mac are financial agents for the non-GSE
portion of HAMP, with Fannie Mae as the program administrator, and
Freddie Mac as the compliance agent.
[8] The new GSE imminent default criteria also requires the use of an
Imminent Default Indicator™, a statistical model that predicts the
likelihood of default or serious delinquency for mortgage loans that
are less than 60 days delinquent. However, this indicator is not
available for non-GSE loans.
[9] GAO, Troubled Asset Relief Program: Treasury Actions Needed to
Make the Home Affordable Modification Program More Transparent and
Accountable, [hyperlink, http://www.gao.gov/products/GAO-09-837]
(Washington, D.C.: July 23, 2009).
[End of section]
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