Troubled Asset Relief Program
Treasury Actions Needed to Make the Home Affordable Modification Program More Transparent and Accountable Gao ID: GAO-09-837 July 23, 2009GAO's sixth report on the Troubled Asset Relief Program (TARP) focuses on the Department of the Treasury's (Treasury) efforts to establish its Home Affordable Modification Program (HAMP). This 60-day report examines (1) the design of HAMP's program features with respect to maximizing assistance to struggling homeowners, (2) the analytical basis for Treasury's estimate of the number of loans that are likely to be successfully modified using TARP funds under HAMP, and (3) the status of Treasury's efforts to implement operational procedures and internal controls for HAMP. For this work, GAO reviewed documentation from Treasury and its financial agents and met with officials from Treasury, its financial agents, and other organizations.
Under HAMP, Treasury will use up to $50 billion in TARP funds to (1) modify the first-lien mortgages of homeowners in danger of foreclosure, (2) encourage the modification of mortgages in areas experiencing serious declines in property values, (3) reduce or pay off second-lien mortgages for homeowners with loans modified under HAMP, (4) arrange deeds-in-lieu or short sales as alternatives to foreclosure; and (5) provide incentive payments to encourage refinancing under the HOPE for Homeowners program. The first-lien mortgage modification effort is the largest and most developed part of HAMP, and Treasury and its financial agents are establishing the operational infrastructure for this effort. However, one of the requirements under the first-lien program--that borrowers with high levels of household debt agree to obtain counseling--may not fully meet Treasury's goals. Treasury's estimate of the number of borrowers who would likely be helped under its HAMP loan modification program reflects uncertainty created by data gaps and the need to make numerous assumptions, and this projection may be overstated. In addition, Treasury has not specified its plans for systematically updating key assumptions and calculations. Treasury announced that up to 3 to 4 million borrowers who were at risk of default and foreclosure could be offered a loan modification under HAMP. Treasury has taken a number of important steps toward implementing operational procedures and internal controls for HAMP but has not finalized all of the associated processes and is not systematically evaluating servicers' capacity during program admission. Treasury officials have developed and continue to refine key operational procedures and internal controls, including establishing an organizational structure for overseeing HAMP, delegating implementation authorities and responsibilities to its financial agents, and drafting work flows for processes such as those associated with the payment of incentives. As of July 20, 2009, about 180,000 borrowers have entered into trial modifications but HAMP incentive payments will not be made until July 27 at the earliest--pending successful completion of the 90-day trial periods. Yet concerns have been raised by Treasury, the Congressional Oversight Panel, and federal banking regulators about servicers' capacity to fulfill program requirements and implement HAMP. Because servicers are not fully evaluated during the admittance process, Treasury is unable to adequately identify, assess, and address any potential risks that may prevent them from fulfilling program requirements.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-09-837, Troubled Asset Relief Program: Treasury Actions Needed to Make the Home Affordable Modification Program More Transparent and Accountable
This is the accessible text file for GAO report number GAO-09-837
entitled 'Troubled Asset Relief Program: Treasury Actions Needed to
Make the Home Affordable Modification Program More Transparent and
Accountable' which was released on July 23, 2009.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Committees:
United States Government Accountability Office:
GAO:
July 2009:
Troubled Asset Relief Program:
Treasury Actions Needed to Make the Home Affordable Modification
Program More Transparent and Accountable:
GAO-09-837:
GAO Highlights:
Highlights of GAO-09-837, a report to congressional committees.
Why GAO Did This Study:
GAO‘s sixth report on the Troubled Asset Relief Program (TARP) focuses
on the Department of the Treasury‘s (Treasury) efforts to establish its
Home Affordable Modification Program (HAMP). This 60-day report
examines (1) the design of HAMP‘s program features with respect to
maximizing assistance to struggling homeowners, (2) the analytical
basis for Treasury‘s estimate of the number of loans that are likely to
be successfully modified using TARP funds under HAMP, and (3) the
status of Treasury‘s efforts to implement operational procedures and
internal controls for HAMP. For this work, GAO reviewed documentation
from Treasury and its financial agents and met with officials from
Treasury, its financial agents, and other organizations.
What GAO Found:
Under HAMP, Treasury will use up to $50 billion in TARP funds to (1)
modify the first-lien mortgages of homeowners in danger of foreclosure,
(2) encourage the modification of mortgages in areas experiencing
serious declines in property values, (3) reduce or pay off second-lien
mortgages for homeowners with loans modified under HAMP, (4) arrange
deeds-in-lieu or short sales as alternatives to foreclosure; and (5)
provide incentive payments to encourage refinancing under the HOPE for
Homeowners program. The first-lien mortgage modification effort is the
largest and most developed part of HAMP, and Treasury and its financial
agents are establishing the operational infrastructure for this effort.
However, one of the requirements under the first-lien program”that
borrowers with high levels of household debt agree to obtain counseling”
may not fully meet Treasury‘s goals. Specifically, Treasury does not
plan to systematically monitor whether borrowers who are told they must
obtain counseling actually receive it, in part, because it does not
wish to deny a loan modification to borrowers that have demonstrated
they are able to make modified payments. Also Treasury does not plan to
assess the effectiveness of its counseling requirement in limiting
redefaults. The other four HAMP subprograms had been announced but were
not fully designed or operational. Treasury announced the $10 billion
Home Price Decline Protection (HPDP) program, which is intended to
encourage investors to modify mortgages in areas experiencing steep
declines in home prices. But, Treasury officials told us that they had
not yet developed estimates of the number of modifications that would
result from the HPDP, and said that in some cases, the HPDP payments
would go to some loan modifications that would likely have been made
without this incentive. Because none of the expenditures under HPDP
would be recouped, it is crucial that Treasury ensure that funds are
spent only when needed to encourage modifications that would not be
made without this incentive.
Treasury‘s estimate of the number of borrowers who would likely be
helped under its HAMP loan modification program reflects uncertainty
created by data gaps and the need to make numerous assumptions, and
this projection may be overstated. In addition, Treasury has not
specified its plans for systematically updating key assumptions and
calculations. Treasury announced that up to 3 to 4 million borrowers
who were at risk of default and foreclosure could be offered a loan
modification under HAMP. But Treasury‘s projection of a participation
rate of 65 percent of the target group”borrowers who were at least 60
days delinquent in their loans or in imminent danger of default”which
is based roughly on a 90 percent servicer representation rate and a 70
percent borrower response rate, may be high. The loan modification
program most similar to HAMP”FDIC‘s IndyMac Bank program”has a peak
borrower response rate of only 50 percent. Additionally, servicer
participation in HAMP has not yet reached the 90 percent coverage rate
projected by Treasury, and borrowers cannot participate unless their
servicers do. Also, not all homeowners offered a loan modification will
remain current on their modified mortgages”further reducing the number
of homeowners that may avoid foreclosure through the HAMP program.
Lastly, Treasury did not provide detailed information and documentation
essential to adequately support its assumptions. The lack of adequate
documentation and specification of the assumptions makes it difficult
to assess the reliability of Treasury‘s estimates and, going forward,
may hinder efforts to evaluate how well the program is meeting its
objectives.
Treasury has taken a number of important steps toward implementing
operational procedures and internal controls for HAMP but has not
finalized all of the associated processes and is not systematically
evaluating servicers‘ capacity during program admission. Treasury
officials have developed and continue to refine key operational
procedures and internal controls, including establishing an
organizational structure for overseeing HAMP, delegating implementation
authorities and responsibilities to its financial agents, and drafting
work flows for processes such as those associated with the payment of
incentives. As of July 20, 2009, about 180,000 borrowers have entered
into trial modifications but HAMP incentive payments will not be made
until July 27 at the earliest”pending successful completion of the 90-
day trial periods (see timeline below of major HAMP events). While
Treasury has delegated some administrative and oversight
responsibilities to its financial agents, such as program
administration and compliance responsibilities, it has retained
authority for overall HAMP implementation, led by the Homeownership
Preservation Office (HPO) with support from other Treasury offices.
However, HPO continues to have a large number of unfilled positions.
Treasury has also begun to develop performance measures for HAMP, but
many of the specifics of these measures, such as how success will be
defined, have yet to be determined. In addition, Treasury and its
financial agents do not have systematic processes or controls in place
to consistently evaluate the capacity of servicers to fulfill specific
HAMP requirements during the program admittance process. Yet concerns
have been raised by Treasury, the Congressional Oversight Panel, and
federal banking regulators about servicers‘ capacity to fulfill program
requirements and implement HAMP. Because servicers are not fully
evaluated during the admittance process, Treasury is unable to
adequately identify, assess, and address any potential risks that may
prevent them from fulfilling program requirements. But, unlike other
TARP programs, such as the Capital Purchase Program, HAMP expenditures”
which are projected to be up to $50 billion”are not investments that
will be partially or fully repaid, but rather, expenditures that, once
made, will not be recouped. For this reason, a system of effective
internal control over program expenditures is of critical importance.
Figure: Timeline of Major HAMP Events from February 18, 2009, through
July 27, 2009:
[Refer to PDF for image: timeline]
February 18: Treasury announced a national modification program
intended to offer assistance to up to 3 to 4 million homeowners by
reducing monthly payments to sustainable levels.
March 4: Treasury issued official guidance for loan modifications under
the Home Affordable Modification program (HAMP) across the mortgage
industry and announced that servicers could begin conducting
modifications that conform to the guidelines.
March 19: To reach borrowers, Treasury launched its Making Home
Affordable Web site that provides program, eligibility, and housing
counseling information, among other things.
April 13: Six initial servicers sign participation agreements under
HAMP: Chase Home Finance, Wells Fargo, CitiMortgage, GMAC Mortgage,
Saxon Mortgage Services, and Select Portfolio Servicing.
April 15: Treasury launched an administrative Web site for mortgage
servicers to provide them information and tools needed to participate
in HAMP.
April 28: Treasury announces additional details related to the Second
Lien program”an additional component of HAMP.
May 14: Treasury announces additional details on the Home Price Decline
Protection Incentives program and the Foreclosure Alternatives program”
two additional components of HAMP.
July 18-20: Over 1 million letters sent to borrowers, over 350,000
trial modification offers extended, and over 180,000 trial
modifications under way. Over 27 million page views on the Making Home
Affordable Web site.
July 27: The earliest date Treasury expects to make the first matching
and incentive payments to servicers under HAMP.
Source: Treasury, OFS.
[End of figure]
What GAO Recommends:
GAO recommends that the Secretary of the Treasury; (1) consider methods
for monitoring compliance with and the effectiveness of its counseling
requirement; (2) reevaluate the basis and design for HPDP; (3)
regularly update assumptions and projections underlying the estimated
number of borrowers likely to be helped by HAMP; (4) staff vacant
positions within HPO, and evaluate its staffing levels and
competencies; (5) finalize a comprehensive system of internal control
over HAMP; and (6) systematically assess servicer‘s capacity to meet
HAMP‘s requirements during program admission. Treasury stated it would
consider GAO‘s recommendations as it moved forward.
View [hyperlink, http://www.gao.gov/products/GAO-09-837] or key
components. For more information, contact Mathew J. Scirč at (202) 512-
8678 or sciremj@gao.gov.
[End of section]
Contents:
Letter:
Scope and Methodology:
Background:
Treasury Has Not Fully Developed All HAMP Subprograms, and the Initial
Design of At Least Two Aspects of HAMP Limits Its Potential to Help
Homeowners:
Treasury's Projection of the Number of Loans That Could Be Modified
under HAMP Was Based on Uncertainties in Key Assumptions and May Be
Overstated:
Treasury Has Developed but Not Finalized the Oversight Structure for
HAMP, and Is Not Systematically Evaluating Servicers' Capacity during
Program Admission:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: List of Servicers That Have Signed HAMP Participation
Agreements, as of July 14, 2009:
Appendix II: Comments from the Department of the Treasury:
Appendix III: Contacts and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Projected Cost and Number of Borrowers Targeted for Assistance
Using TARP Funds under HAMP, as of July 14, 2009:
Table 2: Summary of HAMP Payments Using TARP Funds on First-Lien
Modifications:
Figures:
Figure 1: Default and Foreclosure Inventory Rates through the First
Quarter of 2009:
Figure 2: Foreclosure Inventory Rates by State, as of March 31, 2009:
Figure 3: Timeline of Major HAMP Events from February 18, 2009, through
July 27, 2009:
Figure 4: Rates of Home Foreclosure, Negative Equity, and Unemployment
by State:
Figure 5: Treasury's Projections of Homeowner Participation in HAMP,
Reflecting Uncertainties Due to Data Gaps and Necessary Assumptions,
2009-2012:
Abbreviations:
COP: Congressional Oversight Panel:
FDIC: Federal Deposit Insurance Corporation:
FHA: Federal Housing Administration:
FHFA: Federal Housing Finance Agency:
FSOB: Financial Stability Oversight Board:
GSE: government-sponsored enterprise:
HAMP: Home Affordable Modification Program:
HERA: Housing and Economic Recovery Act of 2008:
HPDP: Home Price Decline Protection:
HPO: Homeownership Preservation Office:
HUD: Department of Housing and Urban Development:
LTV: loan-to-value:
MHA: Making Home Affordable:
NPV: net present value:
OCC: Office of the Comptroller of the Currency:
OFS: Office of Financial Stability:
OTS: Office of Thrift Supervision:
SIGTARP: Office of the Special Inspector General for TARP:
TARP: Troubled Asset Relief Program:
VA: Department of Veterans Affairs:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 23, 2009:
Congressional Committees:
Dramatic increases in home mortgage defaults and foreclosures have
imposed significant costs on borrowers, lenders, mortgage investors and
neighborhoods; and have been a key contributor to the current financial
crisis. On October 3, 2008, the President signed into law the Emergency
Economic Stabilization Act (the act), which authorized the Department
of the Treasury (Treasury) to establish the $700 billion Troubled Asset
Relief Program (TARP).[Footnote 1] Treasury's initial focus in
implementing TARP was to attempt to stabilize the financial markets and
increase lending to businesses and consumers. However, the authorities
granted to Treasury under the act also are to be used to, among other
things, preserve homeownership and protect home values--two of the
act's stated purposes--and to maximize assistance for homeowners with
respect to foreclosure mitigation efforts. On February 18, 2009,
Treasury announced a framework for a program that would, among other
things, help at-risk homeowners avoid potential foreclosure by using up
to $50 billion of TARP funds to reduce their monthly mortgage payments.
Under the Home Affordable Modification Program (HAMP), Treasury's
Office of Financial Stability (OFS) will share the cost of reducing
monthly payments on first-lien mortgages with mortgage holders/
investors and provide financial incentives to servicers, borrowers, and
mortgage holders/investors for loans modified under the program. HAMP
also includes other subprograms, such as one that would provide
incentives to modify or pay off second-lien loans of borrowers whose
first mortgages were modified under HAMP. However, some observers have
questioned the number of homeowners that HAMP, as it is currently
structured, will help, and Treasury's own estimates do not resolve this
issue. Additionally, we have noted in prior reports that developing a
comprehensive system of internal controls for TARP has been an ongoing
challenge, in part because of the rapid evolution of TARP and its
activities, which includes HAMP.[Footnote 2] As a result, Treasury runs
the risk of implementing a homeownership preservation program that does
not yet have proper controls to protect taxpayers' interests and ensure
that HAMP objectives are met.
The act requires that GAO report at least every 60 days on the
activities and performance of TARP.[Footnote 3] This 60-day report (1)
reviews the design of HAMP's program features with respect to
maximizing assistance to struggling homeowners, (2) examines the
analytical basis for Treasury's estimate of the number of loans that
are likely to be successfully modified using TARP funds under HAMP, and
(3) evaluates Treasury's progress in implementing operational
procedures and internal controls for HAMP.
Scope and Methodology:
To review the design of HAMP's first-lien modification features with
respect to maximizing assistance to struggling homeowners, we reviewed
the act and program guidance provided by Treasury on the HAMP Web site
and interviewed officials at Treasury and Fannie Mae. To describe the
steps Treasury has taken to implement the program and to discuss HAMP
features, we reviewed publicly available documents--including official
program guidelines--and discussed these with Treasury officials.
Because Treasury told us that features of the Federal Deposit Insurance
Corporation's (FDIC) loan modification program at IndyMac Federal Bank
formed the basis for some of the HAMP features, we reviewed documents
provided by FDIC and discussed these with FDIC officials. We also
interviewed NeighborWorks officials to understand how its housing
counseling network has been providing counseling to HAMP borrowers with
high total household debt and its plans to track these borrowers. To
evaluate the initial framework of the Home Price Decline Protection
(HPDP) subprogram, we reviewed Treasury documents describing HPDP and
its methods for determining incentive payments and interviewed
officials responsible for its design. To describe HAMP's second-lien
and foreclosure alternatives subprograms, we reviewed publicly
available documents and discussed these proposed HAMP subprograms with
Treasury officials. To examine how Treasury's HAMP helps homeowners
with negative equity--a factor that could have a major impact on
delinquencies and foreclosures, especially if home price declines
continue--we reviewed Treasury documents that described guidelines for
loans and borrowers eligible to participate in the program with
particular attention to negative equity and interviewed the officials.
We also observed a demonstration of the HAMP net present value (NPV)
test model by Fannie Mae and Federal Housing Finance Agency (FHFA)
staff, a model used by participating servicers to determine whether to
modify a loan. We also reviewed literature on factors likely to affect
mortgage delinquencies and home foreclosures and analyzed data on home
foreclosures, negative equity, and unemployment rates across states in
the United States from various sources, including the Mortgage Bankers
Association's National Delinquency Survey data on home foreclosures,
First America CoreLogic's data on negative equity, and the Department
of Labor's Bureau of Labor Statistics data on unemployment rates.
To examine the analytical basis for Treasury's estimate of the number
of loans that are likely to be successfully modified for at-risk
borrowers using TARP funds, we reviewed documents from Treasury that
described the loan characteristics of the mortgage market, Treasury's
guidelines for loans and borrowers eligible to participate in the
program, assumptions about participation by homeowners and servicers,
and calculations of loans that were likely to be modified. These
calculations used the NPV test model developed by an interagency
working group made up of officials from FDIC, Fannie Mae, Freddie Mac,
FHFA, and Treasury. We also reviewed documentation from other federal
agencies that were involved in HAMP or that had experience with loan
modifications--FDIC, Fannie Mae, Freddie Mac, and FHFA. We observed a
demonstration by Fannie Mae, the program administrator, on the NPV test
model using the HAMP Web site designed for participating servicers.
[Footnote 4] We interviewed officials from Treasury, FHFA, Fannie Mae,
and Freddie Mac who were responsible for the design of the loan
modification program and the default and NPV models that support the
design and operations of the program. We also consulted publications by
private entities about loan characteristics of the mortgage market,
including the Mortgage Bankers Association's National Delinquency
Survey data on delinquencies and foreclosures and mortgage market
analyses by Credit Suisse.
To evaluate the status of Treasury's efforts to implement operational
procedures and internal controls for HAMP, we reviewed the financial
agent agreements and the servicer participation agreements to
understand their roles and responsibilities. In addition, we reviewed
documents from these entities that outlined the organizational
structure of HAMP and described internal controls, including
organizational charts, flow charts depicting operational processes,
narrative descriptions of risks and related controls, and other support
documentation. To determine the extent to which Treasury and its
financial agents had taken steps to insure that servicers were prepared
for and had the capacity to conduct HAMP loan modifications at the time
of program admittance, we reviewed a summary of the results of the
readiness reviews conducted, discussed the readiness review process and
the reviews done to date with Treasury officials, and reviewed HAMP
servicer registration procedures. We also interviewed officials at
Treasury, Fannie Mae, and Freddie Mac who were responsible for
designing the operational procedures and internal controls for HAMP. To
understand servicers' capacity to fulfill data collection and reporting
requirements, we reviewed a summary of Treasury's meeting with 13
servicers and the results of a survey of servicers on these HAMP
requirements. We also conducted interviews with participating servicers
who entered into HAMP participation agreements to discuss program
requirements. These servicers were Saxon Mortgage, Citi Mortgage, Home
Loan Services, Green Tree Servicing, Carrington Mortgage Services, and
Ocwen Servicing. We also reviewed the HAMP-related Web sites, press
releases, and reports published by the regulatory agencies, in part to
identify the data collection and reporting requirement guidelines that
were in place.
We conducted this performance audit from May 2009 through July 2009 in
San Francisco, California, Boston, Massachusetts, and Washington, D.C.,
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
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on the audit objectives.
Background:
As shown in figure 1, national default and foreclosure rates have
increased dramatically between the third quarter of 2006 and the first
quarter of 2009, rising to their highest level in 30 years. Loans in
nonpayment status for 90 days or more are commonly considered to be in
default, and for these loans, foreclosure can be a real possibility.
Foreclosure is a legal process initiated by a mortgage lender against a
homeowner after a certain number of payments have been missed. 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.
Figure 1: Default and Foreclosure Inventory Rates through the First
Quarter of 2009:
[Refer to PDF for image: multiple line graph]
Quarter and year: Q1 1979;
Default: 0.47%;
Foreclosure Starts: 0.17%;
Foreclosure Inventory: 0.31%.
Quarter and year: Q2 1979;
Default: 0.43%;
Foreclosure Starts: 0.13%;
Foreclosure Inventory: 0.3%.
Quarter and year: Q3 1979;
Default: 0.49%;
Foreclosure Starts: 0.12%;
Foreclosure Inventory: 0.27%.
Quarter and year: Q4 1979;
Default: 0.54%;
Foreclosure Starts: 0.15%;
Foreclosure Inventory: 0.29%.
Quarter and year: Q1 1980 (period of economic recession);
Default: 0.54%;
Foreclosure Starts: 0.14%;
Foreclosure Inventory: 0.32%.
Quarter and year: Q2 1980 (period of economic recession);
Default: 0.5%;
Foreclosure Starts: 0.13%;
Foreclosure Inventory: 0.32%.
Quarter and year: Q3 1980 (period of economic recession);
Default: 0.6%;
Foreclosure Starts: 0.15%;
Foreclosure Inventory: 0.33%.
Quarter and year: Q4 1980 (period of economic recession);
Default: 0.66%;
Foreclosure Starts: 0.16%;
Foreclosure Inventory: 0.38%.
Quarter and year: Q1 1981;
Default: 0.66%;
Foreclosure Starts: 0.18%;
Foreclosure Inventory: 0.44%.
Quarter and year: Q2 1981;
Default: 0.58%;
Foreclosure Starts: 0.16%;
Foreclosure Inventory: 0.41%.
Quarter and year: Q3 1981;
Default: 0.65%;
Foreclosure Starts: 0.14%;
Foreclosure Inventory: 0.41%.
Quarter and year: Q4 1981;
Default: 0.68%;
Foreclosure Starts: 0.17%;
Foreclosure Inventory: 0.44%.
Quarter and year: Q1 1982 (period of economic recession);
Default: 0.72%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.53%.
Quarter and year: Q2 1982 (period of economic recession);
Default: 0.68%;
Foreclosure Starts: 0.19%;
Foreclosure Inventory: 0.55%.
Quarter and year: Q3 1982 (period of economic recession);
Default: 0.79%;
Foreclosure Starts: 0.2%;
Foreclosure Inventory: 0.62%.
Quarter and year: Q4 1982 (period of economic recession);
Default: 0.89%;
Foreclosure Starts: 0.23%;
Foreclosure Inventory: 0.67%.
Quarter and year: Q1 1983;
Default: 0.86%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.71%.
Quarter and year: Q2 1983;
Default: 0.75%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.66%.
Quarter and year: Q3 1983;
Default: 0.84%;
Foreclosure Starts: 0.2%;
Foreclosure Inventory: 0.66%.
Quarter and year: Q4 1983;
Default: 0.91%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.67%.
Quarter and year: Q1 1984;
Default: 0.89%;
Foreclosure Starts: 0.2%;
Foreclosure Inventory: 0.68%.
Quarter and year: Q2 1984;
Default: 0.79%;
Foreclosure Starts: 0.21%;
Foreclosure Inventory: 0.63%.
Quarter and year: Q3 1984;
Default: 0.9%;
Foreclosure Starts: 0.23%;
Foreclosure Inventory: 0.68%.
Quarter and year: Q4 1984;
Default: 0.98%;
Foreclosure Starts: 0.2%;
Foreclosure Inventory: 0.73%.
Quarter and year: Q1 1985;
Default: 0.98%;
Foreclosure Starts: 0.25%;
Foreclosure Inventory: 0.79%.
Quarter and year: Q2 1985;
Default: 0.82%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.76%.
Quarter and year: Q3 1985;
Default: 0.92%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.75%.
Quarter and year: Q4 1985;
Default: 1.03%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.81%.
Quarter and year: Q1 1986;
Default: 1.01%;
Foreclosure Starts: 0.25%;
Foreclosure Inventory: 0.87%.
Quarter and year: Q2 1986;
Default: 0.96%;
Foreclosure Starts: 0.24%;
Foreclosure Inventory: 0.92%.
Quarter and year: Q3 1986;
Default: 0.99%;
Foreclosure Starts: 0.26%;
Foreclosure Inventory: 0.92%.
Quarter and year: Q4 1986;
Default: 1.06%;
Foreclosure Starts: 0.26%;
Foreclosure Inventory: 0.98%.
Quarter and year: Q1 1987;
Default: 1.04%;
Foreclosure Starts: 0.28%;
Foreclosure Inventory: 1.09%.
Quarter and year: Q2 1987;
Default: 0.88%;
Foreclosure Starts: 0.24%;
Foreclosure Inventory: 1.12%.
Quarter and year: Q3 1987;
Default: 0.83%;
Foreclosure Starts: 0.25%;
Foreclosure Inventory: 1.03%.
Quarter and year: Q4 1987;
Default: 0.96%;
Foreclosure Starts: 0.27%;
Foreclosure Inventory: 1.06%.
Quarter and year: Q1 1988;
Default: 0.89%;
Foreclosure Starts: 0.29%;
Foreclosure Inventory: 1.07%.
Quarter and year: Q2 1988;
Default: 0.82%;
Foreclosure Starts: 0.26%;
Foreclosure Inventory: 1.03%.
Quarter and year: Q3 1988;
Default: 0.81%;
Foreclosure Starts: 0.26%;
Foreclosure Inventory: 1%.
Quarter and year: Q4 1988;
Default: 0.9%;
Foreclosure Starts: 0.27%;
Foreclosure Inventory: 0.95%.
Quarter and year: Q1 1989;
Default: 0.83%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 0.95%.
Quarter and year: Q2 1989;
Default: 0.71%;
Foreclosure Starts: 0.35%;
Foreclosure Inventory: 1.06%.
Quarter and year: Q3 1989;
Default: 0.74%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.99%.
Quarter and year: Q4 1989;
Default: 0.81%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.98%.
Quarter and year: Q1 1990;
Default: 0.7%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.97%.
Quarter and year: Q2 1990;
Default: 0.65%;
Foreclosure Starts: 0.3%;
Foreclosure Inventory: 0.93%.
Quarter and year: Q3 1990;
Default: 0.71%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.93%.
Quarter and year: Q4 1990;
Default: 0.78%;
Foreclosure Starts: 0.29%;
Foreclosure Inventory: 0.94%.
Quarter and year: Q1 1991 (period of economic recession);
Default: 0.78%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.97%.
Quarter and year: Q2 1991 (period of economic recession);
Default: 0.73%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.96%.
Quarter and year: Q3 1991;
Default: 0.82%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 0.98%.
Quarter and year: Q4 1991;
Default: 0.86%;
Foreclosure Starts: 0.35%;
Foreclosure Inventory: 1.04%.
Quarter and year: Q1 1992;
Default: 0.8%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.04%.
Quarter and year: Q2 1992;
Default: 0.78%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 1.04%.
Quarter and year: Q3 1992;
Default: 0.84%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 1.04%.
Quarter and year: Q4 1992;
Default: 0.8%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.02%.
Quarter and year: Q1 1993;
Default: 0.77%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 1%.
Quarter and year: Q2 1993;
Default: 0.74%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 1.02%.
Quarter and year: Q3 1993;
Default: 0.79%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 1.01%.
Quarter and year: Q4 1993;
Default: 0.79%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 0.96%.
Quarter and year: Q1 1994;
Default: 0.75%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 0.94%.
Quarter and year: Q2 1994;
Default: 0.77%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.03%.
Quarter and year: Q3 1994;
Default: 0.76%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 0.92%.
Quarter and year: Q4 1994;
Default: 0.76%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.86%.
Quarter and year: Q1 1995;
Default: 0.7%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.86%.
Quarter and year: Q2 1995;
Default: 0.73%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.88%.
Quarter and year: Q3 1995;
Default: 0.8%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.91%.
Quarter and year: Q4 1995;
Default: 0.73%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.87%.
Quarter and year: Q1 1996;
Default: 0.68%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 0.95%.
Quarter and year: Q2 1996;
Default: 0.61%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 0.96%.
Quarter and year: Q3 1996;
Default: 0.61%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 1%.
Quarter and year: Q4 1996;
Default: 0.63%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 1.03%.
Quarter and year: Q1 1997;
Default: 0.55%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.08%.
Quarter and year: Q2 1997;
Default: 0.56%;
Foreclosure Starts: 0.35%;
Foreclosure Inventory: 1.08%.
Quarter and year: Q3 1997;
Default: 0.58%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.09%.
Quarter and year: Q4 1997;
Default: 0.65%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 1.11%.
Quarter and year: Q1 1998;
Default: 0.6%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 1.17%.
Quarter and year: Q2 1998;
Default: 0.6%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 1.12%.
Quarter and year: Q3 1998;
Default: 0.63%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.17%.
Quarter and year: Q4 1998;
Default: 0.66%;
Foreclosure Starts: 0.39%;
Foreclosure Inventory: 1.17%.
Quarter and year: Q1 1999;
Default: 0.6%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.22%.
Quarter and year: Q2 1999;
Default: 0.56%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.18%.
Quarter and year: Q3 1999;
Default: 0.6%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 1.11%.
Quarter and year: Q4 1999;
Default: 0.62%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.17%.
Quarter and year: Q1 2000;
Default: 0.55%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.17%.
Quarter and year: Q2 2000;
Default: 0.54%;
Foreclosure Starts: 0.3%;
Foreclosure Inventory: 1.03%.
Quarter and year: Q3 2000;
Default: 0.59%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 1.09%.
Quarter and year: Q4 2000;
Default: 0.7%;
Foreclosure Starts: 0.43%;
Foreclosure Inventory: 1.16%.
Quarter and year: Q1 2001;
Default: 0.66%;
Foreclosure Starts: 0.4%;
Foreclosure Inventory: 1.24%.
Quarter and year: Q2 2001;
Default: 0.74%;
Foreclosure Starts: 0.47%;
Foreclosure Inventory: 1.29%.
Quarter and year: Q3 2001;
Default: 0.82%;
Foreclosure Starts: 0.46%;
Foreclosure Inventory: 1.34%.
Quarter and year: Q4 2001;
Default: 0.89%;
Foreclosure Starts: 0.47%;
Foreclosure Inventory: 1.46%.
Quarter and year: Q1 2002 (period of economic recession);
Default: 0.8%;
Foreclosure Starts: 0.45%;
Foreclosure Inventory: 1.51%.
Quarter and year: Q2 2002 (period of economic recession);
Default: 0.85%;
Foreclosure Starts: 0.49%;
Foreclosure Inventory: 1.46%.
Quarter and year: Q3 2002 (period of economic recession);
Default: 0.94%;
Foreclosure Starts: 0.44%;
Foreclosure Inventory: 1.49%.
Quarter and year: Q4 2002 (period of economic recession);
Default: 0.94%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 1.46%.
Quarter and year: Q1 2003;
Default: 0.83%;
Foreclosure Starts: 0.41%;
Foreclosure Inventory: 1.43%.
Quarter and year: Q2 2003;
Default: 0.92%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.35%.
Quarter and year: Q3 2003;
Default: 0.9%;
Foreclosure Starts: 0.43%;
Foreclosure Inventory: 1.24%.
Quarter and year: Q4 2003;
Default: 0.89%;
Foreclosure Starts: 0.46%;
Foreclosure Inventory: 1.29%.
Quarter and year: Q1 2004;
Default: 0.85%;
Foreclosure Starts: 0.46%;
Foreclosure Inventory: 1.29%.
Quarter and year: Q2 2004;
Default: 0.85%;
Foreclosure Starts: 0.39%;
Foreclosure Inventory: 1.18%.
Quarter and year: Q3 2004;
Default: 0.86%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 1.16%.
Quarter and year: Q4 2004;
Default: 0.92%;
Foreclosure Starts: 0.46%;
Foreclosure Inventory: 1.15%.
Quarter and year: Q1 2005;
Default: 0.81%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 1.08%.
Quarter and year: Q2 2005;
Default: 0.83%;
Foreclosure Starts: 0.38%;
Foreclosure Inventory: 1%.
Quarter and year: Q3 2005;
Default: 0.85%;
Foreclosure Starts: 0.41%;
Foreclosure Inventory: 0.97%.
Quarter and year: Q4 2005;
Default: 1.09%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.99%.
Quarter and year: Q1 2006;
Default: 0.95%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.98%.
Quarter and year: Q2 2006;
Default: 0.9%;
Foreclosure Starts: 0.4%;
Foreclosure Inventory: 0.99%.
Quarter and year: Q3 2006;
Default: 0.95%;
Foreclosure Starts: 0.47%;
Foreclosure Inventory: 1.05%.
Quarter and year: Q4 2006;
Default: 1.02%;
Foreclosure Starts: 0.57%;
Foreclosure Inventory: 1.19%.
Quarter and year: Q1 2007;
Default: 0.95%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.28%.
Quarter and year: Q2 2007;
Default: 1.07%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.4%.
Quarter and year: Q3 2007;
Default: 1.26%;
Foreclosure Starts: 0.78%;
Foreclosure Inventory: 1.69%.
Quarter and year: Q4 2007;
Default: 1.58%;
Foreclosure Starts: 0.88%;
Foreclosure Inventory: 2.04%.
Quarter and year: Q1 2008 (period of economic recession);
Default: 1.56%;
Foreclosure Starts: 1.01%;
Foreclosure Inventory: 2.47%.
Quarter and year: Q2 2008 (period of economic recession);
Default: 1.75%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 2.75%.
Quarter and year: Q3 2008 (period of economic recession);
Default: 2.2%;
Foreclosure Starts: 1.07%;
Foreclosure Inventory: 2.97%.
Quarter and year: Q4 2008 (period of economic recession);
Default: 3%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 3.3%.
Quarter and year: Q1 2009 (period of economic recession);
Default: 3.39%;
Foreclosure Starts: 1.37%;
Foreclosure Inventory: 3.85%.
Source: GAO analysis of MBA data, National Bureau of Economic Research.
[End of figure]
The increase in foreclosures has affected homeowners in all states, but
some states have been affected more than others. As illustrated in
figure 2, the Sunbelt states--Arizona, California, Florida, and Nevada--
have particularly large inventories of homes in foreclosure.
Figure 2: Foreclosure Inventory Rates by State, as of March 31, 2009:
[Refer to PDF for image: vertical bar graph]
State: Florida;
Foreclosure inventory rate: 10.56%.
State: Nevada;
Foreclosure inventory rate: 7.83%.
State: Arizona;
Foreclosure inventory rate: 5.56%.
State: California;
Foreclosure inventory rate: 5.21%.
State: Illinois;
Foreclosure inventory rate: 4.53%.
State: Ohio;
Foreclosure inventory rate: 4.36%.
State: New Jersey;
Foreclosure inventory rate: 4.32%.
State: Indiana;
Foreclosure inventory rate: 4.13%.
State: Michigan;
Foreclosure inventory rate: 3.97%.
State: Maine;
Foreclosure inventory rate: 3.92%.
State: Rhode Island;
Foreclosure inventory rate: 3.83%.
State: Minnesota;
Foreclosure inventory rate: 3.22%.
State: Wisconsin;
Foreclosure inventory rate: 3.11%.
State: Maryland;
Foreclosure inventory rate: 3.04%.
State: New York;
Foreclosure inventory rate: 2.97%.
State: Georgia;
Foreclosure inventory rate: 2.95%.
State: Hawaii;
Foreclosure inventory rate: 2.91%.
State: Connecticut;
Foreclosure inventory rate: 2.85%.
State: Kentucky;
Foreclosure inventory rate: 2.83%.
State: Massachusetts;
Foreclosure inventory rate: 2.75%.
State: Delaware;
Foreclosure inventory rate: 2.71%.
State: District of Columbia;
Foreclosure inventory rate: 2.65%.
State: South Carolina;
Foreclosure inventory rate: 2.65%.
State: Idaho;
Foreclosure inventory rate: 2.59%.
State: Mississippi;
Foreclosure inventory rate: 2.55%.
State: Louisiana;
Foreclosure inventory rate: 2.44%.
State: Colorado;
Foreclosure inventory rate: 2.42%.
State: Pennsylvania;
Foreclosure inventory rate: 2.39%.
State: Utah;
Foreclosure inventory rate: 2.36%.
State: Iowa;
Foreclosure inventory rate: 2.34%.
State: Oklahoma;
Foreclosure inventory rate: 2.3%.
State: Oregon;
Foreclosure inventory rate: 2.21%.
State: New Mexico;
Foreclosure inventory rate: 2.19%.
State: New Hampshire;
Foreclosure inventory rate: 2.07%.
State: West Virginia;
Foreclosure inventory rate: 2.01%.
State: Virginia;
Foreclosure inventory rate: 1.99%.
State: Tennessee;
Foreclosure inventory rate: 1.98%.
State: Kansas;
Foreclosure inventory rate: 1.95%.
State: Alabama;
Foreclosure inventory rate: 1.88%.
State: Missouri;
Foreclosure inventory rate: 1.87%.
State: Vermont;
Foreclosure inventory rate: 1.86%.
State: Washington;
Foreclosure inventory rate: 1.81%.
State: Nebraska;
Foreclosure inventory rate: 1.8%.
State: Arkansas;
Foreclosure inventory rate: 1.67%.
State: Texas;
Foreclosure inventory rate: 1.66%.
State: North Carolina;
Foreclosure inventory rate: 1.56%.
State: South Dakota;
Foreclosure inventory rate: 1.48%.
State: Montana;
Foreclosure inventory rate: 1.27%.
State: Arkansas;
Foreclosure inventory rate: 0.99%.
State: North Dakota;
Foreclosure inventory rate: 0.94%.
State: Wyoming;
Foreclosure inventory rate: 0.94%.
Source: GAO analysis of Mortgage Bankers Association data.
[End of figure]
Options to Avoid Foreclosure:
Defaults and foreclosures have imposed significant costs on borrowers,
lenders, and mortgage investors and have contributed to increased
volatility in the U.S. and global financial markets. 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, the borrower does not.
* With a forbearance plan, a lender agrees not to exercise the legal
right of foreclosure if the borrower agrees to a payment plan that will
resolve the borrower's deficiency for a set period of time. The plan
may incorporate features such as reduced or suspended payments that
allow the homeowner to recover from a serious event, such as illness,
that has caused the homeowner to miss several loan payments. Usually,
the lender will require the borrower to make up the difference at a
later time.
* Loan modification involves making temporary or permanent changes to
the terms of the existing loan agreement. There are several ways to
make these changes, including allowing the borrower to skip payments
and adding the skipped payments to the amount of the loan (capitalizing
arrearages), reducing the interest rate charged, extending the loan
term, and reducing the total amount of the loan (forgiving principal).
* In a short sale, a house is sold through a real estate agent or other
means rather than through foreclosure, even if the proceeds of the sale
are less than what the owner still owes on the mortgage. Lenders may
agree to accept the proceeds of a short sale and may waive any
deficiency.
* Under a deed-in-lieu of foreclosure, the homeowner voluntarily
conveys the interest in the home to the lender to satisfy a loan that
is in default as an alternative to foreclosure proceedings. Lenders may
opt to accept ownership of the property in place of the money owed on
the mortgage and may waive any deficiency. Deeds-in-lieu will generally
not be accepted by a mortgage holder if there are other liens on the
property, as foreclosure may be necessary for the mortgage holder to
gain clear title.
Role of the Secondary Market in Foreclosures:
As we noted in December 2008, any program that aims to modify loans or
present other alternatives to foreclosure faces challenges,
particularly when the loans have been bundled into securities that are
sold to investors.[Footnote 5] Most mortgages are bundled into
residential mortgage-backed securities that are bought and sold by
investors. These securities may be issued by government-sponsored
enterprises (GSE), such as Fannie Mae and Freddie Mac, and private
companies.[Footnote 6] Privately issued mortgage-backed securities,
known as private-label securities, are typically backed by mortgage
loans that do not conform to GSE purchase requirements because they are
too large or do not meet GSE underwriting criteria. The
originator/lender of a pool of securitized assets usually continues to
service the securitized portfolio, including providing customer service
and payment processing for borrowers and collection actions, in
accordance with the pooling and servicing agreement. The decision to
modify loans held in a mortgage-backed security typically resides with
the servicer. However, one of the challenges that servicers face in
modifying these loans is making transparent to investors the analysis
supporting the value of modification over foreclosure. Additionally,
the pooling and servicing agreements may place some restrictions on the
servicer's ability to make large-scale modifications of the underlying
mortgages without the investors' approval.[Footnote 7] In addition,
many homeowners may have second liens on their homes that may be
controlled by a different loan servicer, potentially complicating loan-
modification efforts.
Treasury's Making Home Affordable Program:
As we reported in December 2008, Treasury established an Office of
Homeownership Preservation within OFS to address the issues of
preserving homeownership and protecting home values.[Footnote 8] On
February 18, 2009, Treasury announced the broad outline of a three-
pronged effort to help homeowners avoid foreclosure and provided
additional program descriptions on March 4, 2009, April 28, 2009, and
May 14, 2009. First, one of the efforts--the Home Affordable Refinance
Program--would provide a refinancing vehicle for homeowners that had
(1) Fannie Mae and Freddie Mac held or guaranteed mortgages, (2)
interest rates above the prevailing market rates, and (3) loan-to-value
ratios between 80 and 105.[Footnote 9] Treasury estimated the number of
borrowers in that current loan-to-value range for whom a refinanced
mortgage would be potentially beneficial, based on the prevailing
interest rates in February, at 4 to 5 million homeowners. No TARP funds
would be used to refinance these loans. Second, Treasury would increase
its funding commitment in preferred stock purchase agreements to Fannie
Mae and Freddie Mac, authorized by the Housing and Economic Recovery
Act (HERA) of 2008, from $100 billion each to $200 billion each to help
support low mortgage rates by strengthening confidence in the two GSEs.
Treasury indicated that the increased funding commitment would be made
under HERA and would not require the use of TARP funds. The third
effort, HAMP, is designed to commit $75 billion of GSE and TARP funds
to offer relief through loan modification for up to 3 to 4 million
borrowers struggling to pay their mortgages. According to Treasury
officials, up to $50 billion of TARP funds will be used primarily to
encourage the modification of mortgages that financial institutions own
and hold in their portfolios (whole loans) and mortgages held in
private-label securitization trusts.[Footnote 10] Fannie Mae and
Freddie Mac are expected to provide up to an additional $25 billion to
encourage servicers and borrowers to modify loans owned or guaranteed
by the two GSEs. Treasury has taken various key steps to implement
HAMP. Fannie Mae and Freddie Mac are in the process of implementing the
HAMP guidelines for borrowers with loans that they own or guarantee.
[Footnote 11]
As outlined in the March 4, 2009, program guidelines, HAMP's
eligibility requirements stipulate that:
[Refer to PDF for image]
* the property must be owner-occupied and the borrower's primary
residence (the program excludes vacant and investor-owned properties);
* the property must be a single-family (1-4 unit) property 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;[Footnote
12]
* the loans must have been originated on or before January 1, 2009;
and:
* the first-lien mortgage payment must be more than 31 percent of the
homeowner's gross monthly income.[Footnote 13]
The cutoff date for borrowers to be accepted into the program is
December 31, 2012.
Treasury has delegated significant responsibilities to its financial
agents to administer the program, which we discuss in greater detail
later in this report. Fannie Mae has signed an agreement with Treasury
to act as the program administrator and record keeper for HAMP and is
responsible for developing and administering program operations.
Freddie Mac has signed an agreement with Treasury to act as the
compliance agent for HAMP, and its responsibilities include conducting
information technology testing, security reviews, and audits. Finally,
Bank of New York-Mellon, in the role of custodian for TARP, is
responsible for remitting mortgage payment reductions and program
incentive payments to participating servicers.
As we described in our January 2009 report, the act created other
oversight entities in addition to our oversight responsibilities,
including the Congressional Oversight Panel (COP), the Office of the
Special Inspector General for TARP (SIGTARP), and the Financial
Stability Oversight Board (FSOB). We are coordinating our work with
COP, SIGTARP, and FSOB and are meeting with officials from these
entities to share information and effectively make use of our combined
resources. COP issued a report in March 2009 that focused on
foreclosures, and Treasury's efforts related to its Homeowner
Affordability and Stability Plan.[Footnote 14] As of June 30, 2009,
SIGTARP and FSOB had not issued any reports specifically looking at
Treasury's planned use of TARP funds to preserve homeownership and
protect property values, although this area may be the topic of future
efforts.
Treasury Has Not Fully Developed All HAMP Subprograms, and the Initial
Design of At Least Two Aspects of HAMP Limits Its Potential to Help
Homeowners:
In keeping with the act's purposes, Treasury has developed HAMP with
the objective of preserving homeownership and protecting home values.
[Footnote 15] According to Treasury, HAMP's primary goal is to reduce
struggling borrowers' mortgage payments to an affordable level, thereby
preventing unnecessary foreclosures and helping to stabilize home
prices in neighborhoods hardest hit by foreclosures. HAMP was announced
on February 18, 2009, and since that time, in addition to HAMP's main
first-lien modification program, four major subprograms have been
announced. Together these five programs use the $50 billion Treasury
targeted for HAMP to:
* modify first-lien mortgage loans;
* provide additional incentives to mortgage holders/investors to
modify, rather than foreclose on, loans in areas where home price
declines have been most severe;
* modify or eliminate second-lien loans (such as home equity lines of
credit);
* offer alternatives to foreclosure for homeowners that do not qualify
for a first-lien loan modification under HAMP; and:
* provide incentive payments under the HOPE for Homeowners mortgage
refinance program under the Federal Housing Administration (see figure
3).[Footnote 16]
Treasury has made the most progress in implementing the first-lien
modification program, and most of its features appear to be consistent
with goals articulated by Congress and Treasury. However, one of the
first-lien modification requirements--that borrowers with high levels
of household debt obtain housing counseling in order to avoid possible
redefault, which borrowers agree to when they enter into a trial loan
modification--lacks an appropriate mechanism that would help ensure the
requirement's success. Specifically, Treasury does not plan to
systematically track borrowers who are told they must obtain counseling
to determine whether they do so or to analyze the effectiveness of the
counseling. In addition, Treasury developed the HPDP subprogram with
the purpose of increasing the number of modifications completed under
HAMP. However, as it is currently described, some of the HPDP incentive
payments appear to be unnecessary because Treasury may make payments
for modifications that would have been made without this program.
Treasury has targeted up to $10 billion for the HPDP program.
Figure 3: Timeline of Major HAMP Events from February 18, 2009, through
July 27, 2009:
[Refer to PDF for image: timeline]
February 18: Treasury announced a national modification program
intended to offer assistance to up to 3 to 4 million homeowners by
reducing monthly payments to sustainable levels.
March 4: Treasury issued official guidance for loan modifications under
the Home Affordable Modification program (HAMP) across the mortgage
industry and announced that servicers could begin conducting
modifications that conform to the guidelines.
March 19: To reach borrowers, Treasury launched its Making Home
Affordable Web site that provides program, eligibility, and housing
counseling information, among other things.
April 13: Six initial servicers sign participation agreements under
HAMP: Chase Home Finance, Wells Fargo, CitiMortgage, GMAC Mortgage,
Saxon Mortgage Services, and Select Portfolio Servicing.
April 15: Treasury launched an administrative Web site for mortgage
servicers to provide them information and tools needed to participate
in HAMP.
April 28: Treasury announces additional details related to the Second
Lien program”an additional component of HAMP.
May 14: Treasury announces additional details on the Home Price Decline
Protection Incentives program and the Foreclosure Alternatives program”
two additional components of HAMP.
July 18-20: Over 1 million letters sent to borrowers, over 350,000
trial modification offers extended, and over 180,000 trial
modifications under way. Over 27 million page views on the Making Home
Affordable Web site.
July 27: The earliest date Treasury expects to make the first matching
and incentive payments to servicers under HAMP.
Source: Treasury, OFS.
[End of figure]
Breakdown of Costs for HAMP Initiatives Has Yet to Be Determined:
As shown in table 1, Treasury expects to use about $32.5 billion in
TARP funds to encourage modifications on first-lien mortgages of up to
2 to 2.6 million borrowers by sharing the costs of reducing borrowers'
monthly payments with mortgage holders/investors, and by providing
incentive payments for successful modifications to borrowers,
servicers, and mortgage holders/investors.[Footnote 17] Also, using
part of the $50 billion in TARP funds, Treasury plans to provide up to
$10 billion in incentive payments to mortgage holders/investors for
modifications in areas experiencing home price declines to partially
offset potential losses should the modified loan redefault once prices
have dropped. To reduce payments or pay off second lien loans of 1 to
1.5 million borrowers, Treasury has announced a Second-lien
Modification Program using a yet to be determined amount of the TARP
funds targeted for HAMP. For borrowers unable to qualify for a first-
lien modification under HAMP, Treasury will provide TARP funding to
encourage servicers to use alternatives to foreclosure, including short
sales and deeds-in-lieu of foreclosure. Finally, Treasury announced
that it would use part of the TARP funds allocated for HAMP to provide
incentive payments to servicers that help refinance mortgages and
lenders that originate refinanced mortgages under the HOPE for
Homeowners program.
The number of borrowers Treasury expects to reach through the HPDP,
foreclosure alternatives, and HOPE for Homeowners incentive payments
subprograms has yet to be determined. In addition, funding levels for
second-lien modifications, foreclosure alternatives, and HOPE for
Homeowners incentive payments subprograms have yet to be determined.
According to Treasury officials, these specifications have not yet been
made because they wish to retain flexibility under HAMP to target TARP
funds to those subprograms that attract the largest numbers of
borrowers, servicers, and mortgage holders/investors.
Table 1: Projected Cost and Number of Borrowers Targeted for Assistance
Using TARP Funds under HAMP, as of July 14, 2009:
HAMP subprograms (TARP funds only): First-lien Modification;
Estimated number of borrowers assisted: Up to 2 to 2.6 million;
Initial subprogram funding level: About $32.5 billion;
Obligated: $18.7 billion.
HAMP subprograms (TARP funds only): Home Price Decline Protection;
Estimated number of borrowers assisted: To be determined[A];
Initial subprogram funding level: Up to $10 billion;
Obligated: None.
HAMP subprograms (TARP funds only): Second-Lien Modification;
Estimated number of borrowers assisted: Up to 1 to 1.5 million;
Initial subprogram funding level: To be determined;
Obligated: None.
HAMP subprograms (TARP funds only): Foreclosure Alternatives;
Estimated number of borrowers assisted: To be determined;
Initial subprogram funding level: To be determined;
Obligated: None.
HAMP subprograms (TARP funds only): HOPE for Homeowners Incentive
Payments;
Estimated number of borrowers assisted: To be determined;
Initial subprogram funding level: To be determined;
Obligated: None.
HAMP subprograms (TARP funds only): Total initial HAMP funding level;
Initial subprogram funding level: Up to $50 billion.
Source: Treasury, OFS.
[A] All modified first-lien loans are eligible for HPDP payments.
[End of table]
Treasury Has Focused Most of Its Efforts on the First-Lien Modification
Program:
The first-lien modification program is the largest and most developed
of HAMP's five parts and will use TARP funds to share the cost of
modifying first-lien mortgages over a set period (5 years or until the
loan is paid off, whichever occurs first) with mortgage holders/
investors in order to reduce to affordable levels the monthly loan
payments of homeowners in danger of foreclosure.[Footnote 18] The first-
lien program targets borrowers in default (defined as 60 days or more
delinquent on their mortgage payments) or in imminent danger of default
(borrowers that are current on their mortgages but facing hardships
such as job losses or interest rate increases on their adjustable rate
mortgages) for first-lien modifications. Initial HAMP guidelines for
completing first-lien modifications were released on March 4, 2009, and
updated guidance was issued on April 6, 2009.[Footnote 19] The
guidelines set out the requirements for eligibility, loan underwriting,
loan modification, and servicer compliance and reporting. Treasury has
launched a Web site that describes first-lien modification
opportunities under HAMP and provides self-assessment tools and
calculators borrowers can use to determine if they might be eligible.
[Footnote 20] Through the Web site, borrowers are directed to free
housing counseling, homeowner events in their communities, and a
hotline. According to Treasury, as of July 18, 2009, this Web site had
been viewed over 27 million times.
Treasury has also established an additional Web site to communicate
with potential and participating servicers. Servicers can use the Web
site to register to participate in HAMP, obtain official HAMP guidance,
and submit program data once they begin conducting HAMP trial first-
lien modifications.[Footnote 21] As of July 14, 2009, 27 servicers had
executed HAMP servicer participation agreements with Fannie Mae, the
HAMP administrator. The servicer participation agreements for HAMP
specify the loan modification and other foreclosure prevention services
to be performed, the payment structure for the first-lien subprogram,
and other requirements, including those concerning audits, reporting,
and data collection and retention. The agreements specify actions
Fannie Mae may take if a servicer defaults under the agreement, such as
by failing to perform or comply with any of its material obligations.
In the event of a servicer default, Fannie Mae has the authority, with
Treasury's approval, to reduce the amounts payable to the servicer,
require repayment of previous payments made under HAMP under certain
circumstances, require the servicer to submit to additional oversight,
or terminate the servicer's participation agreement. According to
Treasury, participating servicers report that as of July 20, 2009 they
had extended over 354,115 trial modification offers to borrowers and
180,305 trial modifications had begun.[Footnote 22]
To control total obligations for HAMP first-lien modifications,
Treasury has set initial funding limits, or caps, for the potential
total amount that will be obligated to each participating servicer. The
caps include the maximum amount allotted to help reduce borrowers'
mortgage payments and to pay the associated incentive payments to
borrowers, servicers, and mortgage holders/investors.[Footnote 23]
Almost $19 billion of the TARP funds had been obligated to these
servicers as of July 14, 2009 (see appendix I for a list of the
servicers that had signed TARP agreements as of July 14, 2009.)
The first-lien modification program has three main features. First, a
cost-sharing arrangement with mortgage holders/investors is designed to
help reduce first-lien mortgage payments to 31 percent of the
homeowner's gross household income. 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. For eligible loans with
monthly mortgage payments that are already below 38 percent, Treasury
will match servicers' reductions. This modified monthly payment is
fixed, as long as the loan remains in good standing with the program
for a maximum of 5 years or until the loan is paid off, whichever is
earlier. Treasury estimated that HAMP would cut participating
borrowers' existing monthly payments by one-third, on average.[Footnote
24]
A second major feature of the program is the required use of
standardized loan modification procedures, including the application of
a net present value (NPV) test on all loans that are 60 days or more
delinquent and for those borrowers who are current but in imminent
danger of default. The NPV test compares the "net present value" of
expected cash flows from a loan with a modification and the same loan
with no modification.[Footnote 25] If the estimated cash flow with a
modification is "positive" (i.e., more than the estimated cash flow of
the unmodified loan), the loan servicer is required to make the loan
modification. According to Treasury, the NPV test increases mortgage
holder/investor confidence and the consistency of borrower treatment
under the program by providing a transparent and externally derived
objective standard for all loan servicers to follow. In addition, the
first-lien modification guidelines set forth the sequential
modification process (the modification "waterfall") that servicers are
to follow to reduce payments. Specifically, to reach the target
affordability level of 31 percent, interest rates must first be reduced
to as little as 2 percent. If the debt-to-income ratio is still over 31
percent at the 2 percent interest rate, 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 26] Servicers may also forgive mortgage principal to achieve
the target monthly payment ratio of 31 percent of the borrower's income
on a stand-alone basis or before any other step in the standard
waterfall process set forth above.
A third major feature of the first-lien modification program is its
incentive payment structure. Treasury will use HAMP funds to provide
both one-time and ongoing, so-called 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 costs of modifying a loan (see table
2). In addition to the cost-sharing payment to reduce borrowers'
monthly payments to be paid to mortgage holders/investors, Treasury
will make the following HAMP incentive payments:
* Servicer incentive payments include one-time payments of $1,000 for
each completed modification under HAMP.
* Servicers also receive an additional current borrower bonus incentive
payment of $500 when a loan is modified for a borrower whose loan is
current. Mortgage holders/investors will also receive this type of
incentive as a one-time payment of $1,500 for each modification
agreement executed with a borrower who is current on entering HAMP.
[Footnote 27]
* Borrowers who remain current on their mortgage payments are eligible
for up to $1,000 in annual, ongoing "pay-for-performance" incentives
for 5 years to be used to pay down the mortgage principal.[Footnote 28]
* Servicers are also eligible for up to $1,000 in annual, ongoing, so-
called pay-for-success incentive payments that accrue when monthly
mortgage payments are made on time for 3 years after borrower's monthly
mortgage payment is modified.
According to Treasury, modifying the loans of borrowers facing a
hardship that could make default imminent while they are current on
their mortgage payments may reduce the likelihood that these borrowers
will default on the modified loan. All HAMP matching and incentive
payments are contingent on the successful completion of a trial period.
All HAMP payments listed in table 2, except for the cost-reduction
share payment and the one-time servicer incentive payment, are
contingent on a reduction of at least 6 percent in the borrower's
monthly mortgage payment.[Footnote 29]
Table 2: Summary of HAMP Payments Using TARP Funds on First-Lien
Modifications:
Payment type: Monthly payment reduction cost share;
Payment beneficiary: Mortgage holder/investor;
Description: Monthly one-to-one matching payments made to achieve 31
percent debt-to-income ratio for borrower;
Payment period: Paid monthly by Treasury for up to 5 years beginning in
the first month of the official modification;
Amount: Mortgage holder/investor first reduces the mortgage payment to
38 percent of the borrower's monthly income if the premodification
payment is higher than that amount. Between 38 and 31 percent of the
borrower's monthly income Treasury matches reductions down to 31
percent on a dollar-for-dollar basis.
Payment type: Servicer incentive;
Payment beneficiary: Servicer;
Description: One-time payment for loans that successfully complete
trial modification period;
Payment period: Paid one time by Treasury in the first month of the
official modification;
Amount: $1,000.
Payment type: Current borrower one-time bonus;
Payment beneficiary: Servicer and mortgage holder/investor;
Description: To encourage modifications for nondelinquent borrowers;
Payment period: Paid one time by Treasury in the first month of the
official modification;
Amount: $500 (servicer); $1,500 (mortgage holder/investor).
Payment type: Borrower Pay-for-performance success;
Payment beneficiary: Borrower;
Description: Annual payment for ongoing timely borrower loan
modification payments. Success payments pay down borrower unpaid
principal balance;
Payment period: Paid by Treasury 12 months after the trial modification
start date and annually thereafter for a total of 5 years;
Amount: Up to $1,000 per year for 5 years.
Payment type: Servicer pay for success;
Payment beneficiary: Servicer;
Description: Annual incentive payment for ongoing borrower
participation and timely payments in HAMP;
Payment period: Paid by Treasury 12 months after the trial modification
start date and annually thereafter for a total of 3 years;
Amount: Up to $1,000 per year for 3 years.
Source: Treasury, OFS.
[End of table]
A number of other HAMP first-lien loan modification features are
intended to help reduce monthly payments and prevent foreclosures while
protecting taxpayer funds. For example, to avoid helping borrowers with
mortgages on investment properties, eligibility requirements limit HAMP
to borrowers with owner-occupied properties. To qualify for the
program, borrowers' incomes must also be verified. According to
Treasury, accurately measuring income is critical to making sure the
program is helping borrowers who truly need the assistance to remain in
their homes and to preventing fraud. Furthermore, as we have reported
in the past, particularly between the years 2000 and 2006, an increased
number of private-label securitized loans were underwritten using
limited or no documentation of borrower income or assets.[Footnote 30]
For certain loans prospectively eligible for HAMP modification,
servicers may have limited past data on the borrower's income or
assets.
Borrowers must also demonstrate their ability to pay the modified
amount by successfully completing a trial period of at least 90 days
before the loan is considered modified and any government payments are
made under HAMP. According to Treasury, this feature was instituted to
ensure that loan modifications are affordable and sustainable, thereby
reducing the amount of taxpayer funds that would be used for
unsuccessful modifications. Further, servicers are required to screen
all current borrowers who contact them with an economic hardship to see
if there is a danger of imminent default. Treasury has not specified
how servicers should screen borrowers for imminent default. Rather,
according to HAMP guidelines, the servicer must make a determination as
to whether a payment default is imminent based on the servicer's own
standards for imminent default. One participating servicer told us that
clarification from Treasury would be helpful on this point. In the
process of making its imminent default determination, the servicer must
evaluate and verify the borrower's financial condition in light of any
financial hardship and investigate the condition of and circumstances
affecting the property securing the mortgage loan. If the servicer
determines that default is imminent, it must document in its servicing
system the basis for its determination and evaluate the borrower for a
HAMP modification using the NPV test. According to Treasury, loan
modifications are more likely to succeed if they are made before a
borrower misses a payment because, among other reasons, delinquent
borrowers are often difficult to contact.
Treasury Informs Borrowers with High Total Household Debt They Must
Obtain Housing Counseling but Does Not Plan to Track Whether Counseling
Has Occurred:
HAMP requires borrowers with high total household debt levels
(postmodification debt-to-income ratios of 55 percent or higher) to
agree to obtain housing counseling, which according to Treasury, will
help reduce redefaults.[Footnote 31] We have previously reported that
it is important for any loan modification program to be designed to
limit the likelihood of redefault.[Footnote 32] While HAMP requires
high debt-to-income borrowers to agree to obtain this counseling, it
does not require documentation that they actually received the
counseling. Specifically, HAMP first-lien modification guidelines
instruct servicers to send a counseling letter to borrowers with high
total debt levels informing them that they must work with a counselor
approved by the Department of Housing and Urban Development (HUD) on a
plan to reduce their total indebtedness.[Footnote 33] Borrowers are
made aware of this requirement before entering the trial period in the
cover letter to the trial period plan, and the trial period plan itself
requires borrowers to certify that they will obtain counseling if the
lender requires them to do so.
Treasury officials told us that they would not require proof that the
borrowers had obtained housing counseling because Treasury does not
want to deny a modification to borrowers that successfully complete the
trial period but may not have obtained counseling. Treasury also did
not want to delay modifications under the program until servicers built
systems in coordination with counselors to track whether borrowers
obtained counseling. Treasury officials told us that while designing
HAMP, Fannie Mae, Freddie Mac, and servicers had expressed concerns
about the difficulty and burden of communication between the servicer
and the counseling agency to certify that borrowers had received
counseling. Treasury has indicated that it will capture information on
borrowers who access counselors through the Homeowners HOPE hotline
listed on the Making Home Affordable Web site.[Footnote 34] However,
according to a senior administrator of that hotline, providing loan-
level tracking on borrowers they counsel is a complicated issue. One
national organization that has been involved in counseling HAMP high
debt-to-income borrowers told us that it will soon be able to use its
Web-based loan-level portal to track whether HAMP borrowers receive
housing counseling.[Footnote 35] Without knowing if borrowers who were
told that they are required to obtain this counseling actually do so,
or evaluating the performance of borrowers who do and do not receive
counseling, Treasury will not know whether the requirement is meeting
its purpose of reducing redefaults among high-debt-burdened borrowers.
Treasury Has Announced Four Additional HAMP Subprograms, but the Need
for the $10 Billion Home Price Decline Protection Subprogram Is
Unclear:
In addition to the first-lien modification program of HAMP, Treasury
has announced a HAMP subprogram intended to partially protect mortgage
holders/investors against future declining home prices and thus
encourage additional loan modifications. It is also designing other
HAMP subprograms intended to reduce payments on second mortgages,
provide alternatives to foreclosure to homeowners who do not qualify
for modifications or cannot maintain payments during the trial period
or modification, and offer incentives to servicers and lenders involved
in originating refinanced loans under the HOPE for Homeowners Program.
* On May 14, 2009, Treasury announced additional details on its HPDP
subprogram, which is designed to use up to $10 billion in TARP funds to
encourage mortgage holders/investors to undertake more modifications by
assuring them that their losses in housing markets experiencing high
price declines will be partially offset. These incentives will be based
on the severity of house price declines in different metropolitan area
housing markets and the average house price in each of those markets.
Treasury will make HPDP payments benefiting mortgage holders/investors
annually for the first 2 years after the modification of a loan located
in a metropolitan area with declining house prices.[Footnote 36] No
payments would be made if prices appreciate in the two quarters
preceding modification of the loan. HPDP incentive payments will be
included in future versions of the NPV model for loans being considered
for modification under HAMP, and will, according to Treasury, increase
the likelihood that the NPV calculation will produce a result in favor
of modification. Although Treasury says that this incentive will
increase the number of modifications made under HAMP, it has not yet
stated how many more modifications might be made. According to Treasury
officials, the number of additional modifications as a result of these
payments depends on interactions with other changes in the NPV model
and the specific subprogram parameters. Treasury is developing these
estimates as the subprogram specifications are finalized.
According to Treasury officials, a loan with a positive NPV test
result--that is one that would mean a mandatory modification-without
the benefit of the HPDP payments will nonetheless receive this
incentive payment, but only if the property is located in a qualified
metropolitan area. It is not clear why mortgage holders/investors
should further benefit from modifying loans that would pass an NPV test
without an HPDP incentive solely because the properties are located in
a market where home prices are declining. Providing HPDP payments for
modifications that would have been made without this payment reduces
the funds available for other HAMP efforts. As the subprogram is
currently described, it is unclear how much of the $10 billion
allocated to the HPDP incentives would be needed to increase the number
of modifications made under HAMP and maximize assistance to homeowners
as provided for by the act. Furthermore, because none of the
expenditures under HPDP would be recouped, it is crucial that Treasury
ensure that funds are spent only when they are specifically needed to
encourage additional modifications that would not be made without this
incentive.
* On April 28, 2009, Treasury announced the framework for reducing
payments on or, in some cases, extinguishing second liens for borrowers
that receive first-lien loan modifications under HAMP. Treasury
estimates that approximately 50 percent of the borrowers who may
receive a HAMP first-lien modification have second liens, and between 1
million and 1.5 million borrowers, might be eligible to receive a
second-lien payment modification depending on servicer participation in
this subprogram. Treasury plans to release second lien modification
guidelines in late July or August 2009. Servicers that sign a second
lien subprogram participation agreement will be obligated to modify the
second lien when a HAMP modification is performed on the associated
first lien. The second-lien modification will include an interest rate
reduction down to 1 percent and a reamortization of the loan to match
the terms of the modified first-lien. There will be three types of
incentives under this subprogram: a servicer incentive, an investor
incentive, and a borrower incentive that will be applied toward paying
down the principal on the first lien if the borrower is successful in
making payments on the second. As an alternative to modifying the
second lien, the servicer will have the option of paying it off in
exchange for a lump sum payment under a preset formula. According to
Treasury officials, the purpose of the second-lien subprogram is to
help lower total monthly household debt payments and increase
affordability of the second mortgage. As we have seen, Treasury has yet
to determine the cost of the second-lien modification subprogram.
* Another planned HAMP subprogram provides alternatives for borrowers
that do not qualify for a loan modification under the first-lien
subprogram or cannot maintain payments during the trial period or
modification but want to avoid foreclosure. Treasury states that these
alternatives will be less costly to mortgage holders/investors than
foreclosures because the borrower, servicer, and investor will avoid
the foreclosure process entirely. According to an announcement by
Treasury on May 14, 2009, participating servicers will be required to
consider a short sale and, if that is unsuccessful, a deed-in-lieu of
foreclosure when eligible borrowers are not able to complete a
modification under HAMP. A short sale allows the borrower to sell the
property at its current value even if the sale nets less than the total
amount owed on the mortgage. With a deed-in-lieu under HAMP, the
borrower voluntarily transfers ownership of the property to the
servicer (provided the title is free and clear of additional liens).
Servicers will receive compensation of $1,000 for a short sale or deed-
in-lieu, and borrowers will receive $1,500 for relocation expenses. The
Foreclosure Alternatives Program is designed to minimize the negative
impact foreclosures can have on communities, including home price
decline, vandalism and crime. This subprogram is still under
development, and Treasury has not yet released detailed guidelines or
estimated the overall cost or number of borrowers it expects to reach
with these foreclosure alternatives. According to Treasury officials,
detailed guidelines are expected by the end of August.
* On April 28, 2009, Treasury announced that it would partially support
additional loan refinancings under the HOPE for Homeowners program.
Servicers and lenders that help make mortgages more affordable for
struggling homeowners through HOPE for Homeowners will receive pay-for-
success incentive payments comparable to some of the incentive payments
made under a HAMP first-lien modification. Servicers can receive a
$2,500 up-front incentive payment for a successful HOPE for Homeowners
refinancing. Lenders who originate the new HOPE for Homeowners
refinanced loans are eligible for success fees of up to $1,000 per year
for up to 3 years, so long as the refinanced loan remains current.
According to Treasury, it will use TARP funds targeted for HAMP for
these incentive payments. Treasury has not yet estimated the overall
cost or the number of borrowers it expects to reach with the HOPE for
Homeowners incentive payments.
HAMP May Not Resolve the Challenges of a Growing Segment of Borrowers
with Negative Equity in Their Homes:
According to Treasury officials, HAMP's overriding policy objectives
are to make mortgages more affordable for struggling homeowners;
maximize participation by borrowers, servicers, and mortgage holders/
investors; implement HAMP quickly; and maintain reasonable budget
costs. As a result, HAMP, which deals with making borrowers' monthly
payments affordable by reducing them to the target of 31 percent of
their gross household incomes, does not focus directly on the issue of
negative equity that is experienced by a large and growing segment of
borrowers (so-called "underwater" borrowers). When a borrower owes more
on the mortgage than the house is currently worth, the affordability of
monthly payments may not be the only consideration in the borrower's
decision to stay in the house. Several other factors may influence the
borrower's decision to default, including the degree to which the
borrower is underwater, the borrower's expectation of future house
prices, the borrower's current employment status and wealth, and
possibly the borrower's views on the moral and social acceptability of
default. As shown in figure 4, many states with high foreclosure rates
also have high proportions of mortgages with negative equity, and these
proportions are often higher in states with large increases in
unemployment.[Footnote 37]
Figure 4: Rates of Home Foreclosure, Negative Equity, and Unemployment
by State:
[Refer to PDF for image: three maps of the United States]
A. Rates of home foreclosures (2008):
No data:
None.
Less than 1%:
Alaska;
Montana;
North Dakota;
Wyoming.
1-2%:
Alabama;
Arkansas;
Kansas;
Missouri;
Nebraska;
New Hampshire;
New Mexico;
North Carolina;
Oregon;
South Dakota;
Tennessee;
Utah;
Vermont;
Virginia;
Washington;
West Virginia.
2-3%:
Colorado;
Connecticut;
Delaware;
District of Columbia;
Georgia;
Hawaii;
Idaho;
Iowa;
Kentucky;
Louisiana;
Maryland;
Massachusetts;
Minnesota;
Mississippi;
New York;
Oklahoma;
Pennsylvania;
South Carolina;
Wisconsin;
3-4%:
Illinois;
Indiana;
Maine;
Michigan;
New Jersey;
Rhode Island.
Greater than 4%:
Arizona;
California;
Florida;
Nevada;
Ohio.
B. Rates of negative home equity (2008):
No data:
Alabama;
Maine;
Wyoming;
North Dakota;
South Dakota;
Vermont;
West Virginia;
Less than 10%:
Hawaii;
New York;
Pennsylvania;
10-20%:
Connecticut;
Delaware;
District of Columbia;
Idaho;
Illinois;
Indiana;
Louisiana;
Maryland;
Massachusetts;
Mississippi;
Montana;
New Jersey;
New Mexico;
North Carolina;
Oregon;
South Carolina;
Utah;
Washington.
20-30%:
Alaska;
Arkansas;
Colorado;
Iowa;
Kansas;
Kentucky;
Minnesota;
Missouri;
Nebraska;
New Hampshire;
Oklahoma;
Rhode Island;
Tennessee;
Texas;
Virginia;
Wisconsin;
30-40%:
Arizona;
California;
Florida;
Georgia;
Ohio;
Greater than 40%:
Michigan;
Nevada;
C. Change in unemployment rate (2006-2008):
No data:
None.
-0.5-0.0%:
Arkansas;
Montana;
New Mexico;
North Dakota;
Oklahoma;
South Dakota;
Texas;
West Virginia;
Wisconsin;
Wyoming.
0.0-1.0%:
Alaska;
Colorado;
Connecticut;
Indiana;
Iowa;
Kansas;
Kentucky;
Louisiana;
Maine;
Maryland;
Mississippi;
Nebraska;
New Hampshire;
New Jersey;
New York;
Pennsylvania;
South Carolina;
Utah;
Washington.
1.0-1.5%:
Arizona;
Delaware;
District of Columbia;
Hawaii;
Massachusetts;
Minnesota;
Missouri;
Ohio;
Oregon;
Tennessee;
Vermont;
Virginia.
1.5-2.0%:
Alabama;
Georgia;
Idaho;
Illinois;
Michigan;
North Carolina;
Greater than 2.0%:
California;
Florida;
Nevada;
Rhode Island.
Sources: GAO analysis of Mortgage Bankers Association, First American
CoreLogic, and Bureau of Labor Statistics data; Art Explosion.
[End of figure]
Although HAMP does not address the issue of negative home equity
directly, Treasury officials emphasized that underwater borrowers were
not precluded in any way from applying for HAMP loan modifications and
that HAMP had no loan-to-value ratio (LTV) ratio requirements. The
officials also told us that ultimately the overall homeownership
preservation program, Making Home Affordable (MHA), would have
initiatives designed to address other factors affecting foreclosures,
such as negative equity. For example, servicers are required to
simultaneously evaluate borrowers for a trial loan modification under
HAMP and HOPE for Homeowners refinance and to offer the HOPE for
Homeowners option if possible. MHA will offer incentives to servicers
under the HOPE for Homeowners program that are as generous as the
incentives offered with HAMP modifications.[Footnote 38] Under HOPE for
Homeowners, borrowers could also benefit from principal reduction that
would reinstate positive equity in their homes. In addition, borrower
incentive payments under the HAMP first-lien modification program go
toward paying down principal on a first-lien mortgage. Treasury
officials also noted that other HAMP incentives could help address
negative equity including the possibility of a principal write-down as
part of reducing borrowers' monthly payments under HAMP.
Analyses by Fannie Mae showed that underwater borrowers who were
eligible for loan modifications under HAMP because they were in default
or in imminent danger of default could pass the NPV test for loan
modification successfully. These analyses found that borrowers with
high-LTV mortgages generally passed the NPV model test for loan
modification.
Although Treasury has said that HAMP does not exclude and will
ultimately offer specific tools to address the problem of underwater
borrowers, there is still the possibility that some of these
homeowners, facing the prospect of owing far more than their homes are
worth, will walk away from their mortgages. A possible relationship
between growing numbers of mortgage holders with negative equity and
rising foreclosure rates suggests that the problem may become more
critical, especially if home price declines continue. Currently no
clear consensus exists on how to deal with underwater borrowers. In
particular, lenders and policymakers face an information problem in
trying to help borrowers with negative equity because it is hard to
determine which borrowers really need help in order to stay in their
homes. Nonetheless, the possibility of using negative equity as a
criterion for loan modification should be approached with caution,
given limited historical experience with large segments of borrowers
with negative home equity and the potential for providing incentives to
borrowers who would not default on their mortgages without them. We are
currently undertaking further analysis to better understand the
relationship between negative equity and the risks of defaults and
foreclosures.
Treasury's Projection of the Number of Loans That Could Be Modified
under HAMP Was Based on Uncertainties in Key Assumptions and May Be
Overstated:
Treasury's estimate of the number of borrowers who would likely be
helped under HAMP reflects uncertainty created by data gaps and the
need to make numerous assumptions, and this projection may be
overstated. Further, documentation of the many assumptions and
calculations necessary for the analysis is incomplete and Treasury has
not specified plans for systematically updating its projections. While
we acknowledge that Treasury was moving quickly to develop estimates
for a new and untried program for which there were limited comparable
data, more thorough documentation would help establish a credible
baseline against which to monitor and revise key program assumptions to
ensure the program objectives are being met.
Treasury's Projected Number of Loans That Could be Modified Is
Complicated, Challenging, and Uncertain:
The process for estimating the expected number of home loans that could
be modified under HAMP is complicated and challenging, and the
projection is uncertain. Treasury officials faced challenges in
projecting the number of loans likely to be modified under HAMP. First,
Treasury had to cope with incomplete data on the characteristics of
mortgage loans and borrowers. For example, there is no single source of
information on existing mortgages. Loan databases vary in the
information collected and in their presentation, making it difficult to
develop comparable and consistent bases for empirical projections.
Also, it is arguable whether models of borrower and lender behavior
based on experience prior to the mortgage crisis are completely
relevant in predicting behavior in stressed markets because of the
unprecedented severity of the housing price decline exacerbated by
weaknesses in the overall economy. These conditions complicate the
analysis and create uncertainty. Furthermore, Treasury officials had to
develop the estimate very quickly. HAMP was initially announced on
February 18, 2009, and Treasury published detailed guidelines and
authorized servicers to begin modifications only 2 weeks later, when
HAMP guidelines were publicly released on March 4, 2009. Such a time
constraint limited Treasury's ability to undertake rigorous empirical
analysis to provide a projection that is robust to changes in its
assumptions.
Treasury Projected That HAMP Could Help Up to 3 to 4 Million Borrowers,
but Loans That Would Remain Current under the First-Lien Subprogram
Could Be Lower:
In order to support Treasury's policy design and cost estimation, it
developed an initial internal projection that up to 3 to 4 million
borrowers who were at risk of default and foreclosure could be offered
a loan modification under HAMP. However, because of the unsettled
dynamics of the mortgage market and overall economic conditions, actual
outcomes may well be different from the projection. Treasury projected
that about two-thirds of the eligible 3 to 4 million borrowers would
have their mortgages modified using TARP funds and that the remaining
one-third--those owned or guaranteed by Fannie Mae or Freddie Mac--
would be modified using GSE funds. However, consistent with recent
experience, not all of the loans modified under HAMP would likely
remain current over the 5-year life of the first-lien subprogram.
According to Treasury officials, the redefault rate estimates that they
examined were for loan modification programs that predated HAMP, which
likely did not result in monthly mortgage payment reductions or contain
incentive payments similar to those of HAMP.
According to HAMP guidelines, loans that originated on or before
January 1, 2009, may be eligible, and new borrowers will be accepted
until December 31, 2012. Because the maximum possible length of the
first-lien modification program for each loan after the 90-day trial
period is 5 years, loans that enter HAMP in 2012 will have to terminate
participation in HAMP by 2017. After completion of the first-lien
modification program, borrowers' mortgage payments could gradually
increase to levels consistent with an interest rate cap that reflects
market conditions at the time the loan modification is made.[Footnote
39]
Treasury's Projection of Loans Likely to Be Modified Depends on Several
Uncertain Assumptions and Requires Complete Documentation:
Based on our analysis of Treasury's description and documentation of
its process for determining the number of loans that could be modified
under HAMP, we identified four phases, consisting of projecting the
following:
1. the likely number of borrowers at risk of default/foreclosure;
2. the proportion of loans held by borrowers with debt-to-income ratios
greater than 31 percent that were eligible for payment reductions
because these loans were likely unaffordable;
3. the proportion of borrowers likely to apply for loan modification as
determined by servicers' and borrowers' expected participation; and:
4. the proportion of loans that would likely pass the NPV test for loan
modification and be offered the 90-day loan modification trial.
As previously noted, HAMP has several eligibility requirements,
including that the property be an owner-occupied, single-family
residence (one to four units) that is the borrower's primary residence
and that the mortgage loan amount not exceed the current threshold for
so-called "jumbo" loans.[Footnote 40]
To determine the number of eligible loans likely to become at risk of
foreclosure, Treasury used data from a variety of sources to make its
initial projection that roughly 50.3 million active loans, excluding
those insured by FHA or guaranteed by VA, existed, including those in
default and already in the foreclosure process.[Footnote 41] Excluding
loans that did not meet HAMP's eligibility requirements, Treasury
calculated that about 47.4 million, or 94 percent, of this group might
be eligible for loan modification.
Next, based on current mortgage market conditions and expected future
changes in the performance of different types of loans, in March 2009,
program officials projected that over 10 million loans, or 21 percent
of the existing total loans, would likely become at risk of foreclosure
through the fourth quarter of 2012 (step 1 of figure 5).[Footnote 42]
Treasury officials underscored that this estimate was not a formal
Administration projection and did not reflect an Administration view
about either the housing market or economic recovery. Uncertainties
exist in this projection both because of the problematic nature of
forecasting the future macroeconomic situations including home prices,
unemployment rates and other factors that have influenced default and
foreclosure rates as well as the difficulty forecasting borrower
decisions to default. Further complicating the projections is a lack of
knowledge about the potential number of vacant homes and the number of
investor-owned homes that are improperly or potentially fraudulently
classified as owner occupied. A recent estimate by the Joint Center for
Housing Studies of Harvard University indicated that the homeowner
vacancy rate for the nation had reached a record high of 2.8 percent
last year. For homes built since 2000, the vacancy rate was 9.7 percent
in 2008, a jump of almost 4 percentage points in just 2 years.[Footnote
43] Because of the recent increase in vacancy rates and the potential
number of homes owned by investors and not households, Treasury's
estimate of owner-occupied homes, and thus of the number of borrowers
HAMP could assist, may be overstated.
The second step of the estimation considers the HAMP's requirement that
borrowers' current debt-to-income ratios exceed 31 percent.
Extrapolating from limited data on borrowers' current debt-to-income
ratios, Treasury projected that 80 percent of the over 10 million loans
at risk of foreclosure would meet this requirement, or about 8.4
million loans, because these loans are likely unaffordable (step 2 of
figure 5).
Third, the estimation required an assumption about the participation of
eligible borrowers who apply for loan modification. Treasury projected
that 65 percent (about 5.5 million loans) of the targeted group of
borrowers (borrowers at risk of foreclosure and with debt-to-income
ratios exceeding 31 percent) would likely apply for loan modification
under HAMP (step 3 of figure 5). According to Treasury, this projection
is consistent with its projection that enough servicers would
participate in HAMP to cover approximately 90 percent of the potential
loan population and that the borrower response rate would be more than
50 percent. In developing the participation rate, Treasury officials
told us they considered a number of possible combinations of the
servicer representation rate and borrower participation rate, including
a borrower participation rate of 70 percent. However, Treasury's
estimate of lender participation has not yet been borne out by
experience. As of July 14, 2009, 27 loan servicers (including the 5
largest U.S. servicers) had signed participation agreements. Treasury
estimated that these participants represented about 76 percent of non-
GSE loans (see appendix I for a listing of the servicers that had
signed agreements as of July 14, 2009). As previously noted, HAMP
covers GSE loans, as well as non-GSE loans. According to Treasury
officials, servicers with signed participation agreements represent
around 85 percent of GSE and non-GSE loans in the country. Treasury
officials noted that the process of signing up servicers is ongoing,
that servicer participation rates have been increasing, and that
several servicers were "in the pipeline" and ready to sign contracts
shortly. In deciding to participate, servicers can be influenced by
several factors, including their own capacity to modify loans and the
appeal of the government's incentive programs. It remains to be seen
how many more servicers will decide to sign up for HAMP.
Treasury's projected response rate for borrowers may also be too high.
The program that is most like HAMP--FDIC's IndyMac Federal Bank loan
modification program--thus far has had a maximum response rate of 50
percent for borrowers, well below the rate projected for HAMP.[Footnote
44] Treasury stated that HAMP's participation rate will likely be
higher, in part because of the outreach Treasury has done to publicize
it. According to Treasury officials, a number of steps have been taken
to raise awareness of the first-lien modification program consistent
with the Presidential announcement and the high-profile nature of HAMP.
These steps include creating a Web site that is targeted toward
borrowers and that, according to Treasury officials, received over 27
million page views as of July 18, 2009. Treasury officials also said
that, according to servicers, more than 1 million letters had been
mailed to borrowers to inform them about HAMP and that servicers had
reviewed several hundred thousand current and delinquent loans for
potential eligibility.
However, Treasury's estimate includes borrowers holding mortgages on
homes that may not be owner-occupied, which are specifically excluded
from HAMP participation. Further, not all potentially eligible
borrowers may decide to participate in HAMP for a variety of reasons--
for example, because of their experience with loans that eventually
became unaffordable or because they may have limited knowledge about
HAMP. Moreover, borrowers cannot participate in HAMP unless their
servicers also do. Borrowers with servicers who elect not to
participate in HAMP will thus be excluded. All these factors suggest
that Treasury's estimate of the participation rate may well be
optimistic, but Treasury has planned to provide resources to support
the targeted projection.
Treasury's fourth step in the process of calculating how many
homeowners the first-lien modification subprogram would help was to
estimate the number of loans that were likely to pass the NPV test
required to start a 90-day loan modification trial. Treasury officials
developed a simplified NPV test model to help determine the expected
number of loans that would be modified. As previously discussed, the
NPV test is considered positive for loan modification if the total
expected cash flow of a modified loan is greater than the total
expected cash flow of an unmodified loan. Servicers are required to
modify loans when the NPV test shows this "positive" outcome, while
they have the discretion to modify loans that do not pass the NPV test
or to pursue alternatives to foreclosure such as short sales or deeds-
in-lieu. Treasury estimated that about 70 percent (3.9 million) of the
at-risk population of borrowers tested would likely pass the NPV test
and be offered the 90-day trial modification (see step 4 in figure 5).
Figure 5: Treasury's Projections of Homeowner Participation in HAMP,
Reflecting Uncertainties Due to Data Gaps and Necessary Assumptions,
2009-2012:
[Refer to PDF for image: series of four pie-charts]
(1) Borrowers likely at risk of default/foreclosure: over 10 million;
Using a variety of data sources constituting roughly 50.3 million loans
nationwide, program officials project over 10 million borrowers (meet
the qualifying terms in the HAMP guidelines and) are likely at risk of
default/foreclosure.
(2) Borrowers likely to have unaffordable loans: 8.4 million;
Using limited data on these borrowers‘ current debt-to-income ratios,
Treasury projects about 80 percent (8.4 million) of these borrowers
have debt-to-income ratios greater than 31 percent, and thus are likely
to have unaffordable loans.
(3) Borrowers likely to apply for loan modification: 5.5 million;
Using information on the proportion of these loans carried by servicers
likely to apply for loan modification and borrower likely response
rate, Treasury projects about 65 percent (5.5 million) of these
borrowers would likely apply for loan modification.
(4) Borrowers likely to pass the NPV test and be offered the 90-day
loan modification trial: 3.9 million;
Using information from their simplified net present value (NPV) test
model to determine borrowers whose loans would benefit from
modification, Treasury projects about 70 percent (3.9 million) of these
borrowers would likely pass the test and be offered the 90-day loan
modification trial.
Source: GAO analysis of OFS documents, as of March 2009.
Note: The data include loans modified using TARP funds and loans
modified using GSE funds.
[End of figure]
Among the 3.9 million borrowers likely to be offered trial
modifications, not all of the borrowers will successfully complete the
trial period. In addition, some borrowers will subsequently default on
their modified loans after completing the trial period. According to
Treasury officials, the redefault rate estimates that it examined were
consistent with the Office of the Comptroller of the Currency's (OCC)
and Office of Thrift Supervision's (OTS) analyses of loan
modifications, as well as with FDIC's IndyMac Bank estimates. For
example, the IndyMac Federal Bank loan modification program, which is
the program most like Treasury's, used a 40 percent redefault rate in
its base NPV spreadsheet to determine the value of modifying a loan.
[Footnote 45] In their most recent quarterly Mortgage Metrics Report
dated June 30, 2009, OCC and OTS reported the percentage of borrowers
that had redefaulted (60 days or more delinquent) on their modified
loans ranged between about 23 percent at 3 months following
modification to about 52 percent at 12 months following modification.
[Footnote 46] However, Treasury officials stressed that it was
difficult to compare potential HAMP redefault rates to those for other
loan modification programs because of significant differences in
program features. In particular, they noted that loan modifications
that did not result in monthly mortgage payment reductions similar to
those required under HAMP (31 percent debt-to-income threshold) or
contain incentive payments similar to HAMP's would not provide an
adequate basis for comparison. Also, the data cover activities of only
certain member institutions (9 national banks and 4 thrifts) and,
therefore, may not fully represent all market segments, including the
subprime lending market. In addition, the redefault rates reported by
others are for loans that have been recently modified (typically within
the last 12 months or less), while the life of the HAMP, over which
redefaults would be measured, covers five years.
Treasury officials have indicated that some of their key assumptions
involve significant uncertainties, and these uncertainties make the
need for complete and accurate documentation of the assumptions and
analyses supporting the estimates of critical importance. The lack of
adequate documentation and incomplete specification of many of the
assumptions underlying Treasury's projection of the number of borrowers
who could be helped by HAMP makes it difficult to assess the
reliability of the estimates and, going forward, may hinder efforts to
evaluate how well the first-lien program is meeting its objectives.
[Footnote 47] In order to improve the validity of the overall
projection of the number of loans that would be modified under HAMP, it
is essential that the process be supported by detailed information and
complete documentation and that the key assumptions and calculations
are regularly reviewed and updated.
Treasury Has Developed but Not Finalized the Oversight Structure for
HAMP, and Is Not Systematically Evaluating Servicers' Capacity during
Program Admission:
Treasury has taken a number of important steps toward implementing
operational procedures and internal controls for HAMP including
establishing an organizational structure for overseeing HAMP;
delegating implementation authorities and responsibilities to its
financial agents; and drafting work flows, such as the allocation
process for each participating servicer. However, significant gaps in
its oversight structure remain, including the lack of a full complement
of permanent staff in OFS's Homeownership Preservation Office (HPO),
the office responsible for HAMP governance, and the lack of a finalized
comprehensive system of internal control for the program, including
policies, procedures and guidance for program activities. In addition,
it is unclear when comprehensive processes will be in place to address
noncompliance among servicers, including processes to ensure that
servicers evaluate borrowers in imminent danger of default for HAMP
participation. Further, Treasury has not established procedures to
consistently evaluate the capacity of participating servicers to
fulfill HAMP requirements or to assess any risk that individual
servicers may pose to the program during the admission process.
Moreover, some servicers have raised concerns about the complexity and
burden of HAMP's data collection and reporting requirements, suggesting
that these servicers may not have the capacity to fulfill HAMP
requirements. Without a consistent method of evaluating all servicers
during program admission, Treasury is limited in its ability to
identify, assess, and address potential risks that could prevent
servicers from fulfilling program requirements.
Treasury and Its Financial Agents Have Taken Steps to Design Procedures
and Controls to Implement HAMP but Have not Finalized a Comprehensive
System of Internal Control:
In implementing HAMP, Treasury developed an organizational structure
that delegates some administrative and oversight responsibilities to
its financial agents while retaining authority for overall HAMP
implementation. According to Treasury, the broad responsibilities that
have been delegated to its financial agents--Fannie Mae, Freddie Mac,
and Bank of New York-Mellon--have been delineated in the agreements
that have been signed with these entities, with specific roles assigned
to each entity:
* Fannie Mae, as the HAMP program administrator, is responsible for
developing and administering program operations including registering,
executing participation agreements with, and collecting data from
servicers.
* Freddie Mac, as the HAMP compliance agent, is responsible for
compliance and audit of the program, including onsite and remote
servicer reviews and audits. According to Freddie Mac, its authorities
include conducting announced and unannounced information technology
testing, security reviews, and audits. In addition, Freddie Mac
officials said they would manage any corrective action and report
compliance violations to Treasury and other regulatory agencies.
* Bank of New York-Mellon, as Treasury's custodian and payment agent
for TARP, is responsible for remitting mortgage payment reductions and
program incentive payments to participating servicers.
Individual servicers enter into servicer participation agreements that
set out their responsibilities, including processing loan modifications
that adhere to program guidelines; reporting complete and accurate data
to Fannie Mae; receiving and distributing incentive payments for
borrowers and investors; properly applying payments to borrower
accounts; and developing, enforcing, and conducting internal reviews of
an internal control process that monitors and helps ensure program
compliance. As previously discussed, the servicer participation
agreement specifies actions Fannie Mae may take if a servicer fails to
perform or comply with any of its material obligations under the
program including reducing the amounts payable to the servicer,
requiring repayment of previous payments made under HAMP under certain
circumstances, requiring the servicer to submit to additional program
oversight, or terminating the servicer participation agreement.
Within Treasury, OFS's HPO has primary responsibility for HAMP
implementation. According to Treasury, roles within HPO include audit
oversight, Congressional and regulatory liaisons, communications and
marketing, policy development, data analysis, and operations. HPO
officials told us that they rely on several other OFS and Treasury
support offices, including those involved with compliance and risk,
internal controls, cash management, and human resources to assist HPO
with various aspects of HAMP governance.
While much of Treasury's organizational structure for HAMP has been
established, as we have previously reported, hiring efforts for HAMP
are still ongoing.[Footnote 48] Although HPO was created in November
2008, and its current structure established in March 2009, some of its
positions continue to be filled with temporary detailees from other
offices or agencies, and many positions remain vacant. According to
Treasury officials, all director positions within HPO have been filled.
However, although Treasury has continued to seek a highly qualified
candidate to fill the position of Chief Homeownership Preservation
Officer, as we stated in our most recent TARP 60-day report, it has
been filled by interim chiefs. According to Treasury, as of July 16,
2009, 11 positions are filled with permanent employees and 3 are filled
with temporary detailees, while 17 positions remain vacant. According
to OFS's strategic workforce plan, Treasury will perform a review of
each major component of OFS on a bi-monthly basis to assess continuing
workforce needs and determine where adjustments are needed, including
whether positions are filled by appropriate staff, whether position
descriptions need to be updated, and whether there are staffing gaps
that need to be addressed.
According to Treasury, as of July 2009, a bi-monthly review of HPO had
not yet been conducted but would be scheduled later in the month.
Because HAMP is a new and untested program involving significant
outlays of taxpayer dollars to privately owned companies (servicers)
and mortgage holders/investors, it will be important for HPO to
continue to regularly evaluate the number of staff and their
competencies to ensure that it has the resources needed to effectively
govern the program. Consistent with GAO's internal control standards,
the quality of human capital policies and practices including, but not
limited to, hiring affects the control environment[Footnote 49]. A
strong control environment will depend, in part, on the competence of
staff hired to manage and perform program operations. As we have
previously recommended, Treasury should continue its hiring efforts in
an expeditious manner to ensure that Treasury has the personnel needed
to carry out and oversee TARP initiatives. Potential weaknesses in the
control environment due to hiring and staffing deficiencies may limit
Treasury's ability to plan, direct, and control HAMP operations and
could put taxpayer funds at risk.
In addition to establishing an organizational structure for HAMP,
Treasury has developed and, according to program officials, continues
to refine key operational procedures and internal controls that it
anticipates executing when the initial first-lien modification payments
are made to servicers under HAMP. In particular, Treasury has drafted
flow charts which delineate aspects of the overall HAMP process, using
key internal control points with corresponding narrative descriptions.
According to Treasury, internal controls have been implemented for
transactions that have already occurred To date, transactions have
primarily involved the setting of servicer caps. On July 17, 2009,
Treasury began a simulation involving Treasury, Fannie Mae, and Bank of
New York-Mellon of the HAMP disbursement process that tested internal
controls over the disbursement of TARP funds. However, complete
policies and procedures for HAMP are still in draft and are scheduled
to be completed by September 30, 2009. To ensure that program
guidelines are followed consistently and resources are used
appropriately throughout the HAMP process in the coming stages of the
program, it will be important for Treasury to finalize and monitor its
internal control system. As part of our future TARP work, we will
continue to review Treasury's ongoing efforts to establish and
implement a comprehensive system of internal control.
Treasury officials noted that they are developing performance measures
for HAMP, an early draft of which includes process measures such as the
number of servicers participating in the program and the number of
borrowers being reached, as well as outcome measures such as average
debt-to-income ratios (pre and post modification) and redefault rates.
However, many of the specifics of these performance measures have not
yet been defined. For example, Treasury has not specified the sources
of the data to be used or the definitions of success for each measure.
Further, the draft performance measures do not include measures of
servicer performance, including whether servicers are meeting program
requirements related to modifying loans for borrowers not yet in
default. Treasury officials indicated that they will work with
servicers to set more precise process measures for the program,
including average borrower wait time for inbound borrower inquiries,
the completeness and accuracy of information provided to applicants,
and response time for completed applications. Treasury officials also
told us that by August 4th, Treasury will begin issuing monthly reports
with some servicer-specific performance measures, including the number
of trial modifications each servicer has extended to eligible
borrowers, the number of trial modifications that are underway; the
number of final modifications and, eventually, the long term success of
those modifications. According to the Senate committee report
accompanying the Government Performance and Results Act of 1993, annual
performance goals are the major means for gauging progress toward
accomplishment of longer-term program goals. In developing performance
measurements, it will be important for Treasury to be able to evaluate
HAMP's progress toward its goals, including preserving homeownership,
and to define outcome measures that will be objective, measurable,
quantifiable, and reflects the goals and mission of HAMP.
While HPO continues to refine the areas of the HAMP operational process
that require direct Treasury involvement, Fannie Mae has begun mapping
out the overall HAMP program process--including registration and data
collection set up for participating servicers--and assessing potential
risks in the overall processes to specify points for internal control.
In addition, Treasury officials noted that they are currently reviewing
with Fannie Mae its documentation of the processes around the
calculation of incentive payments and the invoicing process. Treasury
officials said Fannie Mae has provided Treasury for its review and
comment the most recently available draft internal control
documentation for HAMP processes for which controls have been designed,
completed or executed. Treasury officials said they are participating
in regular meetings with Fannie Mae personnel to discuss the different
HAMP processes and associated internal controls.
According to Fannie Mae, the agency is developing controls to ensure
the effectiveness of operations throughout the modification process,
including those needed prior to making the first modification payment
to servicers. For example, Fannie Mae officials noted that--working
with Treasury and other agencies--they had developed automated edit
checks for loans that were being electronically evaluated for HAMP
eligibility. Fannie Mae has documented certain internal controls,
including those that focus on registering, executing contracts with,
and setting up servicers in HAMP electronic systems; the HAMP payment
process; and the HAMP reporting process. Fannie Mae is working with
Treasury to develop processes and internal control documentation for
additional steps in the HAMP process, including, for example, trial
modification administration and data collection and reporting. Fannie
Mae has set a timeline for the development, assessment, and testing of
the administrative and set-up, record keeping and reporting, paying
agent, and electronic data management processes for HAMP. According to
the timeline, most processes will be designed by mid-August, with
assessment and testing to continue through late October 2009. According
to Treasury, as of June 30, 2009, Fannie Mae, in coordination with
Treasury, performed effectiveness testing for three areas--servicer set-
up, servicer caps, and incentive accruals (calculations of HAMP
payments owed to each servicer in the immediate future). However, some
processes that were scheduled to be completed by now are still under
development. Specifically, setting up the trial modification process in
Fannie Mae's electronic data system, and the initiation and eligibility
aspects of the official modification process were all scheduled to be
completed in June 2009, but were still under development as of July
2009.
Freddie Mac has begun defining and documenting its HAMP compliance
testing program. According to Freddie Mac, compliance reviews will take
three approaches:
* announced reviews (remote and onsite), which will provide a
structured and consistent process to assess servicer compliance;
* unannounced reviews (remote and onsite), which will provide the
ability to review any loan at any time; and:
* data analysis, including third-party data verification, which will
provide ongoing analyses of servicers to identify patterns or trends
that require investigation.
Freddie Mac plans to use these three approaches to verify participating
servicers' adherence to program guidelines and has begun to consider
how potential areas of noncompliance will be identified. For example,
Freddie Mac will conduct trial period reviews, which are on-site audits
and file reviews targeting larger servicers and are intended to assess
the strength of the servicer's control environment, systems, and
staffing. According to Treasury, the first trial review was completed
in June 2009, two reviews began or will begin in July 2009, and four
reviews are scheduled to begin in August 2009. In addition, to ensure
that all eligible borrowers are given the opportunity to participate in
the program, Freddie Mac indicated that it will use performance
reporting data to track modification volume against expectations.
According to Treasury officials, Freddie Mac will also develop a
"second look" process, whereby it will audit modification applications
that have been declined. Freddie Mac will coordinate with servicers to
address specific cases that surface as a concern, as well as more
generally address potential operational weaknesses where errors prove
more systematic. To identify fictitious modifications, such as
modifications reported by a servicer on a loan that does not exist,
Freddie Mac will take steps such as investigating borrower complaints
and running database tests to identify multiple modifications for a
single borrower.
However, it is unclear when Freddie Mac will have procedures in place
to address identified instances of noncompliance among servicers. In
particular, while Treasury has emphasized in program announcements that
one of HAMP's primary goals is to reach borrowers who are still current
on mortgage payments but at risk of default, no comprehensive processes
have yet been established to assure that all borrowers at risk of
default in participating servicers' portfolios are reached. For
example, the program guidelines do not specify how servicers are to
document inquiries from borrowers claiming to be at risk of default.
According to Treasury officials, some procedures have been put in place
to ensure that this goal is reached. For example, they said that
Freddie Mac would assess whether servicers were offering modifications
to borrowers who were not yet delinquent by reviewing servicer call
records of borrowers in this situation who contacted servicers.
However, it is unlikely that these reviews will provide a complete
assessment of servicers' responses to borrower inquiries.
Neither Treasury Nor Its Financial Agents Are Systematically Evaluating
the Capacity of Servicers to Fulfill HAMP Requirements during Program
Admittance:
Servicers are required to fulfill extensive program requirements, which
for some servicers will necessitate increasing staffing and updating
data collection systems. However, Treasury and its financial agents are
not consistently assessing the ability of prospective HAMP servicers to
meet distinct HAMP requirements and guidelines during the program
admittance process. In November 2008, the federal banking regulators
stated that banking organizations needed to ensure that their servicers
were sufficiently funded and staffed to work with borrowers to avoid
preventable foreclosures while implementing effective risk mitigation
measures. However, in its March 2009 report, COP noted that servicers
were generally understaffed, lacked the capacity to handle the pre-HAMP
demand for loan workout requests, and had no apparent ability to handle
a greater volume of loan modifications, such as that expected to be
generated under HAMP.[Footnote 50] Furthermore, on July 9, 2009, the
Secretaries of the Treasury and HUD sent a letter to participating
servicers that identified a general need for servicers to devote
substantially more resources to HAMP's loan modification program. In
this letter, the secretaries asked that servicers appoint a high-level
liaison to be the point of contact for implementation of the MHA
program, expand their servicing capacity, and improve the execution
quality of loan modifications.
Consistent with GAO standards for internal control, program managers
should identify potential program risks, and analyze them for their
possible effect.[Footnote 51] As mentioned above, participating
servicers agree to fulfill program requirements set forth in all
program guidelines, including the servicer participation agreements
they sign with Fannie Mae. The HAMP servicer registration process
guidelines contain controls to validate the servicers and their
portfolio size and activity level, and Treasury officials said that
they were conducting weekly phone calls with servicers and planning a
servicer conference.
Freddie Mac conducted readiness reviews of a limited number of
servicers. However, Treasury officials told us that the readiness
reviews were not intended to be used to evaluate servicers prior to
entering the program, but instead were part of the program
implementation process. Freddie Mac officials noted that the objective
of these reviews was to assess servicers' readiness to (1) understand
the requirements of the HAMP program; (2) effectively execute program
requirements within their infrastructure; and (3) ensure compliance
with program requirements by implementing new policies, procedures, and
controls. Treasury described the reviews as a snapshot of how an
initial group of servicers understood and could implement HAMP
requirements. According to Treasury and Freddie Mac, readiness reviews
of seven of the largest servicers that own or service some loans not
owned by Freddie Mac or Fannie Mae have been completed and no
additional readiness reviews are planned. As a result, 20 servicers
that have executed agreements as of July 14, 2009, will not receive
readiness reviews. Thus, without systematically conducting readiness
reviews--or using other means of assessing servicer capacity--during
the admittance process Treasury cannot identify, assess, and address
risks associated with servicers that lack the capacity to fulfill all
program requirements.
Moreover, Freddie Mac officials told us that they had initially planned
multiday servicer readiness reviews that included both interviews and
documentation reviews, but they indicated that the reviews to date
consisted only of interviews with senior executives and that
information gathered during the interviews was not verified. Freddie
Mac also initially stated that if deficiencies were identified during
servicer readiness reviews, a remediation plan would be developed and
appropriate follow up actions instituted, but it later indicated that
the reviews conducted did not involve any follow-up monitoring as a
result of identified deficiencies. It is unclear how Treasury and
Freddie Mac will follow up with servicer deficiencies identified as
part of these reviews.
While Freddie Mac noted that servicers that had received readiness
reviews were optimistic about their ability to meet program
requirements, they also indicated that servicers needed adequate time
to fully design, develop, test, and implement new procedures and
infrastructure to properly handle cash movement and incentive
disbursements. In addition, as part of these reviews servicers
expressed concerns about their capability to monitor potential fraud
among borrowers and said that they need greater guidance in
identifying, assessing, mitigating, and disclosing potential
noncompliance situations including those involving fraud, waste, and
abuse.
Moreover, some servicers have expressed concerns about their ability to
meet all program requirements, particularly with regard to data
collection and reporting, outside of the readiness reviews. On April 6,
2009, Fannie Mae announced requirements for data collection and
reporting by participating HAMP servicers and on July 6, 2009 it issued
an update to this guidance.[Footnote 52] According to these guidelines,
servicers are required to report selected data during the modification
trial period and when the modification has been approved. Once the
modification has been approved, servicers must begin reporting activity
on HAMP loans on a monthly basis. These data reports are submitted to
Fannie Mae in its role as HAMP program administrator and record keeper,
and include loan identifiers, servicer registration and bank account
information, and loan-level data such as borrower identification
information and NPV test results. However, according to a HOPE NOW
survey of some of its servicer members, none of the nine servicers that
provided written responses could provide all of the 106 data elements
that Treasury had deemed high priority, with servicers reporting that
they could collect between 38 and 87 of these high-priority data
elements.[Footnote 53] In addition, during an outreach meeting Treasury
held with 13 HAMP servicers, some participating servicers indicated
that they would have difficulty collecting data and providing reports
for all of the required data elements, citing barriers such as capacity
issues, limited system platform capabilities, lack of experience with
particular data elements, and incomplete guidance on data definitions
and report templates. Similarly, all six of the servicers that we
contacted also told us that they would need to develop separate
platforms to capture HAMP data they had not collected in the past. For
example, three out of the six small to large servicers specifically
cited as a concern collecting demographic information (race, ethnicity,
gender, etc.), which will be required as of October 1, 2009, because of
the sensitive nature of the information.[Footnote 54] Treasury updated
its data definition document again on July 20, 2009. According to
Treasury, HAMP's phased in data collection and reporting approach was
developed to try to limit the burden of these requirements on
servicers.
Treasury officials noted that nearly all of the servicers that were
expected to participate in HAMP had already been approved through a GSE
eligibility process.[Footnote 55] Currently, all 27 participating HAMP
servicers were GSE-approved servicers. However, some HAMP requirements
are distinct from requirements set by GSEs. For example, as previously
noted, some servicers have expressed concern about meeting HAMP
requirements. Therefore, even when HAMP participating servicers are GSE-
approved, the servicers' capacity to implement a large-scale loan
modification program has not been assessed and is unknown. Furthermore,
in the future, HAMP servicers may include those that only service non-
GSE loans. Treasury officials indicated that they plan to develop
eligibility requirements for non-GSE servicers, but the assessment
criteria and processes for implementing these requirements remain
unclear. Consistent with GAO's standards for internal control, program
managers should identify risks, consider all significant actions
between the program and other parties, and analyze risks identified for
their possible effect.[Footnote 56] Without a comprehensive assessment
of servicers' capacity or the potential risks servicers pose before
they enter into participation agreements and receive taxpayer funds,
Treasury and its financial agents cannot adequately determine the
potential areas of risk individual servicers may pose. Further, they
cannot mitigate the potential negative effects of these risks and may
not be able to provide the additional support and guidance some
servicers may need to properly meet all program requirements. We will
continue to look at servicers' capacity to effectively implement HAMP
as part of our ongoing TARP oversight responsibilities.
Conclusions:
In our March 2009 report on TARP, we reported that significant program
components and controls were under development for HAMP. Currently
several components have not yet been implemented, and although the
central program--the first-lien modification initiative--has been
implemented, many of its administrative processes and its internal
control policies and procedures are not yet finalized. HAMP is the
cornerstone effort under TARP to meet the act's purposes of preserving
homeownership and protecting home values. But as of the date of this
report a number of HAMP programs remain largely undefined. Our analysis
found weaknesses with the design and monitoring plans for the
counseling feature of the first-lien modification program and the
rationale for the HPDP program and with Treasury's estimate of the
number of borrowers that might be helped under the first-lien
modification program. Furthermore, we identified weaknesses with HAMP's
management infrastructure and found that the development of some
processes and internal controls was behind schedule. Finally, we are
concerned that Treasury is not fully vetting servicers with which they
contract to make modifications. One of Treasury's stated goals is to
complete initial modifications quickly. But, unlike other TARP
programs, such as the Capital Purchase Program, HAMP expenditures--
which are projected to be up to $50 billion--are not investments that
will be partially or fully repaid but expenditures that, once made,
will not be recouped. For this reason, a system of effective internal
control over program expenditures is of critical importance.
The design of the first-lien modification program, which has been
designed to reduce borrowers' mortgage payments to affordable levels by
modifying their loans, does appear to largely meet the act's goals.
Servicers that have entered into HAMP servicer participation agreements
have reported that over 180,000 borrowers have entered into the trial
period for the modification of their first-lien mortgages. A number of
features have been built into the first lien-modification program to
try to ensure that the program's objectives of helping borrowers in
danger of foreclosure are met. The key feature is a cost-sharing
arrangement between Treasury and the mortgage holder/investor to lower
mortgage payments to 31 percent of the borrower's income combined with
various incentive payments to servicers, mortgage holders/investors,
and the borrower intended to facilitate and ensure the long-term
success of the loan modification. One of HAMP's features intended to
help reduce the rate of redefault on modified loans requires borrowers
with high total household debt to obtain housing counseling. Treasury
is not tracking whether all borrowers told they must obtain counseling
do so, and thus may not know if this provision is having its intended
effect or if a potential lack of borrower compliance may limit its
impact.
Program guidelines and specific operational procedures have not been
established for four other HAMP subprograms, and the need for one of
these--the $10 billion Home Price Decline Protection (HPDP) program--
remains unclear. HPDP is designed to encourage investors to modify more
mortgages by providing incentives to partially offset probable losses
from home price declines. However, Treasury officials told us that they
had not independently estimated the number of new modifications that
incentive payments under this program might generate. Further,
according to Treasury officials, incentives under HPDP might be paid to
modify loans that already would have qualified for modification under
the first-lien modification program using the NPV test. Although HPDP
may provide incentives for some loan modifications that would otherwise
not be made, without demonstrating the need for these incentive
payments for all loans modified in a given area experiencing home price
declines, Treasury may not be maximizing assistance for helping
homeowners avoid potential foreclosure as required by the act.
Treasury's estimates of the number of borrowers HAMP might help with
first-lien loan modifications are also problematic. We recognize that
Treasury was moving very quickly to develop these estimates for a
program that has no relevant historical point of comparison. As a
result, 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. However, Treasury's estimates of the number of homeowners who
would likely participate in its HAMP loan modification program may be
overstated. In developing these estimates, Treasury did not take into
full account some of the variables underlying its assumptions about the
behavior of both borrowers and servicers and did not provide full
documentation for some of the key assumptions and analyses. Because of
the lack of relevant historical data, the changing nature of the
mortgage market, and the weaknesses in the national economy, the key
assumptions and calculations are surrounded by uncertainty, and
documentation is essential to establishing a baseline against which to
monitor them. Treasury also did not indicate that it planned to update
the information that it used in its assumptions, leaving open the
possibility that its calculations could rapidly become outdated.
Establishing a documented baseline and regularly updating these
estimates would help Treasury and its stakeholders monitor program
progress, identify problem areas as they emerge, and focus program
resources.
Finally, administrative processes, including staffing, and a
comprehensive system of internal controls have yet to be finalized. Of
particular concern is the fact that the key leadership position for
HAMP within HPO has not been permanently filled and that many other
positions affecting HAMP remain open. Furthermore, although the office
has been established for 10 months and its current structure has been
in place since March 2009, HPO has yet to complete a bimonthly
workforce planning review, as called for in each TARP office under
OFS's strategic plan. Given, the importance of HPO's role with respect
to monitoring the financial agents and privately owned servicers
involved in the $50 billion HAMP program, having enough staff with
appropriate skills is essential to governing the program effectively.
While some processes and internal controls have been developed for the
early stages of program implementation, many more controls will need to
be finalized as the program progresses, the first modifications are
completed, and payments begin to ensure that taxpayer dollars are
safeguarded, program objectives are achieved, and program requirements
are met. We also noted that Treasury had no plans to develop processes
to systematically evaluate the capacity of servicers to fulfill
specific HAMP requirements or to identify risks individual servicers
might pose when they applied for the program. Some servicers have
raised concerns about their ability to meet extensive program
guidelines, and another TARP oversight entity has questioned whether
servicers have the staff and operational framework to implement a large-
scale loan modification program. Without a means of reviewing the
capacity of servicers to fulfill program requirements, Treasury cannot
be assured that initial modifications will be completed quickly--one of
Treasury's stated priorities for the program--or that they will be
consistent with program guidelines. Because Treasury does not
systematically evaluate servicers prior to admittance to the program,
it is unable to identify, assess, and address risks, including those
associated with servicers that lack the capacity to fulfill
requirements such as collecting and reporting complete and accurate
data, before executing a contract with them under HAMP. Given the
magnitude of the investment in public funds for HAMP, and the fact that
the program is structured to make direct purchase payments, rather than
investments that may yield a return to the taxpayer as in other TARP
programs, it is important for Treasury to work expeditiously to
establish effective processes and controls to manage the program.
Recommendations for Executive Action:
As part of its efforts to continue improving the transparency and
accountability of HAMP, we recommend that the Secretary of the Treasury
take the following actions:
* consider methods of (1) monitoring whether borrowers with total
household debt of over 55 percent of their income who have been told
that they must obtain HUD-approved housing counseling do so, and (2)
assessing how this counseling affects the performance of modified loans
to see if the requirement is having its intended effect of limiting
redefaults;
* 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;
* 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;
* place a high priority on fully staffing vacant positions in HPO--
including filling the position of Chief of Homeownership Preservation
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;
* 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;
and:
* 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.
Agency Comments and Our Evaluation:
We provided a draft of this report to Treasury for review and comment.
We received written comments from Treasury that are reprinted in
appendix II. We also received technical comments from Treasury that we
incorporated as appropriate.
In its written comments, Treasury stated that it would consider GAO's
recommendations seriously as it moved forward. Specifically, Treasury
stated that in response to its discussions about the program with GAO
and others, it would continue to assess and implement changes to
features of the program to improve its ability to assist the greatest
number of borrowers most in need of assistance at the least cost to
taxpayers. Treasury noted that there had never before been a government
program designed to incentivize mortgage modifications and help
struggling homeowners on the scale of the HAMP program, and that there
were many uncertainties inherent in making projections about
participation, cost and performance for a program that is unprecedented
in size, scope, and goals. Accordingly, Treasury indicated that it
planned on actively evaluating the program, testing key assumptions,
and updating cost and participation estimates as the program
progressed. Treasury also stated that it planned to staff positions in
the Homeownership Preservation Office as quickly as possible. Treasury
noted that it recognized that a strong compliance system was critical
to program effectiveness, and it was committed to finalizing its
compliance processes as a top priority of the program. Lastly, Treasury
stated that it planned to continue to assess servicers' capacity to
meet requirements of the HAMP program and to work aggressively with
servicers to ensure that capacity, implementation, and compliance
requirements are met. As part of our ongoing monitoring of Treasury's
implementation of TARP, we will continue to monitor Treasury's progress
in implementing these and other planned initiatives in future reports.
We are sending copies of this report to the Congressional Oversight
Panel, Financial Stability Oversight Board, Special Inspector General
for TARP, interested congressional committees and members, Treasury,
the federal banking regulators, and others. This report also is
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions about this report, 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 report. GAO staff who made major contributions to
this report are listed in appendix III.
Signed by:
Gene L. Dodaro:
Acting Comptroller General of the United States:
List of Congressional Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable John M. Spratt, Jr.
Chairman:
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: List of Servicers That Have Signed HAMP Participation
Agreements, as of July 14, 2009 (Dollars in thousands):
Name of Institution: Select Portfolio Servicing;
Original cap: $376,000;
Adjustments to cap: $284,590;
Revised cap: $660,590.
Name of Institution: CitiMortgage, Inc.;
Original cap: $2,071,000;
Adjustments to cap: ($991,580);
Revised cap: $1,079,420.
Name of Institution: Wells Fargo Bank, NA;
Original cap: $2,873,000;
Adjustments to cap: ($462,990);
Revised cap: $2,410,010.
Name of Institution: GMAC Mortgage, Inc.;
Original cap: $633,000;
Adjustments to cap: $384,650;
Revised cap: $1,017,650.
Name of Institution: Saxon Mortgage Services, Inc.;
Original cap: $407,000;
Adjustments to cap: $225,040;
Revised cap: $632,040.
Name of Institution: Chase Home Finance, LLC;
Original cap: $3,552,000;
Adjustments to cap: [Empty];
Revised cap: $3,552,000.
Name of Institution: Ocwen Financial Corporation, Inc.;
Original cap: $659,000;
Adjustments to cap: ($105,620);
Revised cap: $553,380.
Name of Institution: Bank of America, N.A.;
Original cap: $798,900;
Adjustments to cap: $5,540;
Revised cap: $804,440.
Name of Institution: Countrywide Home Loans Servicing LP;
Original cap: $1,864,000;
Adjustments to cap: $3,318,840;
Revised cap: $5,182,840.
Name of Institution: Home Loan Services, Inc.;
Original cap: $319,000;
Adjustments to cap: $128,300;
Revised cap: $447,300.
Name of Institution: Wilshire Credit Corporation;
Original cap: $366,000;
Adjustments to cap: $87,130;
Revised cap: $453,130.
Name of Institution: Green Tree Servicing LLC;
Original cap: $156,000;
Adjustments to cap: ($64,990);
Revised cap: $91,010.
Name of Institution: Carrington Mortgage Services, LLC;
Original cap: $195,000;
Adjustments to cap: ($63,980);
Revised cap: $131,020.
Name of Institution: Aurora Loan Services, LLC;
Original cap: $798,000;
Adjustments to cap: ($338,450);
Revised cap: $459,550.
Name of Institution: Nationstar Mortgage LLC;
Original cap: $101,000;
Adjustments to cap: $16,140;
Revised cap: $117,140.
Name of Institution: Residential Credit Solutions;
Original cap: $19,400;
Adjustments to cap: [Empty];
Revised cap: $19,400.
Name of Institution: CCO Mortgage;
Original cap: $16,520;
Adjustments to cap: [Empty];
Revised cap: $16,520.
Name of Institution: RG Mortgage Corporation;
Original cap: $57,000;
Adjustments to cap: [Empty];
Revised cap: $57,000.
Name of Institution: First Federal Savings and Loan;
Original cap: $770;
Adjustments to cap: [Empty];
Revised cap: $770.
Name of Institution: Wescom Central Credit Union;
Original cap: $540;
Adjustments to cap: [Empty];
Revised cap: $540.
Name of Institution: Citizens First Wholesale Mortgage Company;
Original cap: $30;
Adjustments to cap: [Empty];
Revised cap: $30.
Name of Institution: Technology Credit Union;
Original cap: $70;
Adjustments to cap: [Empty];
Revised cap: $70.
Name of Institution: National City Bank;
Original cap: $294,980;
Adjustments to cap: [Empty];
Revised cap: $294,980.
Name of Institution: Wachovia Mortgage, FSB;
Original cap: $634,010;
Adjustments to cap: [Empty];
Revised cap: $634,010.
Name of Institution: Bayview Loan Servicing, LLC;
Original cap: $44,260;
Adjustments to cap: [Empty];
Revised cap: $44,260.
Name of Institution: Lake National Bank;
Original cap: $100;
Adjustments to cap: [Empty];
Revised cap: $100.
Name of Institution: IBM Southeast Employees' Federal Credit Union;
Original cap: $870;
Adjustments to cap: [Empty];
Revised cap: $870.
Name of Institution: Total;
Original cap: $16,237,450;
Adjustments to cap: $2,422,620;
Revised cap: $18,660,070.
Source: Treasury, OFS.
Note: Where Treasury has made no adjustments to the cap, we have listed
the same amount for the revised cap as the amount listed for the
original cap.
[End of table]
[End of section]
Appendix II: Comments from the Department of the Treasury:
Department Of The Treasury:
Assistant Secretary:
Washington, D.C. 20220:
July 20, 2009:
Thomas J. McCool:
Director, Center for Economics Applied Research and Methods:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. McCool:
The Treasury Department (Treasury) appreciates the opportunity to
review the GAO's latest report on Treasury's Troubled Assets Relief
Program, entitled Home Affordable Modification Program. Treasury
welcomes the recognition by the GAO that "The design of the first-lien
modification program, which has been designed to reduce borrowers'
mortgage payments to affordable levels by modifying their loans, does
appear to largely meet the act's goals," as we continue to implement
the Home Affordable Modification Program (HAMP) as part of the
Administration's broad commitment to strengthening our nation's housing
market. There is important work ahead, and we will consider the GAO's
recommendations seriously as we move forward.
The current foreclosure crisis requires immediate aggressive action.
The speed with which HAMP has been announced and implemented represents
an enormous undertaking. This Administration has acted quickly to
confront the economic challenges facing our economy and our housing
market. Within weeks of assuming office, President Obama worked with
Congress to enact the largest economic recovery plan since World War
II. Shortly after signing the American Recovery and Reinvestment Act,
the President announced Making Home Affordable (MHA), a critical
element of our Financial Stability Plan.
Making Home Affordable is a comprehensive plan to stabilize the U.S.
housing market and offer assistance to millions of homeowners by
reducing mortgage payments and preventing avoidable foreclosures. The
President's plan includes the Home Affordable Modification Plan (HAMP),
which commits $50 billion of TARP funds to loan modifications that will
provide sustainably affordable mortgage payments for millions of
borrowers.
President Obama announced MHA within a month of taking office. Just two
weeks after announcing the program on Feb. 18th, the Administration
published detailed program guidelines for HAMP and authorized servicers
to begin doing modifications immediately. The first servicer contracts
were signed on April 13, 2009. While many challenges remain, our
progress in implementing HAMP to date has been substantial. As of July
20, 2009, we have signed contracts with 27 servicers. Between loans
covered by these servicers and loans owned or guaranteed by the GSEs,
more than 85 percent of all mortgage loans in the country are now
covered by the program. Over 325,000 modification offers have been
extended and over 160,000 trial modifications are underway. Already,
MHA has been more successful than any previous program to encourage
mortgage modifications for at risk borrowers.
We recognize that challenges remain in implementation and scaling of
the program, and are committed to working with the servicers to
overcome those challenges and reach as many borrowers as possible. The
recommendations in GAO's latest report are constructive as Treasury
continues to implement its financial stability programs and enhance OFS
performance. The GAO recommendations also track several initiatives
that Treasury is already undertaking.
As the report indicates, there are many uncertainties inherent in
making projections about participation, cost and performance for a
program that is unprecedented in size, scope, and goals. There has
never before been a government program designed to incentivize mortgage
modifications and help struggling homeowners on the scale of the HAMP
program. As the program progresses, we plan on actively evaluating the
program, testing key assumptions, and updating cost and participation
estimates. We also plan to continue to assess servicers' capacity to
meet requirements of the HAMP program and to work aggressively with
servicers to ensure that capacity, implementation and compliance
requirements are met. We recognize that a strong compliance system is
critical to program effectiveness, and are committed to finalizing our
compliance processes as a top priority of the program.
As a part of our efforts to expedite implementation of the MHA program,
Secretaries Geithner and Donovan recently wrote a letter to the CEOs of
all of the servicers currently participating in the MHA program. The
letter requested that the CEOs designate a senior liaison, authorized
to make decisions on behalf of the CEO, to work directly with us on all
aspects of MHA and attend a program implementation meeting with senior
HUD and Treasury officials on July 28, 2009. In addition, the letter
outlined the following three key implementation steps: (1) On August
4th, Treasury will begin publicly reporting results by servicer under
the program; (2) In order to minimize the likelihood that borrower
applications are overlooked or that applicants are inadvertently denied
a modification, Treasury has also asked Freddie Mac, in its role as
compliance agent, to develop a "second look" process pursuant to which
Freddie Mac will audit a sample of MHA modification applications that
have been declined; and (3) Treasury will work with servicers to set
more exacting operational metrics to measure the performance of the
program, such as average borrower wait time for inbound borrower
inquiries, the completeness and accuracy of information provided to
applicants, document handling, and response time for completed
applications.
Treasury has implemented and continues to adapt an extensive and robust
internal control system for RAMP. In response to our discussions about
the program with GAO and others, we will continue to assess and
implement changes to features of the program to improve its ability to
assist the greatest number of borrowers most in need of assistance at
the least cost to taxpayers. Lastly, Treasury continues to staff its
positions in the Homeownership Preservation Office as quickly as
possible. All director-level positions have been filled, and additional
staff continues to be added on a regular basis.
Once again, Treasury appreciates the opportunity to review the report
and GAO's thoughtful recommendations. We look forward to demonstrating
further progress as program implementation continues.
Sincerely,
Signed by:
Herbert M. Allison, Jr.
Assistant Secretary for Finance Stability:
[End of section]
Appendix III: 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, Susan Offutt (Chief
Economist); Lynda Downing, Harry Medina, John Karikari (Lead Assistant
Directors); and Tania Calhoun, Emily Chalmers, Rachel DeMarcus,
Christopher Klisch, Damian Kudelka, Marc Molino, Mary Osorno, Julie
Trinder, Winnie Tsen, and Jim Vitarello made important contributions to
this report.
[End of section]
Related GAO Products:
Troubled Asset Relief Program: June 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-658]. Washington, D.C.: June 17,
2009.
Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date. [hyperlink,
http://www.gao.gov/products/GAO-09-553]. Washington, D.C.: April 23,
2009.
Small Business Administration's Implementation of Administrative
Provisions in the American Recovery and Reinvesment Act. [hyperlink,
http://www.gao.gov/products/GAO-09-507R]. Washington, D.C.: April 16,
2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-504]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for the Period October 28, 2008 through March 20, 2009 and Information
on Financial Agency Agreements, Contracts, and Blanket Purchase
Agreements Awarded as of March 13, 2009. [hyperlink,
http://www.gao.gov/products/GAO-09-522SP]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-539T]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-484T]. Washington, D.C.: March 19,
2009.
Federal Financial Assistance: Preliminary Observations on Assistance
Provided to AIG. [hyperlink, http://www.gao.gov/products/GAO-09-490T].
Washington, D.C.: March 18, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-474T]. Washington, D.C.: March, 11,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-417T]. Washington, D.C.: February
24, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-359T]. Washington, D.C.: February 5,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-296]. Washington, D.C.: January 30,
2009.
High-Risk Series: An Update. [hyperlink,
http://www.gao.gov/products/GAO-09-271]. Washington, D.C.: January 22,
2009.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. [hyperlink,
http://www.gao.gov/products/GAO-09-266T]. Washington, D.C.: December
10, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-247T].
Washington, D.C.: December, 5, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-242T].
Washington, D.C.: December 4, 2008.
Troubled Asset Relief Program: Status of Efforts to Address Defaults
and Foreclosures on Home Mortgages. [hyperlink,
http://www.gao.gov/products/GAO-09-231T]. Washington, D.C.: December 4,
2008.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. [hyperlink,
http://www.gao.gov/products/GAO-09-161]. Washington, D.C.: December 2,
2008.
[End of section]
Footnotes:
[1] Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C.
§§ 5201 et seq. The act originally authorized Treasury to purchase or
guarantee up to $700 billion in troubled assets. 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 under the act by almost $1.3 billion, from
$700 billion to $698.741 billion.
[2] See GAO, Troubled Asset Relief Program: Additional Actions Needed
to Better Ensure Integrity, Accountability, and Transparency,
[hyperlink, http://www.gao.gov/products/GAO-09-161 (Washington, D.C.:
Dec. 2, 2008); Troubled Asset Relief Program: Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-296 (Washington, D.C.: Jan. 30,
2009).
[3] [hyperlink, http://www.gao.gov/products/GAO-09-161]; [hyperlink,
http://www.gao.gov/products/GAO-09-296]; and GAO, Troubled Asset Relief
Program: March 2009 Status of Efforts to Address Transparency and
Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-504] (Washington, D.C.: Mar. 31,
2009); Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date, [hyperlink,
http://www.gao.gov/products/GAO-09-553] (Washington, D.C.: Apr. 23,
2009); and Troubled Asset Relief Program: June 2009 Status of Efforts
to Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-658](Washington, D.C.: June 17,
2009) for our past 60-day reports.
[4] Administrative Website for Servicers, Home Affordable Modification
Program, [hyperlink, https://www.hmpadmin.com/portal/index.html].
[5] GAO, Troubled Asset Relief Program: Status of Efforts to Address
Defaults and Foreclosures on Home Mortgages, [hyperlink,
http://www.gao.gov/products/GAO-09-231T] (Washington D.C.: Dec. 4,
2008).
[6] The GSEs--Fannie Mae and Freddie Mac--are private, federally
chartered companies created by Congress to, among other things, provide
liquidity to home mortgage markets by purchasing mortgage loans, thus
enabling lenders to make additional loans. To be eligible for purchase
by the GSEs, loans (and borrowers receiving the loans) must meet
specified requirements. In September 2008, Fannie Mae and Freddie Mac
were placed into federal government conservatorship.
[7] A pooling and servicing agreement is a contractual agreement for
the pooling (i.e., collection) of a large amount of individual mortgage
loans and the servicing of those loans by a servicer. A mortgage
pooling and servicing agreement describes how pooled loans will be
serviced and dictates how proceeds and losses will be distributed to
mortgage holders/investors, and may set forth loss-mitigation options
available to the servicer and the extent of the servicer's authority to
use these options.
[8] [hyperlink, http://www.gao.gov/products/GAO-09-161].
[9] On July 1, 2009, the Department of Housing and Urban Development
(HUD) announced that the maximum loan-to-value rate had been increased
to 125 percent.
[10] Loans held in private-label securitization trusts include loans
not insured or guaranteed by Fannie Mae, Freddie Mac, HUD's Federal
Housing Administration (FHA), the Department of Veterans Affairs (VA),
and rural housing loans. The $50 billion dollars will also be used for
activities other than loan modification as discussed in later sections
of this report.
[11] Any funds provided by Treasury to the GSEs under the funding
commitments, while not under TARP, will be funded, like TARP, through
the issuance of public debt. Any losses incurred by the GSEs in
relation to the additional $25 billion they provide would be financed
by Treasury (through issuance of public debt) through the funding
commitments to the extent that the GSEs have liabilities that exceed
assets.
[12] Unpaid principal balance limits (prior to modification) are
$729,750 for a 1-unit building; $934,200 for a 2-unit building;
$1,129,250 for a 3-unit building; and $1,403,400 for a 4-unit building.
[13] The mortgage, or front-end, debt-to-income ratio under the HAMP
first-lien component is the percentage of a borrowers income comprising
mortgage principal, interest, taxes, insurance, and association dues.
[14] Congressional Oversight Panel, The Foreclosure Crisis: Working
Towards a Solution (Washington, D.C., Mar. 6, 2009).
[15] As noted above, the act authorized Treasury to purchase troubled
assets from financial institutions. The act defines troubled assets to
include both certain residential or commercial mortgages and securities
based on such mortgages, and any other financial instrument that the
Secretary determines needs to be purchased to promote financial market
stability. Sections 101 and 3(9) of the Emergency Economic
Stabilization Act. Under HAMP, Treasury, acting through its financial
agent, enters into contracts with servicers that are financial
institutions to purchase financial instruments under which the
servicers commit to modify mortgages and to receive and make payments
in accordance with specified criteria. To participate in HAMP, the
servicer is required to enter into a Commitment to Purchase Financial
Instrument and Servicer Participation Agreement with Fannie Mae, acting
as Treasury's financial agent. We are planning to analyze these
agreements in future work.
[16] The HOPE for Homeowners program was created by Congress under the
Housing and Economic Recovery Act of 2008. The program, which was put
in place in October 2008, is administered by the Federal Housing
Administration under HUD and is designed to help those at risk of
default and foreclosure refinance into more affordable, sustainable
loans.
[17] HAMP is designed to commit a combined total of $75 billion in GSE
and TARP funds to offer assistance to up to 3 to 4 million borrowers.
The estimate of 2-2.6 million first-lien modifications is approximately
two-thirds of the estimated total 3 to 4 million first-lien
modifications to be offered assistance under the combined program.
[18] Mortgage holders/investors can include servicers/lenders that own
whole mortgages within their portfolio, as well as individuals or
institutions that invest in pools of securitized mortgages.
[19] HAMP Supplemental Directive 09-01, Introduction of the Home
Affordable Modification Program (Apr. 6, 2009).
[20] Making Home Affordable, Help for America's Homeowners, [hyperlink,
http://makinghomeaffordable.gov/].
[21] Administrative Web site for Servicers, Home Affordable
Modification Program, [hyperlink,
https://www.hmpadmin.com/portal/index.html].
[22] This information has been reported to Treasury's financial agent
by participating servicers. Treasury has not validated the number of
trial modification offers extended or the number of trial modifications
begun.
[23] According to Treasury, the initial cap allocations were based on
publicly available data, or data submitted by the servicers once
admitted to the program, and reflect Treasury's estimated cost to be
paid by each servicer for modifications. For initial caps, set with
publicly available information, the caps have been updated using more
complete data on the servicer's mortgage portfolio. All servicer caps
will be reassessed on a quarterly basis using data on the actual number
of modifications made by the servicer under the program.
[24] According to Supplemental Directive 09-01, if the modified
interest rate is below the interest rate cap, this reduced rate will be
in effect for the first 5 years followed by annual increases of 1
percent per year (or such lesser amount as may be needed) until the
interest rate reaches the interest rate cap, at which time it will be
fixed for the remaining loan term. If the resulting rate exceeds the
interest rate cap, then that rate is the permanent rate. The directive
defines the interest rate cap as the Freddie Mac Weekly Primary
Mortgage Market Survey rate for 30-year fixed-rate conforming loans,
rounded to the nearest 0.125 percent, as of the date the agreement is
prepared (the March HAMP guidelines define the interest rate cap as the
lesser of this survey rate or the fully indexed and fully amortizing
original contractual rate).
[25] The NPV test compares the expected cash flow from the loan if a
modification were to be made using program guidelines against the
expected cash flow from the loan if no modification were to be made and
the loan remained in default or became current again.
[26] The principal forbearance amount 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.
[27] According to program guidelines, servicers must determine whether
a borrower is at imminent risk of default based on their own servicing
standards. Potentially eligible hardships leading to imminent default
may include, among others, job loss, income reduction, or an interest
rate reset that makes mortgage payments unaffordable.
[28] The Internal Revenue Service has ruled that if a homeowner
benefits from pay-for-performance success payments under HAMP, the
payments are excludable from income under a specified exclusion. Rev.
Rul. 2009-19, 2009 FED 46,412.
[29] Compensation for mortgage payment reduction matching and
incentives may not be remitted until the completion of a successful
trial modification period.
[30] GAO, Information on Recent Default and Foreclosure Trends for Home
Mortgages and Associated Economic and Market Developments, [hyperlink,
http://www.gao.gov/products/GAO-08-78R] (Washington, D.C.: Oct. 16,
2007).
[31] The total household debt-to-income ratio is a comparison of the
borrower's total monthly debt payments (such as monthly housing
payments, any mortgage insurance premiums, payments on all installment
debts, monthly payments on all junior liens, alimony, car lease
payments, aggregate negative net rental income from all investment
properties owned, and monthly mortgage payments for second homes) to
the borrower's monthly gross income.
[32] GAO, Troubled Asset Relief Program: Status of Efforts to Address
Defaults and Foreclosures on Home Mortgages, [hyperlink,
http://www.gao.gov/products/GAO-09-231T] (Washington, D.C.: Dec. 4,
2008).
[33] HAMP Supplemental Directive 09-01. The counseling letter also
informs borrowers that housing counseling is free of charge for the
borrower.
[34] The Homeowners HOPE hotline is operated by the Homeownership
Preservation Foundation--a nonprofit organization that currently has a
network of nine HUD-certified housing counseling agencies from across
the United States that offer free housing counseling to callers.
[35] NeighborWorks America is an organization chartered by Congress
that has been appropriated $410 million in federal funds to operate the
National Foreclosure Mitigation Counseling Program. Consolidated
Appropriations Act of 2008, Pub. L. No. 110-161, Div. I, Title III, 121
Stat. 1844, 2441 (2007) ($180 million); Economic Recovery Act of 2008,
Pub. L. No. 110-289, Div. B, Title III, § 2305, 122 Stat. 2654, 2859
(2008) ($180 million); and Omnibus Appropriations Act of 2009, Pub. L.
No. 111-8, Div. I, Title III, 123 Stat. 524, 982 (2009) ($50 million).
Counseling from a HUD-approved counselor typically includes advice on
defaults, foreclosures, and credit issues.
[36] As discussed later in this report, Treasury's custodian for TARP,
Bank of New York-Mellon, will remit all payments under HAMP to
servicers. Servicers are then responsible for distributing payments
consistent with program guidelines to borrowers' accounts and mortgage
holders/investors.
[37] Home foreclosures data (based on foreclosure inventories) are from
the National Delinquency Survey by Mortgage Bankers Association,
December 31, 2008. Negative equity is measured as properties with 5
percent or less equity to account for borrowers on the margin of being
underwater. The data are available for only 44 states. See Table 1,
Summary of December 2008 Negative Equity Data from First American
CoreLogic, March 4, 2009. Unemployment rate data are from the
Unemployment Rates for States, Bureau of Labor Statistics, [hyperlink,
http://www.bls.gov/lau/lastrk06.htm] for 2006 and [hyperlink,
http://www.bls.gov/lau/lastrk08.htm] for 2008. The percentage point
change in unemployment is used to reflect the change in the economic
status of borrowers in states.
[38] Under the HOPE for Homeowners program, new insured mortgages
cannot exceed 96.5 percent of the current LTV for borrowers whose
mortgage payments do not exceed 31 percent of their monthly gross
income and whose total household debt does not exceed 43 percent;
alternatively, the program allows for a 90 percent LTV for borrowers
with debt-to-income ratios as high as 38 (mortgage payment) and 50
percent (total household debt).
[39] We have previously discussed the interest rate cap.
[40] Jumbo loans, which are eligible for HAMP, are loans that exceed
the loan limits set by the GSEs and include conforming jumbo loans
(those that can be purchased by the GSEs but are priced higher than
nonjumbo loans).
[41] The data sources included Mortgage Bankers Association data for
securitized loans, FHFA reports on data for loans owned or guaranteed
by Fannie Mae and Freddie Mac, and loan data reported by industry
participants. According to the program guidelines, loans owned or
guaranteed by FHA, the Rural Housing Service, and VA will also be
included in the Making Home Affordable program. As already discussed,
loans owned or guaranteed by the GSEs are not modified using TARP funds
but are modified using GSE funds.
[42] Program officials indicated they had made projections of the
number of loans that would be at risk of defaults and foreclosures from
a number of sources, including the private and public sectors.
[43] See The State of the Nation's Housing 2009, Joint Center for
Housing Studies of Harvard University, 2009.
[44] On July 11, 2008, FDIC was named conservator of IndyMac Federal
Bank. Soon after, FDIC developed a loan modification program to convert
nonperforming mortgages owned or serviced by the bank into affordable
loans.
[45] According to FDIC, the redefault rate used in its NPV spreadsheet
was estimated per historical re-default experience for other
modification programs and a program specific projection.
[46] See Office of the Comptroller of the Currency and Office of Thrift
Supervision, OCC and OTS Mortgage Metrics Report: Disclosure of
National Bank and Federal Thrift Mortgage Loan Data First Quarter 2009,
June 2009. This report presents key data on first lien residential
mortgages serviced by national banks and thrifts, focusing on mortgage
performance, loan modifications, payment plans, foreclosures, short
sales, and deed-in-lieu-of-foreclosure actions.
[47] For example, Treasury has not provided supporting documentation
for why a borrower response rate of 70 percent is reasonable. Also,
program officials have not provided detailed information and supporting
documentation for the program's projection of the proportion of the
existing total loans that would likely become at risk of foreclosure.
[48] [hyperlink, http://www.gao.gov/products/GAO-09-658].
[49] 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).
[50] Congressional Oversight Panel, March 2009. Loan workouts include
forbearance plans and loan modifications, which are options to avoid
foreclosure discussed previously in this report.
[51] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].
[52] HAMP Supplemental Directive 09-01 and Home Affordable Modification
Program (HAMP) Servicer Reporting Requirements.
[53] HOPE NOW is an alliance between counselors, mortgage companies,
investors, and other mortgage market participants to maximize outreach
efforts to homeowners in distress to help them stay in their homes and
creates a unified, coordinated plan to reach and help as many
homeowners as possible. The Department of the Treasury and the U.S.
Department of Housing and Urban Development encouraged leaders in the
lending industry, investors and non-profits to form this alliance.
[54] To help servicers implement HAMP, Fannie Mae issued a supplemental
directive concerning the collection of such data. HAMP Supplemental
Directive 09-02, Fair Housing Obligations under the Home Affordable
Modification Program (Apr. 21, 2009).
[55] Servicers who wish to service mortgages for Freddie Mac or Fannie
Mae must meet certain criteria before being approved to service these
loans. Eligibility requirements for both Freddie Mac and Fannie Mae
primarily include being able to service mortgages in a manner
acceptable to the GSE, meeting certain net worth requirements, agreeing
to provide audit records and financial statements, and meeting
specified insurance requirements.
[56] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].
[End of section]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "E-mail Updates."
Order by Phone:
The price of each GAO publication reflects GAO‘s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO‘s Web site,
[hyperlink, http://www.gao.gov/ordering.htm].
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional
information.
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
