Troubled Asset Relief Program
Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs Gao ID: GAO-10-634 June 24, 2010Congress created the Troubled Asset Relief Program (TARP) to, among other things, preserve homeownership and protect home values. In March 2009, the U.S. Department of the Treasury (Treasury) announced the Home Affordable Modification Program (HAMP) as its cornerstone effort to achieve these goals. This report examines (1) the extent to which HAMP servicers have treated borrowers consistently and (2) the actions that Treasury has taken to address the challenges of trial modification conversions, negative equity, redefaults, and program stability. GAO obtained information from 10 servicers that account for 71 percent of HAMP funds and spoke with Treasury, Fannie Mae, and Freddie Mac officials.
While one of Treasury's stated goals for HAMP was to standardize the loan modification process across the servicing industry, GAO found inconsistencies in how servicers were treating borrowers under HAMP that could lead to inequitable treatment of similarly situated borrowers. First, because Treasury did not issue guidelines for soliciting borrowers for HAMP until a year after announcing the program, servicers notified borrowers about HAMP anywhere from 31 days to more than 60 days after a delinquency. Many borrowers also complained that they did not receive timely responses to their HAMP applications and had difficulty obtaining information about the program. Treasury has recently issued guidelines on borrower communications, and plans to monitor compliance with the guidelines. Second, Treasury has emphasized the importance of reaching borrowers before they are delinquent but has not issued guidelines for determining when borrowers are in imminent danger of default. As a result, the 10 servicers that GAO contacted reported 7 different sets of criteria for determining imminent default. Third, while Treasury required servicers to have internal quality assurance procedures to ensure compliance with HAMP requirements, Treasury did not specify how loan files should be sampled for review or what the reviews should contain. As a result, some servicers did not review trial modifications or HAMP denials as part of their quality assurance procedures. Fourth, Treasury has not specified which HAMP complaints should be tracked, and several servicers track only certain types of complaints. Fifth, Treasury has not clearly informed borrowers that the HOPE Hotline can be used to raise concerns about servicers' handling of HAMP loan modifications and to challenge potentially incorrect denials, likely limiting the number of borrowers who have used the hotline for these purposes. Finally, Treasury does not have clear consequences for servicers that do not comply with program requirements, potentially leading to inconsistencies in how instances of noncompliance are handled.
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: Mathew J. Scire Team: Government Accountability Office: Financial Markets and Community Investment Phone: (202) 512-6794GAO-10-634, Troubled Asset Relief Program: Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
June 2010:
Troubled Asset Relief Program:
Further Actions Needed to Fully and Equitably Implement Foreclosure
Mitigation Programs:
GAO-10-634:
GAO Highlights:
Highlights of GAO-10-634, a report to congressional committees.
Why GAO Did This Study:
Congress created the Troubled Asset Relief Program (TARP) to, among
other things, preserve homeownership and protect home values. In March
2009, the U.S. Department of the Treasury (Treasury) announced the
Home Affordable Modification Program (HAMP) as its cornerstone effort
to achieve these goals. This report examines (1) the extent to which
HAMP servicers have treated borrowers consistently and (2) the actions
that Treasury has taken to address the challenges of trial
modification conversions, negative equity, redefaults, and program
stability. GAO obtained information from 10 servicers that account for
71 percent of HAMP funds and spoke with Treasury, Fannie Mae, and
Freddie Mac officials.
What GAO Found:
While one of Treasury‘s stated goals for HAMP was to standardize the
loan modification process across the servicing industry, GAO found
inconsistencies in how servicers were treating borrowers under HAMP
that could lead to inequitable treatment of similarly situated
borrowers. First, because Treasury did not issue guidelines for
soliciting borrowers for HAMP until a year after announcing the
program, servicers notified borrowers about HAMP anywhere from 31 days
to more than 60 days after a delinquency. Many borrowers also
complained that they did not receive timely responses to their HAMP
applications and had difficulty obtaining information about the
program. Treasury has recently issued guidelines on borrower
communications, and plans to monitor compliance with the guidelines.
Second, Treasury has emphasized the importance of reaching borrowers
before they are delinquent but has not issued guidelines for
determining when borrowers are in imminent danger of default. As a
result, the 10 servicers that GAO contacted reported 7 different sets
of criteria for determining imminent default. Third, while Treasury
required servicers to have internal quality assurance procedures to
ensure compliance with HAMP requirements, Treasury did not specify how
loan files should be sampled for review or what the reviews should
contain. As a result, some servicers did not review trial
modifications or HAMP denials as part of their quality assurance
procedures. Fourth, Treasury has not specified which HAMP complaints
should be tracked, and several servicers track only certain types of
complaints. Fifth, Treasury has not clearly informed borrowers that
the HOPE Hotline can be used to raise concerns about servicers‘
handling of HAMP loan modifications and to challenge potentially
incorrect denials, likely limiting the number of borrowers who have
used the hotline for these purposes. Finally, Treasury does not have
clear consequences for servicers that do not comply with program
requirements, potentially leading to inconsistencies in how instances
of noncompliance are handled.
In March 2010, GAO reported that Treasury faced several additional
challenges as it continued to implement HAMP, including (1) converting
trial modifications to permanent status, (2) addressing the growing
issue of negative equity, (3) reducing redefaults among borrowers with
modifications, and (4) ensuring program stability and effective
management. While Treasury has taken some steps to address these
challenges, it urgently needs to finalize and implement remaining
program components and ensure the transparency and accountability of
these efforts. First, Treasury has taken steps to increase the number
of conversions to permanent modifications, but conversion rates
continue to be low. As of the end of May 2010, servicers had converted
only 347,000 temporary modifications (31 percent of the total
eligible) to permanent status. In addition, as servicers focused on
conversions, the number of new trial modifications declined. Roughly
30,000 trial modifications were started in May 2010, down from nearly
63,000 in March 2010. Second, Treasury also announced a principal
forgiveness component for HAMP to assist borrowers with negative
equity; however, this program will be voluntary, and Treasury will
need to quickly implement reporting of when servicers consider
principal forgiveness but choose not to offer it. Such reporting must
provide sufficient program transparency and address potential
questions of whether borrowers are treated equitably. Third, to help
limit redefaults, Treasury requires that borrowers with high total
debt agree to obtain counseling. In July 2009, GAO recommended that
Treasury monitor and assess the effectiveness of this requirement.
However, borrowers continue to have high total debt-to-income ratios
(64 percent) after HAMP modifications, underscoring the importance of
monitoring and assessing HAMP‘s counseling requirement. Finally, GAO
has recommended that Treasury give high priority to staffing the
office responsible for overseeing HAMP implementation and evaluating
staffing levels and competencies. However, Treasury has reduced
staffing levels in this office from 36 to 29 full-time positions. GAO
believes that having sufficient staff is critical to Treasury‘s
ability to design and implement HAMP-funded programs quickly and
effectively. For example, Treasury has been slow to implement its
previously announced programs, including its second-lien modification
and foreclosure alternatives programs. Because the number of
foreclosures has remained high, Treasury has announced additional HAMP
components that must be prudently designed and implemented as
expeditiously as possible (see table 1). These include the previously
discussed principal reduction component of HAMP, a forbearance program
for unemployed borrowers, a new Federal Housing Administration
refinance program, and a program to fund efforts to preserve
homeownership and protect home values in the 10 states hardest hit by
the foreclosure crisis.
Going forward, as Treasury continues to design and implement new HAMP-
funded programs, it will be important to develop sufficient capacity”
including staffing resources”to plan and implement programs, establish
meaningful performance measures, and make appropriate risk
assessments. In particular, Treasury needs to establish performance
measures and goals for all HAMP-funded programs so that Treasury
officials and others can effectively assess the design and outcomes of
these programs and Congress can provide effective oversight.
Treasury‘s HAMP program is part of an unprecedented response to a
particularly difficult time in our nation‘s mortgage markets that has
left many homeowners struggling. As part of its ongoing oversight of
TARP, GAO will continue to monitor Treasury‘s implementation and
management of HAMP and other programs designed to help homeowners and
their communities.
Table 1: HAMP-Funded Programs:
Program: HAMP First-Lien Modification;
Program description: First-lien loan modifications;
Program status:
* Announced in March 2009;
* Implemented in April 2009;
* 109 servicers have signed agreements;
* More than 1.2 million trials started--340,000 active permanent
modifications, 468,000 active trials, 430,000 trial cancellations, and
6,400 permanent modification cancellations through May 2010;
* More than $132 million disbursed in incentive payments as of May 17,
2010.
Program: HAMP Second-Lien Modification;
Program description: Second-lien loan modifications for HAMP first-
lien borrowers;
Program status:
* Announced in March 2009;
* Implemented in March 2010;
* 7 servicers have signed agreements;
* No incentive payments have been made as of May 17, 2010;
* Expected cost and number of borrowers to be helped unknown.
Program: Home Affordable Foreclosure Alternatives;
Program description: Incentives for short sales or deeds-in-lieu of
foreclosure;
Program status:
* Announced in March 2009;
* Implemented in April 2010;
* No incentive payments have been made as of May 17, 2010;
* Expected cost and number of borrowers to be helped unknown.
Program: HFA Hardest-Hit Fund;
Program description: Funding for state housing finance agencies in the
10 states hardest-hit by the foreclosure crisis;
Program status:
* Announced in February and March 2010;
* Implementation date yet to be determined;
* $2.1 billion designated for 10 state HFAs;
* Expected number of borrowers to be helped unknown.
Program: HAMP Principal Reduction;
Program description: Principal reduction for HAMP-eligible borrowers
with high loan-to-value ratios;
Program status:
* Announced in March 2010;
* Estimated implementation by Fall 2010;
* Expected cost and number of borrowers to be helped unknown.
Program: HAMP Unemployed Borrowers;
Program description: Temporary principal forbearance for unemployed
borrowers;
Program status:
* Announced in March 2010;
* Estimated implementation in July 2010;
* No expected TARP funds and number of borrowers to be helped unknown.
Program: FHA Refinance;
Program description: Principal reduction and loan refinancing into an
FHA loan;
Program status:
* Announced in March 2010;
* Estimated implementation in Fall 2010;
* $14 billion designated, but number of borrowers to be helped unknown.
Source: Treasury.
[End of table]
What GAO Recommends:
GAO recommends that Treasury expeditiously move to establish (1)
specific imminent default criteria, (2) additional guidance for
servicers‘ quality assurance programs, (3) requirements for tracking
HAMP complaints, (4) communications to inform borrowers to use the
HOPE Hotline if they have incorrectly been denied HAMP, (5)
consequences for noncompliance with HAMP requirements, (6) reporting
of principal forgiveness activity, (7) performance measures and goals
for all HAMP-funded programs, and (8) a prudent design for remaining
programs. Treasury plans to provide the Congress a detailed
description of the actions it has taken and intends to take regarding
GAO‘s recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-10-634]or key
components. For more information, contact Mathew J. Scirč at (202) 512-
8678 or sciremj@gao.gov.
[End of section]
Contents:
Letter:
Background:
Servicers' Solicitation and Evaluation of Borrowers for HAMP Have Been
Inconsistent, and More Treasury Action Is Immediately Needed To Ensure
Equitable Treatment of Borrowers with Similar Circumstances:
Treasury Has Taken Steps to Address Conversion, Negative Equity,
Redefault, and Program Stability but Needs to Expeditiously Implement
a Prudent Design for Remaining HAMP-Funded Programs:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Treasury's Actions in Response to GAO's July 2009 HAMP
Recommendations:
Appendix III: Comments from the Department of the Treasury:
Appendix IV: GAO Contacts and Staff Acknowledgments:
Table:
Table 1: HAMP-Funded Programs:
Figures:
Figure 1: National Default and Foreclosure Trends, Calendar Years 1979-
2010:
Figure 2: Steps in the Escalation Process Available to Borrowers
through the HOPE Hotline:
Figure 3: Conversion Rates and Nonconversion Reasons for 10 HAMP
Servicers, through December 31, 2009:
Figure 4: GSE and Non-GSE HAMP Trial and Permanent Modifications Made
Each Month:
Abbreviations:
2MP: Second-Lien Modification Program:
FHA: Federal Housing Administration:
GPRA: Government Performance and Results Act of 1993:
GSE: government-sponsored enterprise:
HAFA: Home Affordable Foreclosure Alternatives Program:
HAMP: Home Affordable Modification Program:
HARP: Home Affordable Refinance Program:
HERA: Housing and Economic Recovery Act of 2008:
HFA: Housing Finance Agency:
HPDP: Home Price Decline Protection:
HPO: Homeownership Preservation Office:
HUD: Department of Housing and Urban Development:
MHA: Making Home Affordable:
MHA-C: Making Home Affordable-Compliance:
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:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
June 24, 2010:
Congressional Committees:
In response to the recent financial crisis, the federal government has
been seeking ways to help stem the wave of foreclosures and defaults
that has affected not only homeowners who have lost or are in danger
of losing their homes, but also neighborhoods, local businesses,
lenders, and investors. On October 3, 2008, the President signed into
law the Emergency Economic Stabilization Act of 2008 (the act) which,
among other things, called for the Department of the Treasury
(Treasury) to stabilize the financial markets, preserve homeownership,
and protect home values.[Footnote 1] The act authorized Treasury to
establish the $700 billion Troubled Asset Relief Program (TARP), which
initially focused on stabilizing financial markets and increasing
lending to businesses and consumers.[Footnote 2] Treasury initially
intended to purchase troubled mortgages and mortgage-related assets
and to use its ownership position to influence loan servicers and
achieve more aggressive mortgage modification standards. However,
within 2 weeks of the act's passage, Treasury determined it needed to
move more quickly to stabilize financial markets and announced it
would use $250 billion of TARP funds to inject capital directly into
qualified financial institutions by purchasing equity in them. On
February 18, 2009, Treasury announced the Home Affordability and
Stability Plan, which contained the framework for a mortgage
modification plan that later became the Home Affordable Modification
Program (HAMP). HAMP would use up to $50 billion in TARP funds to help
at-risk homeowners avoid potential foreclosure by modifying their
mortgages to reduce their monthly mortgage payments.
Under HAMP, Treasury's Office of Financial Stability (OFS) provides
financial incentives to servicers, borrowers, and mortgage holders (or
investors for loans that have been securitized and sold in the
secondary market) to modify loans that are not owned or guaranteed by
Fannie Mae or Freddie Mac.[Footnote 3] Treasury shares the cost of
reducing monthly payments on first-lien mortgages with mortgage
holders or investors. The initial descriptions of HAMP also identified
a number of subprograms--for example, to modify or pay off second-lien
loans for borrowers whose first mortgages were modified under HAMP and
to provide incentives to target specific groups of homeowners and
geographic areas that were especially hard hit by foreclosures. More
recently, in March 2010 Treasury announced additional HAMP-funded
programs to assist unemployed borrowers and borrowers who were
"underwater"--that is, those who owed more on their mortgages than the
value of their homes. Further, Treasury announced that up to $14
billion of the original $50 billion in TARP funds allocated for HAMP
would be put toward a refinancing program that would allow borrowers
to receive principal reductions and refinance into loans insured by
the Federal Housing Administration (FHA). Additionally, Treasury has
designated $2.1 billion of the $50 billion to be provided to 10 states
under the Housing Finance Agency (HFA) Innovation Fund for the Hardest-
Hit Housing Markets (HFA Hardest-Hit Fund) with the expectation that
the states will use this money to develop innovative programs that
meet the act's goals of preserving homeownership and protecting home
values. To date, most of the subprograms have yet to be implemented.
The act also requires GAO to conduct ongoing oversight of actions
taken under TARP and to report at least every 60 days on TARP
activities and performance.[Footnote 4] Under this statutory mandate,
we are continuing to report on Treasury's use of TARP funds to
preserve homeownership and protect home values. In July 2009, we
reported on Treasury's design and initial implementation of HAMP,
making a range of recommendations designed to improve HAMP's
transparency and accountability.[Footnote 5] In March 2010, we
testified on continued HAMP implementation challenges that threatened
the successful implementation of the program. This 60-day report
expands on our March 2010 testimony and examines (1) the extent to
which servicers have been treating borrowers consistently under HAMP
and the actions that Treasury and its financial agents have taken to
ensure consistent treatment of borrowers, and (2) the actions that
Treasury has taken to address the challenges involved in converting
trial modifications to permanent modifications, limiting potential
foreclosures among borrowers with negative equity, reducing the
likelihood of redefault among borrowers with permanent modifications,
and ensuring program stability and effective program management.
To examine these questions, we spoke with and obtained information
from 10 HAMP servicers of various sizes that collectively had been
designated 71 percent of the TARP funds allocated to participating
servicers to date and visited 6 of them. In addition, we reviewed the
HAMP program documentation that Treasury issued, including
supplemental directives for the first-lien program and announcements
of new HAMP-funded homeowner assistance programs. We obtained and
analyzed information from Treasury on servicer HAMP loan modification
activity. Our work focused on non-GSE HAMP activity using TARP funds,
but the information obtained from Treasury did not always break out
GSE and non-GSE activity. We also spoke with officials at Treasury and
its financial agents--Fannie Mae and Freddie Mac--to understand their
rationale for program changes, their efforts to ensure compliance with
HAMP guidelines, and their processes for resolving HAMP complaints. In
addition, we spoke to the administrators of the HOPE Hotline and
representatives of NeighborWorks, which funds a large network of
housing counselors, to learn more about the process for resolving HAMP-
related complaints.[Footnote 6] We also met with a trade association
that represents both investors and servicers, and an organization
representing a national coalition of community investment
organizations. Finally, we reviewed the Government Performance and
Results Act of 1993 (GPRA), and the Standards for Internal Control in
the Federal Government to determine the key elements needed to ensure
program stability and adequate program management.[Footnote 7] We
coordinated our work with other oversight entities that TARP created--
the Congressional Oversight Panel, the Office of the Special Inspector
General for TARP (SIGTARP), and the Financial Stability Oversight
Board.
We conducted this performance audit from August 2009 through June 2010
in San Francisco, Santa Ana, and Simi Valley, California; Littleton,
Colorado; West Palm Beach, Florida; Waterloo, Iowa; 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:
National default and foreclosure rates rose sharply from calendar year
2005 through 2009 to the highest level in at least 29 years (figure
1). Default rates declined slightly from the fourth quarter of 2009 to
the first quarter of 2010 but, at 4.91 percent, were still more than
six times higher than they were at the start of 2005. Foreclosure
start rates--the percentage of loans that entered the foreclosure
process each quarter--grew nearly three-fold in the 5-year period from
0.42 percent to 1.23 percent in the first quarter of 2010. Put another
way, more than half a million mortgages entered the foreclosure
process in the first quarter of 2010, compared with about 165,000 in
the first quarter of 2005. Finally, foreclosure inventory--the number
of houses for which the lender has initiated foreclosure proceedings
but has not yet sold the properties--rose more than 325 percent from
the first quarter of 2005 to the first quarter of 2010, increasing
from 1.08 percent to 4.63 percent, with most of that growth occurring
after the second quarter of 2007. As a result, as of the end of the
first quarter of 2010, more than 2 million loans were in the
foreclosure inventory.
Figure 1: National Default and Foreclosure Trends, Calendar Years 1979-
2010:
[Refer to PDF for image: multiple line graph]
This figure contains two multiple line graphs depicting the following
data:
The following periods of economic recession are indicated on the
graphs:
1980;
1982-83;
1991;
2001-2002;
Late 2007-2010.
Q1 1979:
Default: 0.47%;
Foreclosure Starts: 0.17%;
Foreclosure Inventory: 0.31%.
Q1 1980:
Default: 0.54%;
Foreclosure Starts: 0.14%;
Foreclosure Inventory: 0.32%.
Q1 1981:
Default: 0.66%;
Foreclosure Starts: 0.18%;
Foreclosure Inventory: 0.44%.
Q1 1982:
Default: 0.72%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.53%.
Q1 1983:
Default: 0.86%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.71%.
Q1 1984:
Default: 0.89%;
Foreclosure Starts: 0.2%;
Foreclosure Inventory: 0.68%.
Q1 1985:
Default: 0.98%;
Foreclosure Starts: 0.25%;
Foreclosure Inventory: 0.79%.
Q1 1986:
Default: 1.01%;
Foreclosure Starts: 0.25%;
Foreclosure Inventory: 0.87%.
Q1 1987:
Default: 1.04%;
Foreclosure Starts: 0.28%;
Foreclosure Inventory: 1.09%.
Q1 1988:
Default: 0.89%;
Foreclosure Starts: 0.29%;
Foreclosure Inventory: 1.07%.
Q1 1989:
Default: 0.83%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 0.95%.
Q1 1990:
Default: 0.7%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.97%.
Q1 1991:
Default: 0.78%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.97%.
Q1 1992:
Default: 0.8%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.04%.
Q1 1993:
Default: 0.77%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 1%.
Q1 1994:
Default: 0.75%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 0.94%.
Q1 1995:
Default: 0.7%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.86%.
Q1 1996:
Default: 0.68%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 0.95%.
Q1 1997:
Default: 0.55%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.08%.
Q1 1998:
Default: 0.6%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 1.17%.
Q1 1999:
Default: 0.6%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.22%.
Q1 2000:
Default: 0.55%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.17%.
Q1 2001:
Default: 0.66%;
Foreclosure Starts: 0.4%;
Foreclosure Inventory: 1.24%.
Q1 2002:
Default: 0.8%;
Foreclosure Starts: 0.45%;
Foreclosure Inventory: 1.51%.
Q1 2003:
Default: 0.83%;
Foreclosure Starts: 0.41%;
Foreclosure Inventory: 1.43%.
Q1 2004:
Default: 0.85%;
Foreclosure Starts: 0.46%;
Foreclosure Inventory: 1.29%.
Q1 2005:
Default: 0.81%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 1.08%.
Q1 2006:
Default: 0.95%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.98%.
Q1 2007:
Default: 0.95%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.28%.
Q1 2008:
Default: 1.56%;
Foreclosure Starts: 1.01%;
Foreclosure Inventory: 2.47%.
Q2 2008:
Default: 1.75%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 2.75%.
Q3 2008:
Default: 2.2%;
Foreclosure Starts: 1.07%;
Foreclosure Inventory: 2.97%.
Q4 2008:
Default: 3%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 3.3%.
Q1 2009:
Default: 3.39%;
Foreclosure Starts: 1.37%;
Foreclosure Inventory: 3.85%.
Q2 2009:
Default: 3.67%;
Foreclosure Starts: 1.36%;
Foreclosure Inventory: 4.3%.
Q3 2009:
Default: 4.38%;
Foreclosure Starts: 1.42%;
Foreclosure Inventory: 4.47%.
Q4 2009:
Default: 5.09%;
Foreclosure Starts: 1.2%;
Foreclosure Inventory: 4.59%.
Q1 2010:
Default: 4.91%;
Foreclosure Starts: 1.23%;
Foreclosure Inventory: 4.63%.
Source: GAO analysis of MBA data, National Bureau of Economic Research.
[End of figure]
As we reported in December 2008, Treasury has 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:
[Refer to PDF for image]
[End of figure]
* The Home Affordable Refinance Program (HARP), which provides a
refinancing vehicle for homeowners who are current on their mortgage
payments with mortgages held or guaranteed by Fannie Mae and Freddie
Mac, interest rates higher than the prevailing market rates, and loan-
to-value ratios of between 80 and 105.[Footnote 9] Using the
prevailing interest rates in February 2009, Treasury estimated that
between four and five million borrowers could refinance their
mortgages through this program. No TARP funds will be used to
refinance these loans. Instead, Fannie Mae or Freddie Mac, as the
owner or guarantor of the loan, purchased or guaranteed the refinanced
mortgages. The program has resulted in relatively few refinances--
between February 2009 and March 2010, fewer than 292,000 borrowers
were refinanced through this program. In March 2010, the program's end
date was extended from June 10, 2010, to June 30, 2011.
* An increased funding commitment from Treasury for preferred stock
purchases from Fannie Mae and Freddie Mac to strengthen confidence in
the two government-sponsored enterprises (GSE) and help support low
mortgage rates. The preferred stock purchase agreements, authorized by
the Housing and Economic Recovery Act of 2008 (HERA), were amended in
May 2009 to increase Treasury's commitment to each GSE from $100
billion to $200 billion. On December 24, 2009, the preferred stock
purchase agreements were again amended with the provision that the
$200 billion cap increase as necessary. The increased funding
commitment would be made under HERA and would not require the use of
TARP funds. Through March 2010, the cumulative reduction in the net
worth of the two GSEs required them to draw $111 billion from the
Treasury under the senior preferred stock purchase agreements. In May
2010, the Federal Housing Finance Agency requested an additional $10.6
billion in Treasury assistance for Freddie Mac and an additional $8.4
billion for Fannie Mae.
* HAMP, which was designed to commit up to $75 billion of GSE and TARP
funds to offer loan modifications to up to three to four million
borrowers who were struggling to pay their mortgages. According to
Treasury officials, HAMP would use up to $50 billion of TARP funds,
primarily to encourage the modification of non-GSE mortgages that
financial institutions owned and held in their portfolios (whole
loans) and mortgages held in private label securitization trusts.
[Footnote 10] Fannie Mae and Freddie Mac together 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.
[Footnote 11]
As outlined in the March 4, 2009, program guidelines, HAMP's
eligibility requirements for first-lien modifications stipulate that:
* 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 property (one to four units)
with a maximum unpaid principal balance on the unmodified first-lien
mortgage that is equal to or less than $729,750 (for a one-unit
property);[Footnote 12]
* the loan must have been originated on or before January 1, 2009;
* the borrower must complete a HAMP Hardship Affidavit documenting a
financial hardship; and:
* the first-lien mortgage payment must be more than 31 percent of the
homeowner's gross monthly income.[Footnote 13]
* The HAMP first-lien modification program has four main features:
1. Cost sharing. Mortgage holders and 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. For non-GSE loans,
Treasury will then use TARP funds to match further reductions on a
dollar-for-dollar basis, down to the target of 31 percent of the
borrower's gross monthly income. The modified monthly payment is fixed
for 5 years or until the loan is paid off, whichever is earlier, as
long as the borrower remains in good standing with the program. After
5 years, investors no longer receive payments for cost sharing, and
the borrowers' interest rate may increase by 1 percent a year to a cap
of the Freddie Mac rate for 30-year fixed rate loans as of the date
that the modification agreement was prepared, and the borrower's
payments would increase to accommodate the increase in interest rate.
The interest rate and monthly payments are then fixed for the
remainder of the loan.
2. Standardized net present value (NPV) model. The NPV model compares
expected cash flows from a modified loan to the same loan with no
modification, based on certain assumptions. If the expected investor
cash flow with a modification is greater than the expected cash flow
without a modification, the loan servicer is required to modify the
loan. According to Treasury, the NPV model increases mortgage
investors' confidence that modifications under HAMP are in their best
financial interests and helps ensure that borrowers are treated
consistently under the program by providing a transparent and
externally derived objective standard for all loan servicers to follow.
3. Standardized waterfall. Servicers must follow a sequential
modification process to reduce payments as close to 31 percent of
gross monthly income as possible. Servicers must first capitalize
accrued interest and certain expenses paid to third parties and add
this amount to the loan balance (principal) amount. Next, interest
rates must be reduced in increments of one-eighth percent until the 31
percent debt-to-income target is reached, but servicers may not reduce
interest rates below 2 percent. If the interest rate reduction does
not result in a debt-to-income ratio of 31 percent, servicers must
then extend the maturity and/or amortization period of the loan in 1-
month increments up to 40 years. Finally, if the debt-to-income ratio
is still over 31 percent, the servicer must forbear, or defer,
principal until the payment is reduced to the 31-percent target.
Servicers may also forgive mortgage principal at any step of the
process to achieve the target monthly payment ratio of 31 percent,
provided that principal reduction is allowed by the investor.[Footnote
14]
4. Incentive payment structure. Treasury will use HAMP funds to
provide both one-time and ongoing ("pay-for-success") incentives for
up to 5 years to non-GSE loan servicers, mortgage investors, and
borrowers to increase the likelihood that the program will produce
successful modifications over the long term and help cover the
servicers' and investors' costs of modifying a loan.
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 permanently modified and any government payments
are made under HAMP. Treasury has entered into agreements with Fannie
Mae and Freddie Mac to act as its financial agents for HAMP. Fannie
Mae, as the HAMP program administrator, is responsible for developing
and administering program operations including registering servicers
and executing participation agreements with and collecting data from
them. A separate division within Freddie Mac, the Making Home
Affordable-Compliance (MHA-C) team is the HAMP compliance agent, and
is responsible for assessing servicer compliance with non-GSE program
guidelines, including conducting onsite and remote servicer reviews
and audits.
Status of HAMP First-Lien Modification Program:
As of mid-June 2010, 109 active servicers had signed HAMP Servicer
Participation Agreements to modify first-lien mortgages not owned or
guaranteed by Fannie Mae and Freddie Mac.[Footnote 15] Roughly $39.9
billion in TARP funds has been committed to these servicers for
modification of non-GSE loans. Based on the HAMP Servicer Performance
Report through May 2010, more than 1.5 million HAMP trial
modifications had been offered to borrowers of GSE and non-GSE loans,
and more than 1.2 million of these had begun HAMP trial modifications.
[Footnote 16] Of the trial modifications begun, approximately 468,000
were in active trial modifications, roughly 340,000 were in active
permanent modifications, roughly 430,000 trial modifications had been
canceled, and roughly 6,400 permanent modifications had been canceled.
As of May 17, 2010, more than $132 million in TARP funds had been
disbursed to HAMP servicers.
Borrowers who received permanent first-lien HAMP modifications had
high levels of total debt and high loan-to-value ratios. Through the
end of May 2010, borrowers receiving permanent HAMP modifications had
a median back-end debt ratio (the ratio of total monthly debts to
gross monthly income) of roughly 80 percent prior to loan
modification. The median reduction in monthly mortgage payments as a
result of HAMP was roughly $514, which reduced these borrowers' median
back-end debt-to-income ratio to 64 percent. In addition, according to
Fannie Mae, through mid-April 2010, many borrowers continued to be
underwater after a HAMP modification, with an average loan-to-value
ratio more than 150 percent.
Recently Announced HAMP-Funded Programs:
In addition to first-lien modifications, in March 2010 Treasury issued
revised guidelines for the second-lien modification program under HAMP
(2MP), as well as the Home Affordable Foreclosures Alternatives
Program (HAFA). However, Treasury has not stated how much of the $50
billion in TARP funds these two programs are expected to use. 2MP
provides incentives to investors, servicers, and borrowers for the
modification of second liens if the first lien has been modified under
HAMP. Under 2MP, servicers who sign agreements to participate in the
program must modify, partially extinguish, or fully extinguish second
liens where the first lien has been modified under HAMP. As of June
2010, seven servicers had signed up for 2MP, and at least one of these
servicers has initiated trial modifications for second liens.
According to Treasury, four of these seven servicers hold more than 50
percent of all second liens. Regarding HAFA, as of April 5, 2010, non-
GSE servicers could also begin offering foreclosure alternatives, such
as short sales and deeds-in-lieu, in cases where the servicer was
unable to approve the borrower for HAMP, the borrower did not accept a
HAMP trial modification, or the borrower defaulted on a HAMP
modification. The program provides incentive payments to investors,
servicers, and borrowers for completing these foreclosure alternatives
in lieu of foreclosure.[Footnote 17]
In March 2010, Treasury announced four additional HAMP-funded
programs--one for principal reduction under HAMP, one for temporary
forbearance for unemployed borrowers, an FHA refinancing program and
the HFA Hardest-Hit Fund. Principal reduction and temporary
forbearance for unemployed borrowers could be implemented in the
summer of 2010, and the FHA refinancing program in the fall, but
implementation of the HFA Hardest-Hit Fund programs will vary by state.
* The principal reduction program under HAMP will require servicers to
consider principal reduction for HAMP-eligible borrowers with loan-to-
value ratios greater than 115 percent. Treasury has not yet finalized
the potential amount of TARP funds that will be spent on this HAMP
program or the number of borrowers expected to receive principal
reductions. Initial program guidelines were issued in June 2010 and
the program is expected to be effective for participating HAMP
servicers in the fall of 2010.
* Under the plan for temporary forbearance for unemployed borrowers,
which will be effective July 1, 2010, servicers will be required to
consider unemployed borrowers for a forbearance plan to reduce
mortgage payments to an affordable level for the lesser of 3 months or
upon notification that the borrower has become reemployed. To be
considered, unemployed borrowers must request forbearance before
falling behind on three monthly mortgage payments. The servicers must
offer forbearance if the borrower's monthly mortgage payments exceed
31 percent of monthly gross income, including unemployment benefits.
Treasury has not established how many borrowers are likely to be
helped with this feature. Once the borrower has found employment, or
30 days before the forbearance period has expired, the servicer must
evaluate the borrower for eligibility for a HAMP first-lien
modification. According to Treasury, there will be no HAMP incentive
payments made for these forbearance plans, so the program will not
require TARP funds. Missed payments during the forbearance period are
capitalized, and servicers may not collect late fees during the
forbearance period. According to Treasury, representatives of
investors and the four largest servicers, some servicers are already
offering similar forbearance programs to unemployed borrowers.
* The new FHA refinance program will be designated a maximum of $14
billion of the $50 billion originally intended for HAMP and will be a
voluntary program for servicers. However, if servicers choose this
option, they must reduce borrowers' original first-lien principal by
at least 10 percent, and the resulting ratio of all mortgage debt,
including junior liens, to the value of the house can be no greater
than 115 percent. The principal balance of the refinanced first-lien
loan cannot exceed 97.75 percent of the home's value. The borrower
must be current on existing mortgage payments to qualify and have a
credit score of at least 500. The terms and uses of the $14 billion
have yet to be specified.
* The HFA Hardest-Hit Fund designated $2.1 billion out of the $50
billion originally intended for HAMP to 10 state housing finance
agencies to develop more localized programs to preserve homeownership
and protect home values. As of mid-May 2010, Treasury was in the
process of reviewing program proposals submitted by the first five
housing finance agencies that received funding and expected to receive
proposals from the second five state agencies on June 1, 2010.
However, according to initial proposals, some program efforts may
require significant implementation periods. For example, one state
agency reported that some of its program features may not be available
until 5 months after Treasury approves the program.
* As shown in table 1, the implementation dates for a number of the
HAMP-funded homeowner assistance programs have not yet been specified,
and Treasury has not announced how many borrowers the programs are
expected to help. With the exception of the HFA Hardest-Hit Fund, the
cutoff date for borrowers to be accepted into any of the HAMP-funded
programs is December 31, 2012, and disbursements of TARP funds may
continue until December 2017. The cutoff date and last possible
disbursement for the HFA Hardest-Hit Fund has yet to be determined.
Table 1: HAMP-Funded Programs:
Program: HAMP First-Lien Modification;
Program description: First-lien loan modifications;
Program status:
* Announced in March 2009;
* Implemented in April 2009;
* 109 servicers have signed agreements;
* More than 1.2 million trials started--340,000 active permanent
modifications, 468,000 active trials, 430,000 trial cancellations, and
6,400 permanent modification cancellations through May 2010;
* More than $132 million disbursed in incentive payments as of May 17,
2010.
Program: HAMP Second-Lien Modification;
Program description: Second-lien loan modifications for HAMP first-
lien borrowers;
Program status:
* Announced in March 2009;
* Implemented in March 2010;
* 7 servicers have signed agreements;
* No incentive payments have been made as of May 17, 2010;
* Expected cost and number of borrowers to be helped unknown.
Program: Home Affordable Foreclosure Alternatives;
Program description: Incentives for short sales or deeds-in-lieu of
foreclosure;
Program status:
* Announced in March 2009;
* Implemented in April 2010;
* No incentive payments have been made as of May 17, 2010;
* Expected cost and number of borrowers to be helped unknown.
Program: HFA Hardest-Hit Fund;
Program description: Funding for state housing finance agencies in the
10 states hardest-hit by the foreclosure crisis;
Program status:
* Announced in February and March 2010;
* Implementation date yet to be determined;
* $2.1 billion designated for 10 state HFAs;
* Expected number of borrowers to be helped unknown.
Program: HAMP Principal Reduction;
Program description: Principal reduction for HAMP-eligible borrowers
with high loan-to-value ratios;
Program status:
* Announced in March 2010;
* Estimated implementation by Fall 2010;
* Expected cost and number of borrowers to be helped unknown.
Program: HAMP Unemployed Borrowers;
Program description: Temporary principal forbearance for unemployed
borrowers;
Program status:
* Announced in March 2010;
* Estimated implementation in July 2010;
* No expected TARP funds and number of borrowers to be helped unknown.
Program: FHA Refinance;
Program description: Principal reduction and loan refinancing into an
FHA loan;
Program status:
* Announced in March 2010;
* Estimated implementation in Fall 2010;
* $14 billion designated, but number of borrowers to be helped unknown.
Source: Treasury.
[End of table]
Servicers' Solicitation and Evaluation of Borrowers for HAMP Have Been
Inconsistent, and More Treasury Action Is Immediately Needed To Ensure
Equitable Treatment of Borrowers with Similar Circumstances:
Although one of Treasury's stated goals for HAMP is to standardize the
loan modification process across the servicing industry, we identified
several areas of inconsistencies in how servicers treat borrowers
under HAMP. These areas of inconsistency could lead to inequitable
treatment of similarly situated borrowers, and borrowers in similar
circumstances could have different outcomes. First, we found that
servicers differed in when and how they solicited borrowers for HAMP,
and numerous borrowers had complained that they did not receive timely
responses to their HAMP applications or had difficulty getting
information from their servicers about the program. Until March 2010,
a year into the program, Treasury had only minimal requirements for
soliciting borrowers for HAMP and had yet to finalize comprehensive
measures that addressed servicers' performance in this area. Further,
Treasury had not issued specific guidelines for servicers on how to
determine whether borrowers current on their mortgage payments were in
imminent danger of default or for conducting internal quality
assurance reviews. Treasury also had not provided servicers with
specific requirements detailing how servicers should handle and track
borrowers' complaints about HAMP. As a result, some servicers that we
contacted did not systematically track all HAMP complaints or their
resolutions, and borrowers may not have been aware that an independent
escalation process existed to handle complaints about servicers or to
challenge HAMP eligibility denial determinations. Lastly, Treasury had
not yet determined specific remedies for servicer noncompliance with
HAMP program requirements--a key enforcement mechanism for ensuring
that servicers treated borrowers equitably under HAMP.
Treasury Has Taken Steps to Improve Servicer Communications with
Borrowers about HAMP but Issues Remain:
For the first year of the HAMP first-lien program, Treasury's key
guidance on its requirements for the initial outreach to or
solicitation of borrowers for participation in HAMP stated that
servicers should follow their existing practices for soliciting
borrowers. The 10 servicers we contacted reported varying practices,
with a few soliciting borrowers who were 31 days delinquent on
payments and some others not soliciting borrowers until borrowers were
at least 60 days delinquent on payments. However, even when servicers
said their practice was to solicit borrowers who were 60 days past
due, they very often did not. The proportion of borrowers who were 60
days delinquent on their mortgages and who were solicited for HAMP
ranged from 16 to 95 percent. On average, the 10 servicers we
contacted solicited approximately 60 percent of such borrowers.
[Footnote 18] Some servicers explained that they did not solicit
certain borrowers because, for example, the borrowers did not meet
basic eligibility criteria or because the investors for that
particular pool of mortgage-backed securities did not allow HAMP
modifications. However, as of December 2009, the MHA-C group within
Freddie Mac, the compliance agent for HAMP, identified four servicers
through their onsite Management Compliance Audits that could not
always provide evidence that borrowers who were potentially eligible
for HAMP had been solicited.
In March 2010, more than a year after the program was first announced,
Treasury issued additional guidelines governing solicitation efforts.
Effective June 2010, servicers must prescreen all first-lien loans
with two or more mortgage payments are due and unpaid to determine if
the loans meet the basic HAMP eligibility criteria (e.g. the home is
an owner-occupied, primary residence and a single family one-to-four
unit property; the loan originated before January 1, 2009; and the
loan balance is within specified limits). Servicers must make a
"reasonable effort" to solicit for HAMP any borrower who passes this
prescreening--that is, servicers must make a minimum of four telephone
calls to the borrower's last known phone number at different times of
the day and send two written notices, by different means, to the
borrower's last known address within 30 days. Because these are new
requirements, we could not determine how effective they might be in
standardizing solicitation practices, but standardizing solicitation
requirements may help ensure that all potentially eligible borrowers
are notified about HAMP in a timely manner.
Moreover, it appears that some borrowers had problems reaching their
servicers and obtaining information on the status of their
applications and on HAMP in general. For example, between the end of
June 2009 and mid-April 2010, approximately 27,000 of the more than
48,000 borrower complaints to the HOPE Hotline--a 24-hour telephone
line that provides borrowers with free foreclosure prevention
information and counseling--were about this issue. The most common
complaints involved the difficulty of reaching servicers or not
hearing back from them in a timely manner after submitting
documentation. During our visits to six HAMP servicers, we observed a
small sample of phone calls between borrowers and their servicers,
several of which involved complaints about the difficulty of
contacting servicers about HAMP. For example, four out of the nine
calls we observed at one of the large HAMP servicers involved
complaints related to servicers' communications with borrowers. These
included complaints that the servicer had lost documentation and that
the borrower was not able to speak with a representative knowledgeable
about the status of the HAMP application.
In October 2009 and in March 2010 Treasury implemented guidelines
attempting to address some of these issues. Guidelines issued in
October 2009 mandated that servicers acknowledge in writing the
receipt of borrowers' initial HAMP application packages within 10
business days and that they include in their responses a description
of their evaluation process and timeline for processing paperwork.
Additionally, in March 2010, servicers were required to include a toll-
free number in all communications with borrowers, which would allow
them to reach a representative capable of providing specific details
about the HAMP modification process. In April 2010, the Congressional
Oversight Panel recommended that Treasury monitor program participants
and enforce the new borrower outreach and communication standards and
timelines to increase program transparency.[Footnote 19] Treasury
plans to include the new program requirements in MHA-C's compliance
reviews of HAMP servicers, and it will be important for Treasury to
review findings from these reviews to determine whether these
requirements do improve servicers' communications with borrowers and
fully address differences among servicers in soliciting borrowers for
HAMP.
Treasury first drafted metrics to assess HAMP servicers' performance
in communicating with borrowers in October 2009, but these metrics
have not yet been finalized. In December 2009, Treasury requested that
nine of the largest HAMP servicers provide information on a revised
version of these metrics, and Treasury officials told us they were
using the results of this request to further revise the metrics to
ensure consistent and comparable responses.[Footnote 20] According to
Treasury, the preliminary metrics include measures such as the average
speed for answering loss mitigation calls and the number of attempts
made to contact each borrower who is in the initial stages of
foreclosure. Preliminary results showed inconsistencies among
servicers' responses that could indicate differences either in how
servicers were interpreting the questions or in how they treated
borrowers. In our July 2009 report, we noted that Treasury lacked
finalized performance measures for HAMP.[Footnote 21] Since then, the
Congressional Oversight Panel and SIGTARP have recommended that
Treasury collect additional program data and publicly report on the
metrics to ensure transparency and evaluate program success.[Footnote
22] Treasury officials told us they would continue to work with
servicers on their responses to these metrics to finalize them and
establish a common reporting standard. Treasury plans to collect these
metrics for the eight largest HAMP servicers and publicly disclose the
results in July 2010. Without establishing key performance metrics and
reporting of individual servicer performance with respect to those
metrics, Treasury cannot achieve full transparency and accountability
for the HAMP first-lien modification program results and progress.
Servicers May Be Inconsistently Treating Similarly Situated Borrowers
for HAMP Due to Treasury's Lack of Guidance on Determining Imminent
Default and Conducting Quality Assurance Reviews:
While Treasury's goal is to create uniform, clear, and consistent
guidance for loan modifications across the servicing industry, as we
noted in March 2010, Treasury has not provided specific guidance on
how to determine whether borrowers are in imminent danger of default.
[Footnote 23] As also noted in SIGTARP's March 2010 report on HAMP,
this lack of consistent and clear standards could mean that servicers
are inconsistently applying criteria in this area and thereby
inequitably treating borrowers across the program.[Footnote 24]
According to HAMP guidelines, borrowers who are current or less than
60 days delinquent on their mortgage payments but in imminent danger
of defaulting may be eligible for HAMP modifications, and Treasury has
emphasized the importance of reaching borrowers before they are
delinquent. In particular, Treasury instituted additional incentives
to servicers and investors for modifying loans for such borrowers.
According to Treasury, 22.9 percent of all trial modifications started
as of May 2010 were in this category. Treasury stated that it did not
create such guidelines when developing HAMP because it was focused
primarily on delinquent borrowers. However, Fannie Mae and Freddie Mac
have had standardized imminent default criteria since late April 2009
for modifications of loans owned or guaranteed by the GSEs, and in
January 2010 (with an effective date of March 1, 2010) further aligned
these guidelines to provide greater consistency between the two GSEs.
[Footnote 25] Treasury officials have stated that they plan to monitor
the impact of servicers' implementation of the new GSE imminent
default guidance over the next few months. Treasury then plans to
determine whether it will adopt similar criteria for non-GSE loans.
As a result of the lack of specific guidance, we found seven different
sets of criteria for determining imminent default among the 10
servicers we contacted. The seven sets of criteria that we found
varied in both the types of information the servicers considered and
in the thresholds they set for factors such as income and cash
reserves. Two servicers considered borrowers who met the basic HAMP
eligibility requirements (greater than 31 percent monthly mortgage
debt-to-income ratio, one-to-four unit single family residence, etc.)
in imminent default and the servicers did not impose any additional
criteria on them. Three servicers aligned their imminent default
criteria for their non-GSE portfolios with the imminent default
criteria that the GSEs required for their loans prior to March 1,
2010. In addition to the basic HAMP eligibility requirements, these
criteria require borrowers to have cash reserves of no more than 3
months of housing payments (including monthly principal, interest,
property tax, insurance, and either condominium, cooperative, or
homeowners' association payments) and a ratio of disposable net income
to monthly housing payments (debt coverage ratio) of less than 120
percent. One servicer had begun using the new GSE criteria that sets a
new maximum cash reserves limit of $25,000 and does not have debt
coverage ratio requirements for its non-GSE loans. The remaining four
servicers included various additional considerations among their
criteria, including:
* a sliding income scale for the borrower's mortgage debt-to-income
ratio;
* an increase in expenses or decrease in income that is more than a
certain percentage of income;
* a loan-to-value ratio that is above a certain percentage; and:
* a "hardship" situation lasting longer than 12 months.
These differences in criteria may result in one borrower being
approved for HAMP, and another with the same financial situation and
loan terms being denied by a different servicer. In addition, if a
servicer has few or no additional imminent default criteria, the
servicer may be offering HAMP modifications to borrowers who may not
actually be at true risk of defaulting on their loan. However, if a
servicer has very stringent criteria, it may be denying HAMP
modifications to borrowers who will ultimately default on their loans
because of unaffordable monthly mortgage payments.
To account for differences in servicers' loan portfolios, Treasury
specifically allows some differences in how servicers evaluate
borrowers for HAMP that could result in inconsistent outcomes for
borrowers. For example, servicers may add a risk premium of up to 2.5
percent to the Freddie Mac rate for 30-year fixed mortgages when
inputting the discount rate to the NPV model used in evaluating
eligibility for HAMP. The NPV model compares the net present value of
expected cash flows to the investor from a loan that receives a HAMP
modification with the expected cash flows of the same loan with no
modification (also considering the likelihood that the loan would end
in foreclosure). If the estimated cash flow with a modification is
"positive" (i.e., equal to or more than the estimated cash flow of the
unmodified loan), the loan servicer is required to make the HAMP
modification. The higher the risk premium a servicer chooses, the
fewer the number of loans that are likely to pass the NPV model,
because expected future cash flows would have less value. Servicers
must apply one risk premium to all loans held in their portfolio and
one to loans serviced for other investors. Treasury noted that it
chose to allow this variation because mortgage holders and investors
could have different opportunity costs of capital and different
interpretations of risk. Of the 10 servicers we interviewed, 3
servicers (2 large and 1 medium-sized servicers) added the full 2.5
percent risk premium allowable, while the other 7 servicers did not
add an additional risk premium. According to our analysis of Treasury
data, as of April 17, 2010, 11 servicers used a risk premium, most of
them the full 2.5 percent.
Of concern, MHA-C, through its compliance audits, found that 15 of the
largest 20 participating servicers did not comply with various aspects
of the program guidelines in their implementation of the NPV model.
This lack of compliance likely resulted in differences in how
borrowers were evaluated, and could have resulted in the inequitable
treatment of similarly situated borrowers. Servicers have two options
for implementation of the NPV model. Either they may use the Treasury
version of the NPV model housed on a Web portal hosted by Fannie Mae
in its capacity as Treasury's financial agent, or they may recode the
NPV model to run it on their own internal systems. Among seven
servicers that had recoded the NPV model to run it on their own
internal systems, MHA-C found that the servicers had failed to hold
certain data constant when rerunning the NPV model for borrowers they
were evaluating for a permanent HAMP modification. HAMP guidelines
state that only income-related inputs or incorrect data can be changed
during a second NPV model run. But because these servicers often
linked the NPV model with their servicing system, values for inputs
such as property values and credit scores were erroneously updated
during the rerunning of the NPV model. In these cases, MHA-C required
the servicer to make the appropriate fixes so that their in-house
models were consistent with the Treasury model. Until such fixes were
made, MHA-C required the servicers to refrain from denying permanent
modifications because of negative NPV results unless these results
were validated by the Treasury version of the NPV model housed on the
Fannie Mae Web portal with the appropriate data values. In addition,
MHA-C has required these servicers to proactively resolicit any
borrowers who were incorrectly denied a permanent HAMP modification
due to the NPV errors.
Eight servicers that exclusively use the Fannie Mae Web portal had
similar problems with their NPV inputs when rerunning the NPV model
while evaluating borrowers for a permanent modification. In these
cases, servicers have been required to reanalyze loans that were
affected by the error and outline a corrective action plan. Although
MHA-C notified almost all of the 15 servicers of these errors in
February 2010, some of the servicers are still in the process of
analyzing which borrowers were affected, and MHA-C is monitoring the
servicers' progress in these analyses and has instructed servicers not
to conduct foreclosure sales until remediation activities are
complete. According to Treasury, the number of borrowers who were
denied because of a servicer's NPV errors could range from a handful
to thousands, depending on the size of the servicer and the extent of
the error.
In addition, servicers themselves have identified process errors that
led to inconsistencies in how they were evaluating borrowers for HAMP
through their quality assurance reviews. We reviewed quality assurance
reports from the 10 servicers we interviewed and found that the error
rates for the calculation of borrower income were well above the
servicers' own established error thresholds, often set at 3 to 5
percent. In fact, half of these servicers reported at least a 20-
percent error rate for the loan modifications sampled during the most
recent review provided to us. Without accurate income calculations,
similarly situated borrowers applying for HAMP may be inequitably
evaluated for the program and may be inappropriately deemed eligible
or ineligible for the program. Some servicers also found other types
of errors, such as failing to include condominium association dues in
the monthly target housing payment; charging borrowers fees prohibited
by HAMP guidelines--for example, for property valuation; and not
reducing the monthly mortgage payment for the HAMP modification to 31
percent or less of the borrower's gross monthly income. As a result of
these audit findings, servicers implemented process improvements and
corrective actions. Some of the servicers resolicited borrowers who
were incorrectly turned down for HAMP, while others implemented
additional controls to their evaluation processes, such as additional
reviews and enhanced technology systems to aid in the income
calculation process. Most of the servicers implemented additional
training for staff in the specific areas in which errors were found.
For example, one servicer held training on calculating rental income
and income for self-employed borrowers, since these types of income
calculations accounted for a large portion of errors.
However, a lack of specific guidelines has also led to significant
variations in servicers' quality assurance programs for HAMP.
According to the Standards for Internal Control in the Federal
Government, the scope of internal program evaluations should be
appropriate and reflect the associated risks.[Footnote 26] Treasury
guidance requires servicers to develop and execute internal quality
assurance programs to ensure compliance with HAMP, but its guidelines
are not sufficiently specific to ensure that servicers are mitigating
all of the potential program risks. For example, potential program
risks include improper offers of permanent and trial HAMP
modifications, as well as improper denials of both permanent and trial
modifications. However, while Treasury's guidelines state that
servicers must include either a statistically based sample (with a 95
percent confidence level) or a 10-percent stratified sample of loans
modified, drawn within 30 to 45 days of the final modification,
Treasury does not specify whether trial and permanent modifications
should be sampled separately or whether denied modifications should be
sampled at all. According to Treasury, MHA-C has suggested to
servicers that their quality assurance procedures should include
evaluations of the whole HAMP population, including those in trial
modifications and those denied HAMP, but servicers receive this
feedback only after MHA-C completes its compliance reviews. Only 4 of
the 10 servicers we interviewed separately sampled active trial
modifications, approved permanent modifications, denied trial
modifications, and denied permanent modifications, a methodology that
allowed them to review statistically significant samples within each
of these categories. Three of the servicers we interviewed did not
review a representative sample of approved trial modifications, and
two of the servicers did not review a representative sample of denied
modifications. In addition, one servicer we interviewed did not sample
its HAMP modifications separately from its proprietary modifications
and therefore reviewed too few HAMP modifications to result in HAMP-
specific findings.
Treasury guidelines also do not specify required areas of review, and
we found variations in the content of servicers' quality assurance
reviews. For example, while most servicers we interviewed recalculated
borrowers' income for the loans that they sampled as part of their
quality assurance procedures, half of the servicers did not review the
inputs for the NPV model despite the key role that the model plays in
determining whether or not a borrower qualifies for HAMP. In addition,
while 8 of the 10 servicers we interviewed performed some type of
quality assurance review on denied HAMP modifications, one of these
servicers focused its reviews only on whether denial letters were sent
to the borrowers and not on whether the borrowers were appropriately
denied HAMP. As part of its HAMP compliance procedures, MHA-C has
outlined more specific expectations for what servicers should include
in their internal quality assurance reviews, but these expectations
are not published or shared with servicers prior to their MHA-C
compliance reviews. Without more specific guidance in this area from
Treasury, some servicers may continue to have less robust quality
assurance procedures and thereby risk not identifying practices that
may lead to inequitable treatment of borrowers or harm taxpayers
through greater potential for fraud or waste in the program.
Servicers Had Different Processes for Handling HAMP Complaints and
Treasury Had Not Clearly Communicated to Borrowers about or Ensured
the Effectiveness of the Process for Challenging HAMP Eligibility
Determinations:
Treasury has directed HAMP servicers to have procedures and systems in
place to respond to HAMP inquiries and complaints and to ensure fair
and timely resolutions. However, some servicers were not
systematically tracking HAMP complaints or their resolutions, making
it difficult for Treasury to determine whether this requirement was
being met. For example, according to Treasury, a compliance review
conducted by MHA-C in the fall of 2009 cited a servicer for not
tracking, monitoring, or reporting HAMP-specific complaints. In the
absence of an effective tracking system, the compliance agent could
not determine whether the complaints had been resolved. Similarly,
several of the servicers we interviewed indicated that they tracked
resolutions only to certain types of complaints. For instance, several
servicers told us that they tracked only written HAMP complaints and
handled these written complaints differently depending on the
addressee. Without tracking all complaints, it is not possible for any
internal or external review to determine whether complaints had been
properly handled.
Fannie Mae, in its role as the administrator for HAMP, has contracted
with the HOPE Hotline to handle incoming borrower calls about HAMP.
Borrowers may obtain information about the program and assess their
preliminary eligibility, or discuss their individual situations, which
may include complaints about their servicer or about potentially
incorrect denials. Borrowers calling the hotline with a HAMP complaint
can be transferred to a housing counseling agency approved by the
Department of Housing and Urban Development (HUD), and when the
complaint pertains to a borrower assertion that they have been
wrongfully denied a modification or that their servicer has not
applied program guidelines appropriately, the borrower is transferred
to the Making Home Affordable (MHA) Escalation Team, which is housed
within a HUD-approved counseling agency. If additional intervention is
needed, the counselor is to "escalate" the complaint to the housing
counseling agency's management (figure 2). As of mid-April 2010, more
than 37,000 borrower complaints had been escalated to the MHA
Escalation Team, and an unknown number had been escalated to the
housing counseling agency's management. Through mid-April 2010, more
than 4,000 calls to the HOPE Hotline were about potentially incorrect
denials for a HAMP modification. According to Fannie Mae, between
January and April 2010 the housing counseling agency that handles HOPE
Hotline escalations resolved 99 percent of its complaints within 4
days.
Complaints that the counseling agency's management cannot resolve are
referred to an escalation team within Fannie Mae known as the HAMP
Solution Center, which also handles escalations on behalf of borrowers
referred by housing counselors and government agencies outside of the
HOPE hotline. As of April 1, 2010, more than 3,700 complaints had been
escalated to this team. Of these escalated complaints, nearly 2,900
had been resolved, with 19 percent of the resolved escalations
resulting in the initiation of a trial or permanent modification and
approximately 35 percent in a determination of ineligibility. An
additional 17 percent were referred back to the servicers or the HOPE
Hotline, and the remaining 29 percent had other outcomes--for example,
some were referred to other loss mitigation alternatives, and no
action was taken on others. Fannie Mae has set a goal of 7 business
days for the HAMP Solution Center to resolve complaints, but as of mid-
April 2010, the average resolution time was 23 days.
Figure 2: Steps in the Escalation Process Available to Borrowers
through the HOPE Hotline:
[Refer to PDF for image: illustration]
Borrower:
Complaint: Borrower calls the HOPE Hotline and speaks with a counselor
from a HUD-approved counseling agency.
MHA Escalation Team counselor: handles complaint; forwards to:
Housing counselor management (within the counseling group): handles
complaint; forwards to:
HAMP Solution Center (run by Fannie Mae).
During each level of escalation, the advocate communicates the
borrower‘s complaint to the servicer and works with the servicer to
attempt to resolve the complaint, but performs no independent
evaluation of the borrower.
Source: GAO (analysis); Art Explosion (images).
[End of figure]
It is unclear whether the HOPE Hotline and escalation processes are
effective mechanisms for resolving concerns about potentially
incorrect HAMP denials. At each level of the escalation process, the
party handling the complaint works with the servicer and the borrower
(or borrower advocate) to obtain information or actions that would
resolve it. Neither the MHA Escalation Team counselor nor HAMP
Solution Center staff review the borrower's application or loan file;
rather, further reviews of borrowers are to be conducted by the
servicers. According to Treasury, it would be difficult to obtain
borrower's loan files because they are so large. Instead, Treasury
officials told us that they were working toward providing MHA
Escalation Team counselors and HAMP Solution Center staff with access
to some information from the loan files, such as whether the investor
would allow the loan to be modified under HAMP, that could be used
during the escalation process. In addition, Fannie Mae has set up a
quality assurance process for housing counselors who handle MHA
escalations that includes monitoring and scoring of counselors' calls
with borrowers. Although this quality assurance process evaluates the
way counselors resolve borrowers' concerns, it is not clear how the
evaluators could determine whether the resolutions were correct, since
the evaluators also lack access to the borrowers' loan files. As a
result, servicers maintain discretion in determining how to resolve
borrowers' concerns about potentially incorrect HAMP denials. Further
calling into question the effectiveness of the escalation process, in
its April 2010 report on HAMP, the Congressional Oversight Panel
raised additional concerns about the effectiveness of the HOPE Hotline
by stating that it is unclear whether the HUD-approved housing
counseling agencies that work with the HOPE Hotline have sufficient
capacity or adequate training to properly handle borrower requests for
assistance.[Footnote 27]
While the HOPE Hotline escalation process is the primary means for
borrowers to raise concerns about their servicer's handling of their
HAMP applications and potentially incorrect denials, Treasury has not
explicitly informed borrowers that the hotline can be used for these
purposes. For example, the Making Home Affordable Web site states only
that the HOPE Hotline provides help with the program and no-cost
access to counselors at a HUD-approved housing counseling agency.
Treasury also requires that servicers provide information in their
denial letters about the HOPE Hotline, with an explanation that the
borrower can seek assistance at no charge from a counselor at a HUD-
approved housing counseling agency and can request assistance in
understanding the denial notice. Neither of these communication
mechanisms fully informs borrowers that they can call the HOPE Hotline
to voice concerns about their servicer's performance or decisions and
therefore may limit the number of borrowers who use the hotline for
these purposes. For example, as of mid-April 2010, less than 2 percent
of the more than 48,000 calls to the hotline were from borrowers who
felt they had wrongfully been denied under the Making Home Affordable
program, which could include HAMP.
Treasury has Taken Steps to Address Servicers' Compliance with HAMP
Requirements but Has Not Clearly Stated the Consequences for
Noncompliance:
Treasury has taken some steps to ensure that servicers comply with
HAMP program requirements, including those related to the treatment of
borrowers, but has yet to establish specific consequences or penalties
for noncompliance with HAMP guidelines. We first reported in July 2009
that Treasury had not yet formalized a policy to assess remedies for
noncompliance among servicers.[Footnote 28] The HAMP servicer
participation agreement describes actions that Fannie Mae, as program
administrator (at Treasury's direction), may take if a servicer fails
to perform or comply with any of its material obligations under the
program, but does not lay out the specific conditions under which
these actions should be taken. In October 2009, Treasury established
the HAMP Compliance Committee to monitor the performance and
activities of servicers based on information gathered by Fannie Mae,
MHA-C, and others. According to Treasury, the compliance committee--
comprised of staff from Treasury, Fannie Mae, and MHA-C--has drafted a
policy to establish consequences for servicer noncompliance with HAMP
program requirements. Treasury officials told us that the policy was
initially approved in October 2009, but following an internal review
the compliance committee determined that it needed more experience
with servicers' performance before finalizing the policy. The
committee is still redrafting the policy, and Treasury expects that it
will be internally reviewed again in June 2010. Until the policy is
finalized, the committee has instructed MHA-C to report all issues of
servicer noncompliance to the committee which then evaluates these
issues on a case-by-case basis, leaving open opportunities for
inconsistencies in how incidences of noncompliance are remedied.
According to Treasury, no financial remedies have been issued to date,
though Treasury has required MHA-C to perform more targeted reviews,
as well as directed MHA-C to require some servicers to take action to
correct areas of noncompliance. In its April report on HAMP, the
Congressional Oversight Panel recommended that Treasury ensure
compliance through established enforcement mechanisms that provide a
clear message of the consequences for servicer actions to increase
program accountability.[Footnote 29] Without standardized remedies for
noncompliance, Treasury risks inconsistent treatment of servicer
noncompliance and lacks transparency with respect to the severity of
the steps it will take for specific types of noncompliance.
Treasury Has Taken Steps to Address Conversion, Negative Equity,
Redefault, and Program Stability but Needs to Expeditiously Implement
a Prudent Design for Remaining HAMP-Funded Programs:
In our testimony on March 25, 2010, we noted that Treasury faced
several additional challenges as it continues to implement HAMP. These
challenges include (1) converting trial modifications to permanent
status, (2) addressing the growing issue of negative equity, (3)
reducing redefaults among borrowers with modifications, and (4)
ensuring program stability and effective program management.[Footnote
30] While Treasury has taken some steps to address these challenges,
such as announcing a principal reduction program under HAMP and
finalizing the second-lien modification program, it needs to
expeditiously finalize and implement remaining programs in a manner
that ensures transparency and accountability. Our review of HAMP
suggests that potential concerns exist in the areas of program
stability and adequacy of program management as Treasury continues to
add or revise HAMP-funded programs.
Treasury Has Reached Out to Servicers and Simplified Program
Requirements to Increase the Number of Permanent Modifications, but
Conversion Rates Remain Low:
HAMP servicers reported a wide range of conversion rates and gave a
variety of reasons to explain why trial modifications were not
converting to permanent modifications. Through the end of May 2010,
servicers reported conversion rates ranging from 11 percent to 86
percent. Furthermore, a few servicers reported that more than half of
their active trial modifications had been in the trial period for more
than 6 months. The 10 servicers we contacted reported conversion rates
ranging from 1 percent to 57 percent for non-GSE HAMP modifications
that had been in trial periods for 3 or more months as of December 31,
2009 (figure 3). Of these 10 servicers, the 3 we contacted that
required borrowers to provide full documentation of their income
before starting trial modifications reported the highest conversion
rates (38 percent to 57 percent). The seven servicers that used stated
income to determine eligibility for trial modifications had conversion
rates ranging from 1 percent to 18 percent.
We asked these servicers for the percentages of nonconversions that
had resulted from incomplete or problematic documentation, missed
trial period payments, or having to wait for a servicer to take action
to complete the conversion. Several of the servicers reported that
these scenarios were responsible for fewer than half of their
nonconversions (figure 3). Not surprisingly, the servicers that used
verified income reported lower rates of nonconversions because of
incomplete or problematic documentation (1 percent to 14 percent)
compared with the servicers that used stated income (4 percent to 58
percent). Servicers also reported a wide range of nonconversions that
could be attributed to missed payments during trial modifications--
roughly 2 percent to more than 70 percent. However, 9 of the 10
servicers reported that these types of nonconversions accounted for
less than a quarter of the total, and the highest percentage (71
percent) was reported by a servicer that primarily serviced subprime
loans. Finally, some servicers reported having borrowers who had
submitted all documentation and made all trial payments but were
waiting on action from the servicer to receive permanent
modifications. For example, one servicer reported that nearly a third
of borrowers who had been in trial modifications for at least 3
months, but had not been converted to permanent modifications, were in
this situation.
Figure 3: Conversion Rates and Nonconversion Reasons for 10 HAMP
Servicers, through December 31, 2009:
[Refer to PDF for image: illustrated table]
Servicer (type of validation): Servicer 1 (verified);
Conversion rate: 55%;
Reasons for nonconversions:
Incomplete or problematic documentation: 13%;
Missed trial payments: 11%;
Waiting on servicer action: 0;
Other reason[A]: 76%;
Total: 100%.
Servicer (type of validation): Servicer 2 (verified);
Conversion rate: 57%;
Reasons for nonconversions:
Incomplete or problematic documentation: 14%;
Missed trial payments: 71%;
Waiting on servicer action: 0;
Other reason[A]: 15%;
Total: 100%.
Servicer (type of validation): Servicer 3 (verified);
Conversion rate: 38%;
Reasons for nonconversions:
Incomplete or problematic documentation: 1%;
Missed trial payments: 9%;
Waiting on servicer action: 19%;
Other reason[A]: 71%;
Total: 100%.
Servicer (type of validation): Servicer 4 (stated);
Conversion rate: 2%;
Reasons for nonconversions:
Incomplete or problematic documentation: did not report;
Missed trial payments: did not report;
Waiting on servicer action: did not report;
Other reason[A]: did not report;
Total: n/a.
Servicer (type of validation): Servicer 5 (stated);
Conversion rate: 1%;
Reasons for nonconversions:
Incomplete or problematic documentation: 4%;
Missed trial payments: 3%;
Waiting on servicer action: 4%;
Other reason[A]: 89%;
Total: 100%.
Servicer (type of validation): Servicer 6 (stated);
Conversion rate: 6%;
Reasons for nonconversions:
Incomplete or problematic documentation: 13%;
Missed trial payments: 2%;
Waiting on servicer action: 16%;
Other reason[A]: 69%;
Total: 100%.
Servicer (type of validation): Servicer 7 (stated)[B];
Conversion rate: 10%;
Reasons for nonconversions:
Incomplete or problematic documentation: 41%;
Missed trial payments: 7%;
Waiting on servicer action: 5%;
Other reason[A]: 47%;
Total: 100%.
Servicer (type of validation): Servicer 8 (stated);
Conversion rate: 7%;
Reasons for nonconversions:
Incomplete or problematic documentation: 50%;
Missed trial payments: 3%;
Waiting on servicer action: 32%;
Other reason[A]: 15%;
Total: 100%.
Servicer (type of validation): Servicer 9 (stated);
Conversion rate: 5%;
Reasons for nonconversions:
Incomplete or problematic documentation: 58%;
Missed trial payments: 16%;
Waiting on servicer action: 26%;
Other reason[A]: 0;
Total: 100%.
Servicer (type of validation): Servicer 10 (stated);
Conversion rate: 18%;
Reasons for nonconversions:
Incomplete or problematic documentation: 16%;
Missed trial payments: 23%;
Waiting on servicer action: 2%;
Other reason[A]: 59%;
Total: 100%.
Source: GAO analysis of data from 10 HAMP servicers.
[A] Servicers indicated various other reasons for nonconversions, such
as borrowers' inability to pass the NPV model when evaluated for a
permanent modification and a resetting of the trial period if the
servicer found a difference in stated and verified income of more than
25 percent at the time of conversion.
[B] Stated for borrowers at least 60 days delinquent, verified for
imminent default borrowers.
[End of figure]
In November 2009, Treasury launched a conversion campaign and revised
the first-lien HAMP guidelines in an effort to address the challenges
associated with converting trial modifications to permanent
modifications. The conversion campaign included a temporary review
period lasting through January 31, 2010, that did not allow servicers
to cancel trial modifications for any reason other than failure to
meet HAMP property requirements (for example, if the property was not
owner-occupied). In addition, Treasury required the eight largest
servicers to submit conversion action plans that included strategies
such as having people knock on doors to collect missing documentation
from borrowers, having call center staff follow up on trial payments,
and developing call scripts to include a description of incentives
available to borrowers after completion of the trial period. Treasury
also formed "SWAT" teams comprised of Treasury and Fannie Mae staff to
visit large servicers' offices and offer on-site assistance with
conversions. During the conversion campaign, the number of new
conversions each month increased from roughly 26,000 in November to
roughly 35,000 in December and roughly 50,000 in January.
To address the specific challenge of obtaining complete documentation
from borrowers, Treasury has made several changes to streamline and
improve documentation requirements. In October 2009, Treasury
announced a streamlining of required documentation that, among other
things, allows borrowers to use a standard application form that
incorporates income, expense, and hardship information. Treasury
further simplified the documentation requirement in January 2010 when
it announced that pay stubs used to verify income no longer needed to
be consecutive, provided the pay stubs included year-to-date income
and the servicer judged that the borrower's income had been accurately
established. While the streamlining of documentation could make it
easier for certain borrowers to provide all required documentation,
therefore improving conversion rates, it could also increase the risk
of fraud or abuse in the program. Also in January 2010, Treasury
announced that beginning in mid-April, servicers would be required to
evaluate borrowers for trial modifications based on fully documented
income. While using fully documented income will potentially be a
significant change for some servicers, particularly given Treasury's
July 2009 statement that servicers should evaluate borrowers for trial
modifications based on stated income, it could help improve conversion
rates. As we have seen, among the 10 servicers we spoke with, the 3
already requiring full documentation up front generally reported
higher conversion rates.
However, converting trial modifications continues to be a challenge.
As of the end of May 2010, Treasury data showed that only 31 percent
of trial modifications started at least 3 months prior, and therefore
potentially eligible for conversion, had converted to a permanent
modification. In fact, the total number of permanent modifications
started through May 2010 was less than the total number of trial
modifications canceled during the same time period (roughly 347,000
versus 430,000). Furthermore, as servicers focus on conversions and
began the transition to evaluating borrowers using verified income,
the number of trial modifications begun has decreased significantly.
In May 2010, roughly 30,000 trial modifications were started, compared
with nearly 63,000 in March 2010 (figure 4). As of the end of May
2010, Treasury reported that there were roughly 1.7 million estimated
eligible 60-day delinquent borrowers. According to Treasury officials,
Treasury is not planning on taking any additional steps to address
nonconversions because the agency's current focus is on clearing the
backlog of trial modifications awaiting conversion decisions. The
officials noted that servicers had committed to clearing their
backlogs by the end of June 2010. Going forward, Treasury anticipates
that the requirement for up-front documentation will reduce the
challenge of converting trial modifications to permanent modifications.
Figure 4: GSE and Non-GSE HAMP Trial and Permanent Modifications Made
Each Month:
[Refer to PDF for image: multiple line graph]
[Refer to PDF for image: multiple line graph]
Date: May and Prior, 2009;
Trial modification started: 54,722;
Permanent modification started: 0.
Date: June 2009;
Trial modification started: 100,375;
Permanent modification started: 0.
Date: July 2009;
Trial modification started: 118,671;
Permanent modification started: 0.
Treasury announces goal of 500,000 trials by November 1, 2009.
Date: August 2009;
Trial modification started: 144,962;
Permanent modification started: 0.
Date: September 2009;
Trial modification started: 134,838;
Permanent modification started: 4,742.
Date: October 2009;
Trial modification started: 158,170;
Permanent modification started: 10,907.
Date: November 2009;
Trial modification started: 112,508;
Permanent modification started:15,775.
Start of Treasury's Conversion Campaign.
Date: December 2009;
Trial modification started: 115,749;
Permanent modification started: 35,514.
Date: January 2010;
Trial modification started: 91,200;
Permanent modification started: 50,364.
Date: February 2010;
Trial modification started: 83,103;
Permanent modification started: 52,905.
Date: March 2010;
Trial modification started: 62,766;
Permanent modification started: 60,594.
Date: April 2010;
Trial modification started: 37,021;
Permanent modification started: 68,291.
Date: May 2010;
Trial modification started: 30,099;
Permanent modification started: 47,724.
Source: GAO analysis of Treasury data.
[End of figure]
Borrowers may not convert to permanent modifications for several
reasons, including ineligibility for HAMP and failure to make the
required trial modification payments. Some borrowers who do not
receive permanent modifications may be eligible for other non-HAMP
loan modification programs that servicers offer or for alternatives to
foreclosure such as those offered under the HAFA program. For example,
Treasury reported that through April 2010, among the top eight HAMP
servicers, nearly half of borrowers who had trial modifications
canceled received non-HAMP loan modifications.
Recent Program Announcements Aim to Address Negative Equity, but
Programs May Lack Transparency:
The proportion of homeowners who owe more than the value of their
homes continues to be high in many states and, as we reported in July
2009, HAMP as initially designed may not address the growing number of
foreclosures among borrowers with negative equity ("underwater"
borrowers). According to data reported by CoreLogic, a company that
collects and analyzes U.S. real estate and mortgage data, more than
11.2 million (24 percent) of borrowers across the country had negative
equity at the end of the first quarter of 2010.[Footnote 31] In
addition, of borrowers with loan-to-value ratios greater than 150
percent, more than 14 percent had received a notice of default--the
first step in the public recording of default--compared with roughly 2
percent of those with at least some equity in their homes. As we have
seen, according to Fannie Mae, borrowers have loan-to-value ratios of
roughly 150 percent, on average, after a HAMP modification. While
HAMP's initial design focused on bringing mortgage payments to an
affordable level, severe levels of negative equity and expectations
that house prices will continue to decline may lead some borrowers to
choose to default on their mortgage payments even if the payments are
affordable or could be modified to affordable levels.
In an effort to help address the challenge of negative equity, in
March 2010 Treasury announced a principal reduction program under
HAMP. According to the initial program guidelines issued in June 2010,
the principal reduction HAMP program will allow some underwater
homeowners to reduce the balance owed on their mortgage in steps over
3 years, if they remain current on their payments. Servicers will be
required to run both the standard NPV test and an alternative that
considers principal reduction and to compare the results. Under the
alternative approach, servicers will assess the NPV of a modification
that starts by forbearing the principal balance to 115 percent of the
home's value, or to an amount necessary to bring the borrower's
payments to 31 percent of income, whichever requires less principal
reduction.
If forbearing principal to 115 percent of the home's value does not
reduce monthly payments to 31 percent of income, the servicer will
follow HAMP's standard procedures for modifying loans--lowering the
interest rate, extending the term of the loan, forbearing additional
principal, or a combination of these steps in this order. If the NPV
under this approach is higher than it is for a modification without
principal forbearance, the servicer will have the option--but will not
be required--to forgive principal. Servicers will initially treat the
reduced principal amount as forbearance and will forgive the forborne
amount in three equal steps over 3 years, as long as the homeowner
remains in good standing. Investors will receive incentives for
reducing principal, and the incentive amounts vary based on the
delinquency level of the borrower and the current loan-to-value ratio.
Servicers will be required to establish written policies detailing
when principal reduction will be offered, and, according to Treasury,
MHA-C will review these policies to ensure that similarly situated
borrowers are treated equitably with respect to principal reduction.
Some program details continue to be unspecified. In particular, the
alternative NPV model has not yet been specified, and it is unclear
how it will evaluate the impact of principal reduction, including the
changes in the likely redefault rate of borrowers receiving principal
reductions. According to Treasury, the alternative NPV model will be
ready in September or October 2010. In addition, although the original
program announcement stated that servicers would be required to
retroactively consider borrowers for principal forgiveness who had
already received a trial or permanent modification, it is unclear
whether and how servicers will be required to do this. According to
Treasury, additional guidance addressing this issue will be issued in
July 2010. Servicers will be required to start evaluating borrowers
for principal reduction on the later of October 1, 2010, or the
implementation date of the new version of the NPV model, though
servicers could begin offering principal reduction and receiving
incentives as of June 3, 2010. Due to the continued severity of the
foreclosure crisis and negative equity problem, Treasury will need to
expeditiously finalize all program details.
While this program could help some borrowers whose loans are greater
than 115 percent of the home's value, servicers could vary in when
they choose to offer principal reduction. In some cases, servicers may
reasonably refuse to reduce principal, even when the NPV using
principal reduction is higher than the NPV without using it. For
example, servicers may have contractual agreements with investors that
prohibit principal reduction. According to Treasury, principal
reduction is not mandatory because HAMP is a voluntary program and the
HAMP Servicer Participation Agreement allows servicers to opt out of
material program changes made after the agreement was signed. In
addition, the Congressional Oversight Panel reported in April 2010
that allowing servicers to choose whether to offer principal reduction
could help limit moral hazard.[Footnote 32] Specifically, if borrowers
do not know whether their servicers will forgive principal, they will
not be motivated to change their behavior in order to receive it.
According to Treasury, servicers will be required to report to
Treasury the NPV outcomes with and without principal reduction, as
well as whether the borrower was offered it. Further, Treasury
officials noted that beginning in late 2010 or early 2011, public
reports on servicer performance will include information such as the
proportion of borrowers who were offered principal reduction. Because
servicers will have significant discretion in whether and when to
offer principal reduction under this program, Treasury will need to
ensure that public reporting of servicer activity related to principal
forgiveness provides sufficient program transparency and addresses
potential questions of whether similarly situated borrowers are being
treated fairly and consistently.
Households with second-lien mortgages are more likely to be underwater
than those without second-lien mortgages. According to CoreLogic, in
the first quarter of 2010, 38 percent of borrowers with junior liens
such as second-lien mortgages were underwater, compared with 19
percent of borrowers with only first-lien mortgages. Offering relief
on second-lien mortgages is therefore an important factor in
addressing the challenge of underwater borrowers. According to the
initial guidelines for the principal reduction program, second-lien
holders must agree to reduce principal on the second lien mortgage in
the same proportion as the principal reduction on the first lien
mortgage. Separately, under the guidelines for 2MP, incentives are
offered for the extinguishment or partial extinguishment of second
liens.
In addition, Treasury announced a new FHA refinancing program, which
is expected to be implemented by the fall of 2010 and will allow
lenders to refinance underwater first-lien loans into FHA-insured
loans if the borrower is current on mortgage payments. This program
has been designated up to $14 billion in funds that were originally
intended for HAMP and, as with the principal reduction program under
HAMP, will be voluntary for servicers. According to initial program
descriptions, investors must agree to a principal write-down on the
original first-lien loans of at least 10 percent and the combined loan-
to-value ratio, which includes both first and junior liens, cannot be
greater than 115 percent after the refinancing (97.75 percent for the
first lien only). The new FHA refinance option is available only to
homeowners who are current on an existing first-lien mortgage that is
not insured by FHA. Eligible underwater loans are refinanced into FHA
loans on FHA terms based on full documentation, income ratios, and
complete underwriting. Total debt including all forms of household
debt cannot be greater than approximately 50 percent except for some
borrowers with especially strong credit histories.
Investors we spoke with supported principal reduction in conjunction
with an FHA refinance, because even though they would suffer a loss on
the reduction, they would not bear the risk of the borrower
redefaulting, as the loan would then be FHA-insured and out of their
pools. However, they also noted that the program might reach only a
limited number of borrowers as it would only help borrowers who are
current on existing first-lien mortgage payments, underwater, and have
mortgage payments that could be reduced to 31 percent of income with a
loan-to-value ratio for the new loan no greater than 97.75 percent of
the appraised value of the home. Treasury has stated that FHA will
publish quarterly data on numbers of loans refinanced in this way,
including average percentages for loans that are written down and
amounts of principal that are reduced. However, Treasury has not yet
specified what servicers will be required to report for borrowers
considered for the program, including those considered for, but not
offered, the refinance. Also, though Treasury has designated up to $14
billion for this program, it has not specified how these funds will be
used or the number of borrowers likely to be helped by this program.
Finally, Treasury has designated $2.1 billion in HAMP funds for the
HFA Hardest-Hit Fund, providing 10 states with the opportunity to
design programs to prevent foreclosure and improve housing market
stability, potentially including programs to address negative equity.
As of May 11, 2010, Treasury had not yet approved any programs under
this fund, so the extent to which the programs will address negative
equity remains to be seen. The first five states were required to
submit proposals on April 16, 2010, and according to Treasury, it is
evaluating them to determine whether they meet the act's requirements
and support its goals of preserving homeownership and protecting
housing market stability. However, according to initial proposals,
some program efforts may require significant implementation periods.
For example, one state reported that some of its program features
might not be available until 5 months after Treasury approved the
program. To promote transparency, each state HFA will be required to
establish monitoring mechanisms and to implement a system of internal
controls that minimize the risk of fraud, mitigate conflicts of
interest, and maximize operational efficiency and effectiveness. In
addition, HFAs will report data to Treasury on a periodic basis,
including the metrics that are used to measure program effectiveness
against stated objectives. According to Treasury, all program designs
will be posted online, along with metrics measuring performance of
each HFA program. Treasury has stated that the principal reduction
program under HAMP, the FHA refinance program, and the HFA Hardest-Hit
Fund will be the primary efforts to address the challenge of negative
equity, and no new programs are expected.
Treasury Has Not Fully Implemented Measures to Limit Redefault:
Limited information is available on redefaults on permanent
modifications to date, largely because few trials have become
permanent. Treasury's expectations of the number of redefaults may be
changing, although Treasury has not specified the number of successful
permanent HAMP modifications it expects. Through the end of May 2010,
6,233 of the 346,816 permanent modifications had redefaulted and 124
loans had been paid off. Treasury has begun to publish the debt levels
of those receiving permanent HAMP modifications. As we have seen, as
of the end of May 2010, these borrowers had a median total debt-to-
income ratio of roughly 64 percent after the HAMP modification.
[Footnote 33] In April 2010, the Congressional Oversight Panel noted
that with such high debt levels, a small disruption in income or
increase in expenses could result in many redefaults.[Footnote 34]
Treasury said that it would examine redefault rates after borrowers
had been in HAMP permanent modifications for longer than 3 months.
As we reported in July 2009, the redefault rates Treasury anticipated
at the inception of HAMP were consistent with the Office of the
Comptroller of the Currency's (OCC) and the Office of Thrift
Supervision's (OTS) analyses of loan modifications, as well as with
the Federal Deposit Insurance Corporation's estimates for the IndyMac
loan modification program.[Footnote 35] At the time, OCC and OTS
reported that about 52 percent of modifications redefaulted after 12
months, and IndyMac estimated a redefault rate of 40 percent. However,
more recently Treasury officials told us that the redefault rate could
be higher for a typical HAMP modification, noting that borrowers
entering the HAMP program to date had low credit scores and high loan-
to-value ratios relative to those in other modification programs,
further increasing the risk of redefault. As noted, Treasury has not
publicly disclosed its redefault estimates or the number of successful
permanent modifications it expects.
In December 2008, we noted that limiting the likelihood of redefault
would be a significant challenge as Treasury began its efforts to
establish a loan modification program, and Treasury continues to
struggle with this challenge.[Footnote 36] As we pointed out,
Treasury's primary effort to limit redefaults under the HAMP first-
lien program was to require that borrowers with high total debt agree
to obtain counseling.[Footnote 37] However, it is unclear how many
borrowers have actually received this counseling, and Treasury does
not plan either to monitor whether borrowers actually obtain
counseling or to assess the requirement's effectiveness in limiting
redefaults. According to Fannie Mae, the HOPE Hotline had received
104,253 calls about this counseling through April 4, 2010, but Fannie
Mae did not track whether these borrowers actually obtained
counseling. However, the best available information shows that few
borrowers have obtained such counseling to date. Specifically,
according to NeighborWorks, whose National Foreclosure Mitigation
Counseling network consists of roughly 1,700 entities that must be
either HUD-approved counseling agencies or state housing finance
agencies, as of March 2010 it had only funded about 2,700 HAMP
counseling sessions for borrowers with high total debt.[Footnote 38]
This further underscores the importance of monitoring and assessing
HAMP's counseling requirement, as we recommended in July 2009.
In March 2010, Treasury issued revised guidelines for the HAMP second-
lien program, 2MP, which, to the extent that it reduces borrowers'
total debt, could help limit redefaults on first-lien modifications.
However, although a second-lien modification program was initially
announced at the inception of HAMP, Treasury has yet to issue
estimates of the number of borrowers that the program could help.
Treasury officials noted that they would examine the redefault rates
of borrowers receiving 2MP modifications. As of June 2010, seven
servicers have signed agreements to modify or extinguish second liens
under HAMP. However, Treasury will not begin making incentive payments
or tracking modifications under 2MP until the fall of 2010. Until
recently, servicers may not have been able to identify whether
borrowers of second liens in their portfolios have been modified by
the first-lien servicer if they do not also service the first lien.
First liens must be in HAMP trial periods before second liens begin
trial modifications, so in order to modify a second lien, a servicer
must first know whether the corresponding first lien has been
modified. Treasury developed a database to match first and second
liens, which, according to Treasury, was ready in May 2010.
Under 2MP, non-GSE servicers can receive up-front and pay-for-success
incentive payments, borrowers can receive pay-for-performance
incentives, and investors can receive payment reduction cost-share
incentives. When a borrower's first lien is modified under HAMP, a
participating second-lien servicer must offer to modify the borrower's
second lien. The modification steps for 2MP are similar to those for
HAMP first-lien modifications. As with first liens, servicers first
capitalize accrued interest and servicing advances, then reduce the
interest rate, then extend the term of the mortgage, and finally,
forbear or forgive principal. However, with second liens, the interest
rate is generally reduced to 1 percent; the term is extended to match,
at a minimum, the term of the HAMP-modified first lien; and the
principal forbearance or forgiveness is expected to be proportional to
the amount of principal forbearance or reduction on the first lien.
Servicers are not required to reduce principal under 2MP, unless
principal was forgiven on the first lien, but may offer principal
reduction and will receive additional incentives for doing so. The
incentive amount for reducing second liens varies depending on the
combined loan-to-value ratio, or the ratio of the first and second
liens to the value of the home.
The terms of the first-lien modification will be used to determine the
terms of the second-lien modification, and no additional evaluation is
done to determine eligibility for 2MP. The second-lien servicer relies
on the information the borrower provides for the first-lien loan
modification. In particular, the second-lien servicer is not required
to perform an additional NPV model of the related second-lien
mortgage, since it can be reasonably concluded that the combined
modifications will result in a positive NPV outcome if the first lien
was NPV positive. According to Treasury, because the HAMP-modified
first-lien mortgage is delinquent or facing imminent default, the
servicer may reasonably conclude that the borrower is in imminent
danger of defaulting on the second lien. Further, Treasury has stated
that postforeclosure recoveries on second liens are likely to be
minimal if the first lien is delinquent or at risk of default, so it
is reasonable for servicers to conclude that modifications of second
liens are likely to result in higher expected cash flows than
foreclosure.
Implementation of Other HAMP-Funded Homeowner Assistance Programs
Could Benefit from Lessons Learned from Initial HAMP Design and
Implementation Challenges:
While servicers were performing loan modifications prior to HAMP, HAMP
is a new, complex, and large-scale program that places a significant
amount of taxpayer dollars at risk. We have previously reported that
Treasury faced challenges in implementing first-lien modifications,
including finalizing program guidelines and establishing a
comprehensive system of internal controls. Since then, Treasury has
announced several new programs and program features. Going forward, in
designing and implementing the programs, Treasury could benefit from
lessons learned from the initial design and implementation of HAMP. In
particular, it will be important for Treasury to expeditiously develop
and implement these programs while also developing sufficient program
planning and implementation capacity, meaningful performance measures,
and appropriate risk assessments in accordance with standards for
effective program management. In its April 2010 report, the
Congressional Oversight Panel likewise noted that Treasury's response
has lagged behind the pace of the crisis and underscored the need for
Treasury to get its new initiatives up and running quickly and to
ensure program accountability.[Footnote 39] We will continue to
monitor Treasury's implementation and management of HAMP-funded
programs as part of our ongoing oversight of TARP to ensure that new
programs are appropriately designed and operating as intended.
* Program planning and implementation capacity. In July 2009, we
recommended that Treasury finalize a comprehensive system of internal
control for HAMP.[Footnote 40] According to GAO's Standards for
Internal Control in the Federal Government, effective internal
controls include activities to ensure the appropriate planning and
implementation of government programs.[Footnote 41] Effective program
planning includes having complete policies, guidelines, and procedures
in place prior to program implementation. As we noted in March 2010,
servicers told us that they faced significant challenges implementing
HAMP first-lien modifications because of numerous changes to program
guidance. For example, Treasury's new requirement that servicers
evaluate borrowers for trial modifications using verified rather than
stated income will likely mean that some servicers will need to alter
their policies and processes, as well as retrain staff. Treasury
officials told us that it did not anticipate any new programs or
significant changes to HAMP going forward. Nonetheless, to avoid
potential implementation challenges with the newly announced programs
Treasury must balance the need to fully establish guidelines and
reporting requirements in advance of implementation by servicers while
implementing these programs as quickly as possible.
* In addition, GAO's Internal Control Management and Evaluation Tool,
which is based on GAO's Standards for Internal Control in the Federal
Government, states that program managers must identify and define
tasks required to accomplish particular jobs and fill all necessary
positions.[Footnote 42] In July 2009, we recommended that Treasury
place a high priority on fully staffing vacancies in the Homeownership
Preservation Office (HPO) and evaluating staffing levels and
competencies. However, Treasury has reduced staffing levels in HPO
from 36 to 29 full-time positions without formally assessing staffing
levels or determining whether HPO staff have the necessary skills to
govern the program effectively. Treasury officials told us that it was
in the process of approving two additional positions for administering
the HFA Hardest-Hit Fund. In addition, they noted that the
responsibilities of the policy development staff in HPO would be
largely concluded after the final policy documents were issued, and
these staff would then be able to support program implementation.
However, as of May 14, 2010, Treasury still had not conducted a
workforce assessment of HPO, despite the office's additional
administrative responsibilities for the recently announced FHA
refinancing program, and ongoing HAMP implementation, including first-
and second-lien modifications, HAFA, principal reductions, and
forbearance for unemployed borrowers. We noted in July 2009 that
having enough staff with appropriate skills was essential to governing
HAMP effectively, and we continue to believe that it will be an
important factor in Treasury's ability to design and implement the new
HAMP-funded programs both quickly and effectively.
* According to Treasury, its financial agents--Fannie Mae and MHA-C--
are developing a two-stage approach to assessing the capacity and
readiness of the top 25 HAMP servicers to implement the recently
announced programs. First, servicers will conduct a self-assessment of
their readiness using a HAMP checklist. According to Treasury, the
self-assessment will be provided to Fannie Mae for review, and Fannie
Mae will provide further training, additional guidance, and other
support as needed. Treasury officials told us that the second stage
would involve on-site walk-throughs conducted by MHA-C that will
consist of discussions with management, reviews of documentation such
as project plans and testing results, and an end-to-end walk-through
of processes. Treasury officials told us that as of the end of April
2010, 21 servicers had been sent a self-assessment on capacity to
implement HAFA, and that as of May 2010 on-site readiness reviews for
HAFA and 2MP had begun. However, Treasury has not specified a time
frame for the completion of either of the two stages of readiness
assessment for the other recently announced HAMP-funded programs.
* Meaningful performance measures. We reported in July 2009 that
Treasury must establish specific and relevant performance measures
that will enable it to evaluate the program's success against stated
goals in order to hold itself and servicers accountable for these TARP-
funded programs. As noted in GPRA, meaningful and useful performance
measures should focus on program outcomes and provide a basis for
comparing actual program results with performance goals.[Footnote 43]
However, Treasury did not develop performance measures before
implementing the first-lien modifications. According to Treasury,
revised performance measures were drafted in March 2010, a year after
program implementation. Performance measures include process measures
such as the number of servicers participating in the program, as well
as outcome measures such as average debt-to-income ratios (pre-and
postmodification) and redefault rates. Treasury had not yet developed
expected performance measures for 2MP, or the recently announced
principal reduction, forbearance for unemployed borrowers, or FHA
refinance programs as of May 14, 2010.
To ensure clear standards for accountability for the newly announced
programs, Treasury will need to establish specific outcomes-based
performance measures at the outset of the programs. For example, to
assess the success of the HAMP principal reduction and FHA refinance
programs, Treasury will need to develop measures and goals to assess
the extent to which these programs are helping borrowers with negative
equity and limiting foreclosures among this population--Treasury's
stated goals for the program. Similarly, early development of
meaningful performance measures and goals could help Treasury evaluate
the extent to which the 3-month forbearance program is helping
unemployed borrowers avoid foreclosure. Such measures could be used to
determine whether program parameters, including the amount of time
allowed for borrowers to find new employment, are appropriate and
sufficient for ensuring program success. As noted by both the
Congressional Oversight Panel and SIGTARP, it will be imperative for
Treasury to clearly define performance measures for HAMP to ensure
program accountability.[Footnote 44]
Furthermore, Treasury has yet to develop benchmarks, or goals, for
specific performance measures. According to Treasury, draft first-lien
performance measures include metrics such as conversion and redefault
rates. But in the absence of predefined goals to indicate what
Treasury considers acceptable conversion and redefault rates,
assessing the results of these measures will be difficult. Likewise,
as Treasury develops performance measures for the recently announced
HAMP-funded programs, it must also establish benchmarks for them.
* Appropriate risk assessments. Also in our July 2009 report, we noted
that while some processes and internal controls had been developed
during the early stages of HAMP's implementation, many more controls
needed to be finalized as the program progressed to ensure that
taxpayer dollars were safeguarded, program objectives achieved, and
program requirements met. The adequacy of Treasury's internal controls
for HAMP continues to be an area of concern as Treasury refines the
first-lien program and adds new HAMP programs. According to GAO's
Standards for Internal Control in the Federal Government, there are
five key components or standards for effective internal control: (1)
the control environment, (2) risk assessment, (3) control activities,
(4) information and communications, and (5) monitoring.[Footnote 45]
The internal control standards state that agencies must identify the
risks that could impede the success of the newly announced programs
and determine appropriate methods of mitigating these risks. After
risks have been identified, the agency should undertake a thorough and
complete analysis of the possible effects of the risks that includes
an assessment of how likely the risks are to materialize. Finally,
agencies should determine how best to manage or mitigate risk and what
specific actions they should take.
Treasury, in conjunction with Fannie Mae as the HAMP program
administrator, has developed risk control matrixes that identify
various risks associated with the first-lien modification process,
such as potential inaccuracies in accruals of incentive payments or
data reporting, and the controls they have developed to mitigate the
identified risk. However, other programmatic risks may exist that
Treasury has not addressed. For example, as noted above, Treasury
requires that borrowers demonstrate a hardship to qualify for HAMP but
does not require servicers to verify the hardship. For example, if the
borrower indicates that the household has experienced a decrease in
income, the servicer is not required to obtain documentation on past
income to compare to current income. As a result, taxpayer funds may
be used to support modifications of borrowers who have not in fact
experienced a hardship. Furthermore, in December 2008 we noted that
one of the key challenges for loan modification programs was
mitigating the risk of moral hazard--the possibility that borrowers
might choose to default when they otherwise would not in order to
benefit from the loan modification.[Footnote 46] Requiring borrowers
to demonstrate hardship is one means of mitigating this risk, but by
not requiring servicers to verify the hardship, Treasury has not fully
realized the potential benefits of this control.
Our prior work looking at the implementation of the first-lien program
underscores the importance of fully identifying and assessing the
potential risks associated with the newly announced HAMP-funded
homeowner assistance efforts. Further, Treasury needs to develop
appropriate controls to mitigate those risks prior to the
implementation date for the newly announced HAMP programs. For
example, moral hazard is of particular concern for the programs that
include principal reduction. Treasury has built some features into
HAMP to manage the risk of moral hazard, such as requiring a positive
NPV model in order to have principal reduced, something that borrowers
cannot easily calculate in advance. Further, the principal reduction
is initially treated as forbearance and forgiven in three equal steps
over 3 years as long as the homeowner remains current on payments.
Under the FHA refinance program, borrowers must be current on their
mortgage payments to qualify, eliminating the risk that they will
default on their mortgages when they otherwise would not in order to
qualify for this program. However, the issue of moral hazard is one
that will require Treasury's continued attention to ensure that the
safeguards that are put in place sufficiently limit this risk. The
adequacy of Treasury's risk assessments and control activities for the
newly announced HAMP-funded programs is an area that we plan to
monitor and report on as part of our ongoing oversight of Treasury's
use of TARP funds to preserve homeownership and protect property
values.
Conclusions:
Treasury's HAMP program is part of an unprecedented response to a
particularly difficult time in our nation's mortgage markets. The
Emergency Economic Stabilization Act called for Treasury to, among
other things, preserve homeownership and protect home values, and HAMP
continues to be Treasury's cornerstone effort for doing this. However,
more than a year after Treasury's initial announcement of HAMP and the
program's goal of bringing consistency to foreclosure mitigation,
servicers continue to treat borrowers seeking to avoid foreclosures
inconsistently in part because of a lack of specific guidelines from
Treasury. In particular, Treasury did not specify requirements for
soliciting potentially eligible borrowers for HAMP during the first
year of the program, even though outreach is important in the early
phases of program implementation. While Treasury has recently issued
more specific requirements on communicating with borrowers, it is
continuing to finalize measures of servicer performance in this area.
In addition, while Treasury's stated goals are to standardize the loan
modification process and reach borrowers before they are delinquent on
their loans, Treasury's lack of guidelines on how servicers should
determine whether borrowers who are current in their payments but may
be in imminent danger of default has led to significant differences in
how servicers are evaluating these borrowers for HAMP. By specifying
clear and specific guidelines, such as those implemented by the GSEs
for their HAMP modifications, Treasury could better ensure that
similarly situated borrowers receive equitable treatment under HAMP.
Furthermore, Treasury has not fully specified parameters for
servicers' internal quality assurance programs for HAMP and therefore
is not maximizing the potential for servicers' quality assurance
procedures to ensure equitable treatment of borrowers. With greater
specificity from Treasury on how to categorize loans for sampling and
what servicers should be evaluating in their reviews, servicers would
be more likely to have robust HAMP quality assurance programs.
Finally, although Treasury drafted a policy that established
consequences for servicer noncompliance with HAMP requirements in
October 2009, as of May 2010 it had not yet finalized the policy. As a
result, Treasury lacks transparency and risks inconsistency in how it
enforces HAMP servicer requirements.
Treasury requires servicers to have procedures and systems in place to
respond to HAMP complaints and utilizes the HOPE Hotline to escalate
borrowers' concerns about servicers' handling of HAMP applications and
potentially incorrect denials. However, because Treasury has not
specified requirements on the types of complaints that servicers
should track, some servicers are tracking only certain types of
complaints such as those addressed to a company executive. Without
consistent tracking of HAMP complaints, Treasury cannot determine with
certainty whether servicers are ensuring fair and timely resolutions
of HAMP complaints. Treasury has set up the HOPE Hotline escalation
process as the primary means for borrowers to raise concerns about
their servicer's performance on the HAMP loan modification request and
potentially incorrect denials. But whether this is an effective
mechanism to resolve such concerns remains unclear because neither MHA
Escalation Team counselors, their quality assurance reviewers, nor
HAMP Solution Center staff independently review borrowers'
applications or loan files. As a result, discretion over how to
resolve borrowers' concerns about potentially incorrect HAMP denials
largely remains with the servicers. Therefore, Treasury needs to
monitor the effectiveness of this escalation mechanism, particularly
to resolve potentially incorrect denials, and make improvements to
this mechanism or replace it as appropriate. In addition, Treasury has
not taken steps to specifically inform borrowers that the hotline can
be used to escalate concerns about servicers' handling of HAMP
applications and potentially incorrect denials. As a result, borrowers
facing foreclosure who have been told by their servicers that they do
not qualify for a HAMP loan modification may feel that they cannot
challenge the servicer's determination and may lose their homes to
foreclosures that might have been prevented.
As we noted in our March 2010 testimony, Treasury faces several
challenges in implementing HAMP going forward, including converting
trial modifications to permanent modifications, addressing the growing
number of foreclosures among borrowers with negative equity, limiting
redefaults among borrowers who receive HAMP modifications, and
ensuring adequate program stability and management. While Treasury has
taken some steps toward addressing these challenges, the multitude of
problems facing U.S. mortgage markets call for swift and deliberate
action, and it remains to be seen how effective Treasury's efforts
will be. For example, to address the challenge of converting trial
modifications to permanent modifications, Treasury launched a
conversion campaign, streamlined required documentation, and switched
to verified income documentation to start a trial. In addition, in
March 2010 Treasury announced several potentially substantial new HAMP-
funded efforts, but it did not say how many borrowers these programs
were intended to reach or discuss the specifics of these programs. In
particular, Treasury announced a principal reduction program under
HAMP that could help borrowers with negative equity. However, Treasury
has stated that principal reduction will be voluntary for servicers
and will need to ensure that future public reporting of this program
ensures program transparency and addresses potential questions about
whether all borrowers are being treated fairly.
In our July 2009 report, we made a number of recommendations to
improve HAMP's effectiveness, transparency, and accountability. For
example, we recommended that Treasury consider methods of monitoring
whether borrowers who receive HAMP modifications and continue to have
high total household debt (more than 55 percent of their income)
obtain the required HUD-approved housing counseling. While Treasury
has told us that monitoring borrower compliance with the counseling
requirement would be too burdensome, we continue to believe that it is
important that Treasury determine whether consumers are actually
receiving counseling and whether the counseling requirement is having
its intended effect of limiting redefaults. In addition, we
recommended that Treasury place a high priority on fully staffing HPO
and noted that having enough staff with appropriate skills was
essential to governing HAMP effectively. However, Treasury has since
reduced the number of HPO staff without formally assessing staffing
needs. We believe that having sufficient staff is critical to
Treasury's ability to design and implement HAMP-funded programs both
quickly and effectively. We also recommended that Treasury finalize a
comprehensive system of internal controls for HAMP that will continue
to be important as Treasury implements new HAMP-funded programs.
Finally, as Treasury continues with first-lien modifications, and
implements 2MP, HAFA, and the newly announced programs, it will be
important to adhere to standards for effective program management and
to establish sufficient program planning and implementation capacity,
meaningful performance measures, and appropriate risk assessments. As
we, the Congressional Oversight Panel, and SIGTARP have previously
noted, establishing key performance metrics and reporting on
individual servicers' performance with respect to those metrics are
critical to the program's transparency and accountability.
Additionally, without preestablished performance measures and goals,
Treasury will not be able to effectively assess the outcomes of the
newly announced programs. Given the magnitude of the investment of
public funds in HAMP, it will be imperative that Treasury take the
steps needed to expeditiously implement a prudent design for the
remaining HAMP-funded programs. We will continue to monitor Treasury's
implementation and management of HAMP-funded programs as part of our
ongoing oversight of TARP to ensure that such programs are
appropriately designed and operating as intended.
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 actions to expeditiously:
* establish clear and specific criteria for determining whether a
borrower is in imminent default to ensure greater consistency across
servicers;
* develop additional guidance for servicers on their quality assurance
programs for HAMP, including greater specificity on how to categorize
loans for sampling and what servicers should be evaluating in their
reviews;
* specify which complaints servicers should track to ensure
consistency and to facilitate program oversight and compliance;
* more clearly inform borrowers that the HOPE Hotline may also be used
if they are having difficulty with their HAMP application or servicer
or feel that they have been incorrectly denied HAMP, monitor the
effectiveness of the HOPE Hotline as an escalation process for
handling borrower concerns about potentially incorrect HAMP denials,
and develop an improved escalation mechanism if the HOPE Hotline is
not sufficiently effective;
* finalize and issue consequences for servicer noncompliance with HAMP
requirements as soon as possible;
* report activity under the principal reduction program, including the
extent to which servicers determined that principal reduction was
beneficial to investors but did not offer it, to ensure transparency
in the implementation of this program feature across servicers;
* finalize and implement benchmarks for performance measures under the
first-lien modification program, as well as develop measures and
benchmarks for the recently announced HAMP-funded homeowner assistance
programs; and:
* implement a prudent design for remaining HAMP-funded programs.
Agency Comments and Our Evaluation:
We provided a draft of this report to Treasury for its review and
comment. We received written comments from the Assistant Secretary for
Financial Stability that are reprinted in appendix III. We also
received technical comments from Treasury that we incorporated into
the report as appropriate. In its written comments, Treasury stated
that it would review our final report and provide Congress with a
detailed description of the actions that Treasury had taken and
intended to take regarding the recommendations in the report. Treasury
also stated that while GAO notes the progress Treasury has made in
implementing HAMP, it believed that the draft report did not
sufficiently take into the account the scope and complexity of the
challenges Treasury faced when it developed and implemented a
modification initiative, the scale of which had never been previously
attempted. We acknowledge that the HAMP program is part of an
unprecedented response to a particularly difficult time in our
nation's mortgage markets. As noted by Treasury when it first
announced the HAMP framework in February 2009, the deep contraction in
the economy and the housing market had devastating consequences for
homeowners and communities throughout the country. However, more than
a year after Treasury first announced HAMP, the number of permanent
modifications has been limited and key HAMP program components have
not been fully implemented. Treasury noted in its written comments
that the servicing industry did not have the capacity or
infrastructure needed to implement a national loan modification
program such as HAMP. This issue of servicer capacity to successfully
implement HAMP was one that we raised in our July 2009 report as
needing Treasury's attention and remains a concern as Treasury
implements the additional programs and components it has announced to
supplement the HAMP first-lien modification program. While Treasury
has taken some steps to address the challenges we and others have
previously identified, the continuing problems in the U.S. mortgage
markets call for swift and deliberate action. Given the challenges
involved and the magnitude of public funds invested--up to $50 billion
in TARP funds and $25 billion in GSE funds--it remains to be seen how
effective Treasury's efforts will be. 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 is also
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 IV.
Signed by:
Gene L. Dodaro:
Acting Comptroller General of the United States:
List of 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 Sander M. Levin:
Acting Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I Scope and Methodology:
To examine servicers' treatment of borrowers under the Home Affordable
Modification Program (HAMP), between November 2009 and March 2010, we
spoke with and obtained information from 10 HAMP servicers of various
sizes that collectively represented 71 percent of the Troubled Asset
Relief Program (TARP) funds allocated to participating servicers,
visiting 6 of them. The six servicers we visited were: Aurora Loan
Services, LLC; Bank of America, NA; Carrington Mortgage Services, LLC;
GMAC Mortgage, Inc.; Ocwen Financial Corporation, Inc.; and Wells
Fargo Bank, NA. The four additional servicers we spoke with and
obtained data from were: CitiMortgage, Inc.; J.P. Morgan Chase Bank,
NA; Saxon Mortgage Services, Inc.; and Select Portfolio Servicing. For
each of these 10 servicers, we reviewed their HAMP policies,
procedures, and quality assurance reports; and interviewed management
and quality assurance staff. We also requested and reviewed data about
these servicers' solicitations of borrowers for HAMP between when they
began participating in the program and December 31, 2009. We
determined that these data were reliable for the purposes of our
report. In addition, for the servicers we visited, we observed a
sample of HAMP-related phone calls between borrowers and their
servicers. We also reviewed HAMP program documentation issued by the
Department of the Treasury (Treasury), including the supplemental
directives related to first-lien modifications and servicer
communications with borrowers, press releases detailing aspects and
goals of the program, and draft operational metrics. We obtained and
analyzed information from Treasury on servicers' HAMP loan
modification activity. Our work focused on non-GSE HAMP activity using
TARP funds, but the information obtained from Treasury did not always
break out GSE and non-GSE activity. We also spoke with officials at
Treasury and its financial agents--Fannie Mae and Making Home
Affordable-Compliance--to understand their rationale for program
changes, what they were doing to ensure compliance with HAMP
guidelines, and their processes for resolving HAMP complaints. In
addition, we reviewed data on the content and resolution of these
complaints. To understand the characteristics of borrowers in the
program, we analyzed data from IR/2, the HAMP database managed by
Fannie Mae to track the status of HAMP modifications, and we
determined that these data were reliable for the purposes used in our
report. To learn more about the process for and resolution of HAMP-
related complaints, we spoke to the administrators of the HOPE Hotline
and representatives of NeighborWorks, a national nonprofit
organization created by Congress to provide foreclosure prevention and
other community revitalization assistance to the more than 230
community-based organizations in its network. We also met with a trade
association that represents both investors and servicers, and an
organization representing a national coalition of community investment
organizations.
To examine actions Treasury has taken to address the challenges of (1)
converting trial modifications to permanent modifications, (2)
addressing potential foreclosures among borrowers with negative
equity, (3) limiting the likelihood of redefault among borrowers with
permanent modifications, and (4) ensuring program stability and
effective program management, we reviewed the program announcements of
current and upcoming HAMP-funded homeowner assistance programs to
determine the extent to which they address these challenges. We also
spoke with Treasury officials to understand the goals of these
programs, and the steps Treasury has taken to ensure program stability
and adequate program management in light of these programs. In
addition, we requested and reviewed data from Treasury and servicers
relevant to each challenge. Specifically, we requested information
from the 10 HAMP servicers described above on the number of borrowers
who had been in trial modifications for at least 3 months, as of
December 31, 2009, and of these, the number that had converted to
permanent modifications. We also reviewed Treasury reports on
conversion rates and documentation related to Treasury's conversion
campaign. To understand the extent to which borrowers may be facing
negative equity, we reviewed data from American Core Logic for the
first quarter of 2010. Finally, we reviewed the Government Performance
and Results Act and the Standards for Internal Control in the Federal
Government to determine the key elements needed to ensure program
stability and adequate program management.[Footnote 47] We coordinated
our work with other oversight entities that TARP created--the
Congressional Oversight Panel, the Office of the Special Inspector
General for TARP, and the Financial Stability Oversight Board.
[End of section]
Appendix II: Treasury's Actions in Response to GAO's July 2009 HAMP
Recommendations:
GAO recommendation: Consider methods of monitoring whether borrowers
with total household debt of more than 55 percent of their income who
have been told that they must obtain housing counseling do so, and
assessing how this counseling affects the performance of modified
loans to see if the requirement is having its intended effect of
limiting redefaults;
Treasury actions to date:
* According to Treasury, it considered options for monitoring what
proportion of borrowers is obtaining counseling, but determined that
it would be too burdensome to implement;
* Treasury does not plan to assess the effectiveness of counseling in
limiting redefaults because it believes that the benefits of
counseling on the performance of loan modifications is well documented
and the assessment of the benefits to HAMP borrowers is not needed.
GAO recommendation: Reevaluate the basis and design of the Home Price
Decline Protection (HPDP) program to ensure that HAMP funds are being
used efficiently to maximize the number of borrowers who are helped
under HAMP and to maximize overall benefits of utilizing taxpayer
dollars;
Treasury actions to date:
* On July 31, 2009, Treasury announced detailed guidance on HPDP that
included changes to the program's design that, according to Treasury,
improve the targeting of incentive payments to mortgages that are at
greater risk because of home price declines;
* Treasury does not plan to limit HPDP incentives to modifications
that would otherwise not be made without the incentives, due to
concerns about potential manipulation of inputs by servicers to
maximize incentive payments and the additional burden of re-running
the net present value model for many loans.
GAO recommendation: Institute a system to routinely review and update
key assumptions and projections about the housing market and the
behavior of mortgage-holders, borrowers, and servicers that underlie
Treasury's projection of the number of borrowers whose loans are
likely to be modified under HAMP and revise the projection as
necessary in order to assess the program's effectiveness and structure;
Treasury actions to date:
* According to Treasury, on a quarterly basis it is updating its
projections on the number of TARP-funded first-lien modifications
expected when it revises the amount of TARP funds allocated to each
servicer under HAMP;
* Treasury is gathering data on servicer performance in HAMP and
housing market conditions in order to improve and build upon the
assumptions underlying its projections about mortgage market behavior.
GAO recommendation: Place a high priority on fully staffing vacant
positions in the Homeownership Preservation Office (HPO)--including
filling the position of Chief Homeownership Preservation Officer with
a permanent placement--and evaluate HPO's staffing levels and
competencies to determine whether they are sufficient and appropriate
to effectively fulfill its HAMP governance responsibilities;
Treasury actions to date:
* A permanent Chief Homeownership Preservation Officer was hired on
November 9, 2009;
* According to Treasury, staffing levels for HPO have been revised
from 36 full-time equivalent positions to 29;
* According to Treasury, as of April 2010, HPO had filled 27 of the
total of 29 full time positions.
GAO recommendation: Expeditiously finalize a comprehensive system of
internal control over HAMP, including policies, procedures, and
guidance for program activities, to ensure that the interests of both
the government and taxpayer are protected and that the program
objectives and requirements are being met once loan modifications and
incentive payments begin;
Treasury actions to date:
* According to Treasury, it will work with Fannie Mae and Freddie Mac
to build and refine the internal controls within these financial
agents' operations as new programs are implemented;
* Treasury expects to finalize a list of remedies for servicers not in
compliance with HAMP guidelines by June 2010.
GAO recommendation: Expeditiously develop a means of systematically
assessing servicers' capacity to meet program requirements during
program admission so that Treasury can understand and address any
risks associated with individual servicers' abilities to fulfill
program requirements, including those related to data reporting and
collection;
Treasury actions to date:
* According to Treasury, a servicer self-evaluation form, which
provides information on the servicer's capacity to implement HAMP, has
been implemented beginning with servicers who started signing Servicer
Participation Agreements in December 2009.
Source: GAO and analysis of Treasury information.
[End of table]
[End of section]
Appendix III: Comments from the Department of the Treasury:
Department Of The Treasury:
Assistant Secretary
Washington, D.C. 20220:
June 14, 2010:
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 Department of the Treasury ("Treasury") appreciates the
opportunity to review the official draft of the GAO's latest report on
Treasury's Troubled Asset Relief Program (TARP), "Further Action
Needed to Fully and Equitably Implement Foreclosure Mitigation
Programs" (the "Draft Report"). Generally, the Draft Report judges
Treasury for not implementing its Home Affordable Modification Program
CHAMP") more quickly and not providing more specific guidance to
servicers. More specifically, the GAO evaluated servicer performance
and compliance efforts under HAMP. While the GAO notes the progress
Treasury has made in implementing HAMP, we believe the GAO did not
sufficiently take into account the scope and complexity of the
challenges Treasury faced when it developed and implemented a
modification initiative, the scale of which has never been previously
attempted.
Treasury's Response to the Mortgage Crisis was Unprecedented:
Despite the absence of consistent industry standards and
infrastructure for modifying loans on a massive scale, Treasury took
swift and unprecedented action to address a national housing crisis
that had been two years in the making. There were millions of
responsible homeowners grappling with the possibility of foreclosure
and displacement. To address this crisis as quickly as possible,
Treasury designed a program to provide immediate relief to at risk
homeowners as quickly as possible.
There was little precedent on how to design a modification program of
the scale required and limited data on which to base estimates of
potential performance. There was no existing infrastructure in the
mortgage finance market or the government to carry out a national
modification program at a loan level. Program implementation required
recruiting servicers, developing policies and servicer guidance, and
mounting a massive effort to reach homeowners.
At the launch of the program, there were many unknowns regarding
program implementation. Those included the number of servicers that
would participate, the rate at which they could build capacity to
implement the program, and the acceptance of overall program design.
Treasury designed a system where mortgage servicers would undertake
the core implementation responsibilities and Treasury would appoint
capable financial agents to administer the program and to audit
compliance. Before HAMP, the servicing industry did not have the
capacity or infrastructure needed to implement such a national loan
modification program. Their former business models were primarily
payment processing structures ” a much simpler and lower cost type of
business. Consequently, scrviccrs were slow to implement HAMP,
resulting in a slow start for the program.
To accelerate the relief to homeowners, we gave servicers the option
of providing trial modifications based on stated income and hardship,
with the understanding that documentation would be provided before
conversion to permanent modification. That policy enabled more
families to receive immediate payment relief and gave servicers time
to build out platforms to process underwriting documents. It also led
to challenges collecting and tracking documents and reconciling income
documentation when received. A large number of the trials based on
stated income will not convert to permanent modification. Based on
lessons learned from stated income modifications, Treasury issued
guidance in January 2010 requiring income and hardship verification
before beginning a trial modification. The Draft Report should reflect
the GAO's consideration of those challenges when assessing Treasury's
efforts.
The GAO Recognizes Treasury's Progress:
Our strategy to address the crisis has evolved because our challenges
have evolved. The improvements Treasury has announced are responsive
to the changing needs of homeowners across the country and have
accelerated the pace of modifications. In light of the primary goal of
helping homeowners eligible for HAMP prevent avoidable foreclosures
through modifications, since your July 2009 report, Treasury has
announced and/or implemented:
* a forbearance plan to reduce or suspend eligible unemployed
homeowners' mortgage payments temporarily;
* an alternative principal reduction waterfall to encourage servicers
and investors to write down a portion of the outstanding principal
balance of homeowners' mortgage loans, with increased incentives to
encourage those writedowns;
* the Home Affordable Foreclosure Alternatives program, which provides
a streamlined process and financial incentives to servicers and
homeowners who use a short sale or deed-in-lieu to avoid foreclosure
on an eligible loan under HAMP;
* new up-front documentation requirements; and;
* the Second Lien Modification Program (to date, six servicers have
signed agreements to participate).
HAMP is providing immediate relief to homeowners affected by the
mortgage crisis. Those accomplishments should have been weighted more
heavily in the Draft Report.
We appreciate the GAO's recognition that Treasury has continued to
enhance HAMP since the GAO's initial audit report on the program in
July 2009. The GAO acknowledges in the Draft Report that Treasury has
taken steps to address conversions, negative equity, re-defaults, and
program stability; improve servicer communication to homeowners; and
streamline program requirements to increase permanent modifications.
Treasury's Compliance Program Remains Focused on Benefiting the
Homeowner:
Our compliance activities have primarily focused on ensuring that
homeowners are appropriately treated in accordance with HAMP
guidelines. As the program has evolved, by employing consistent
principle-based compliance assessments, we have educated servicers,
clarified expectations, and implemented remedies that have shaped
servicer behavior in order to address the most vital issue: the
ultimate impact on the homeowner.
For example, while the GAO asserted that Treasury lacked guidance
regarding servicers' required Quality Assurance (QA) activities, those
activities are assessed during compliance on-site reviews against
specific criteria, including those mentioned by the GAO. The results
of the assessments are communicated to the servicers, so that, if
required, enhancements can be implemented. Similarly, compliance
activities focused on servicers' use of the NPV model have identified
areas of necessary remediation. Where non-compliance is found,
servicers are required to analyze whether there was any impact to
those homeowners who were tested during the time that the servicers'
NPV processes were not in conformance with HAMP requirements; and,
when necessary, the servicers may be required to re-perform NPV
testing on these homeowners to reasonably ensure that the outcomes
were appropriate for those homeowners. These examples demonstrate some
of the ways in which the compliance effort has positively affected
servicer behavior to the benefit of homeowners. In addition, servicer
specific data on compliance will be published in future HAMP public
reports, further increasing transparency into compliance activities.
With respect to Treasury's enforcement of HAMP requirements, Treasury
has created the HAMP Compliance Committee to review the results of all
compliance activities and ensure consistent treatment of servicers.
The HAMP Compliance Committee has established a process which
evaluates the nature and scope of instances of non-compliance and
assesses appropriate responses, including remedies, in a consistent
manner. These remedies may include those that are non-financial such
as process improvements, analysis of impact on homeowners, and re-
evaluation of homeowners (as described above), and financial remedies
such as withholding incentives or clawing back incentives already
paid. The HAMP remedies policy currently being reviewed for approval
simply documents Treasury's existing robust process. The GAO's
evaluation of Treasury's HAMP compliance program should consider those
factors.
More Than a Million Homeowners' Mort2aee Payments Have Been Reduced:
Unlike any previous foreclosure-mitigation effort, HAMP established a
standard for an affordable and sustainable modification across the
industry that substantially reduced mortgage payments, set at 31% of
gross monthly income. Over 100 servicers are participating in HAMP.
These servicers, when combined with thousands of Fannie Mae and
Freddie Mac servicers participating in the program, service nearly 90%
of eligible outstanding mortgage debt in all 50 states, the District
of Columbia, and the U.S. territories. Nearly one million borrowers
are now in trial or permanent modifications, with median payment
reduction of over $500 per month. In aggregate, HAMP modifications
have reduced total mortgage payments for American homeowners by over
$2.2 billion already.
We appreciate the time your staff dedicated to learning about this
complex program and your consideration of our input regarding
differences of opinion in the characterization of HAMP in the Draft
Report. We will review the final audit report and provide a detailed
description of the actions Treasury has already taken and intends to
take regarding the GAO's recommendations within the statutory period.
We look forward to continuing to work with the GAO regarding our
efforts to improve HAMP and Treasury's implementation of other
programs to stabilize the financial system.
Sincerely,
Signed by:
Herbert M. Allison, Jr.
Assistant Secretary for Financial Stability:
[End of section]
Appendix IV: GAO 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 Hillman (202) 512-8678 or
hillmanr@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above, Lynda Downing, Harry Medina,
John Karikari (Lead Assistant Directors); Tania Calhoun; Emily
Chalmers; William Chatlos; Heather Latta; Rachel DeMarcus; Karine
McClosky; Marc Molino; Mary Osorno; Jared Sippel; Winnie Tsen; and Jim
Vitarello made important contributions to this report.
[End of section]
Footnotes:
[1] Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C.
§§ 5201 et seq.
[2] 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.
[3] Fannie Mae and Freddie Mac--the government-sponsored enterprises
(GSEs)--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. For the purposes of the report, we refer to mortgages
securitized by the GSEs as guaranteed by the GSEs. Securitization is a
process by which the GSEs purchase loans that mortgage lenders
originate and put these loans into mortgage securities that are sold
in global capital markets. The GSEs then guarantee the mortgage
security, which means that when a borrower stops making payments on a
loan included in the mortgage security, the GSE will step in and makes
those payments to the security's investors.
[4] GAO is required to report at least every 60 days on findings
resulting from, among other things, oversight of TARP's performance in
meeting the purposes of the act, the financial condition and internal
controls of TARP, the characteristics of both asset purchases and the
disposition of assets acquired, TARP's efficiency in using the funds
appropriated for the program's operation, and TARP's compliance with
applicable laws and regulations. 12 U.S.C. § 5226(a).
[5] See appendix II for more information on our July 2009 report
recommendations and Treasury's corresponding actions to date.
[6] NeighborWorks America is an organization chartered by Congress
that has been appropriated $475 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); Omnibus Appropriations Act of 2009, Pub.
L. No. 111-8, Div. I, Title III, 123 Stat. 524, 982 (2009) ($50
million); and Consolidated Appropriations Act, 2010, Pub. L. No. 111-
117, Div. A, Title III, 123 Stat. 3034, 3108 (2009) ($65 million).
Counseling from an agency approved by the Department of Housing and
Urban Development typically includes advice on defaults, foreclosures,
and credit issues.
[7] Government Performance and Results Act of 1993, Pub. L. No. 103-
62, 107 Stat. 285 (1993), and 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).
[8] 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).
[9] On July 1, 2009, the Federal Housing Finance Agency 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 securitized by Fannie Mae, Freddie Mac, nor insured or guaranteed
by the Department of Housing and Urban Development's FHA, the
Department of Veterans Affairs, or rural housing loans. The $50
billion will be used for loan modifications and other activities.
[11] Any funds provided by Treasury to the GSEs under the preferred
stock purchase agreements will, like TARP programs, be funded through
the issuance of public debt. Treasury will also issue public debt to
cover any losses that the GSEs incur because of the additional $25
billion they provide, as long as the GSEs have liabilities that exceed
assets.
[12] Unpaid principal balance limits (prior to modification) are
$729,750 for a one-unit building; $934,200 for a two-unit building;
$1,129,250 for a three-unit building; and $1,403,400 for a four-unit
building.
[13] The mortgage, or front-end, debt-to-income ratio under the HAMP
first-lien component is the percentage of a borrower's income
comprising mortgage principal, interest, taxes, insurance, and either
condominium, cooperative, or homeowners' association dues.
[14] The principal forbearance amount is noninterest bearing and
nonamortizing and cannot accrue interest under the HAMP 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.
[15] The GSEs have directed all of their approximately 2,000 servicers
to implement parallel HAMP programs on first-lien mortgages owned or
guaranteed by the GSEs.
[16] Roughly 42 percent of borrowers who were either in trial or
permanent modifications as of April 17, 2010, had non-GSE loans and
therefore fell under the TARP-funded portion of HAMP.
[17] Under a deed-in-lieu of foreclosure, the homeowner voluntarily
conveys all ownership interest in the home to the lender as an
alternative to foreclosure proceedings. In a short sale, a house is
sold by the homeowner through a real estate agency or other means,
rather than through foreclosure, and the proceeds of the sale are less
than what the homeowner still owes on the mortgage. The lender must
give permission to such a transaction and can agree to forgive the
shortfall between the loan balance and the net sales proceeds. Under
HAFA, accepting a deed-in-lieu must satisfy the borrower's entire
mortgage obligation in addition to releasing the lien on the subject
property.
[18] Servicers reported the number of non-GSE borrowers who were 60
days delinquent at the time they signed a servicer participation
agreement for HAMP, and the percentage of these borrowers that had
been solicited as of December 31, 2009.
[19] Congressional Oversight Panel, April Oversight Report: Evaluating
Progress on TARP Foreclosure Mitigation Programs (Washington, D.C.,
Apr. 14, 2010).
[20] According to Treasury officials, 1 servicer among the top 10
servicers was inadvertently left out of the survey.
[21] GAO, Troubled Asset Relief Program: Treasury Actions Needed to
Make the Home Affordable Modification Program More Transparent and
Accountable, [hyperlink, http://www.gao.gov/products/GAO-09-837]
(Washington, D.C.: July 2009).
[22] Congressional Oversight Panel, April 2010, and Office of the
Special Inspector General for the Troubled Asset Relief Program,
Factors Affecting Implementation of the Home Affordable Modification
Program, SIGTARP-10-005 (Washington, D.C., Mar. 25, 2010).
[23] GAO, Troubled Asset Relief Program: Home Affordable Modification
Program Continues to Face Implementation Challenges, [hyperlink,
http://www.gao.gov/products/GAO-10-556T] (Washington, D.C.: March
2010).
[24] Office of the Special Inspector General for the Troubled Asset
Relief Program, March 2010.
[25] In order to identify borrowers in imminent default, Freddie Mac
has created the Imminent Default Indicator™, a statistical model that
predicts the likelihood of default or serious delinquency for mortgage
loans that are current or less than 60 days delinquent. On March 1,
2010, and June 1, 2010, this tool and maximum borrower cash reserves
of $25,000 became the primary imminent default criteria for Freddie
Mac and Fannie Mae loans, respectively.
[26] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].
[27] Congressional Oversight Panel, April 2010.
[28] [hyperlink, http://www.gao.gov/products/GAO-09-837].
[29] Congressional Oversight Panel, April 2010.
[30] [hyperlink, http://www.gao.gov/products/GAO-10-556T].
[31] CoreLogic, New Corelogic Data Shows Decline In Negative Equity,
Media Alert (May 10, 2010).
[32] Congressional Oversight Panel, April 2010.
[33] According to Treasury, the information is determined at the time
of the HAMP application.
[34] Congressional Oversight Panel, April 2010.
[35] [hyperlink, http://www.gao.gov/products/GAO-09-837].
[36] 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.: December
2008).
[37] [hyperlink, http://www.gao.gov/products/GAO-09-837].
[38] Although there are additional HUD-approved counseling agencies
that do not receive National Foreclosure Mitigation Counseling funds
which may provide this kind of HAMP counseling, HUD's database does
not track this information.
[39] Congressional Oversight Panel, April 2010.
[40] [hyperlink, http://www.gao.gov/products/GAO-09-837].
[41] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].
[42] GAO, Internal Control Management and Evaluation Tool, [hyperlink,
http://www.gao.gov/products/GAO-01-1008G] (Washington, D.C.: August
2001).
[43] Government Performance Results Act of 1993, supra.
[44] Congressional Oversight Panel, April 2010 and Special Inspector
General for TARP, March 2010.
[45] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1].
[46] [hyperlink, http://www.gao.gov/products/GAO-09-231T].
[47] Government Performance and Results Act of 1993, Pub. L. No. 103-
62, 107 Stat. 285 (1993), and 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).
[End of section]
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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:
