Troubled Asset Relief Program
Actions Needed by Treasury to Address Challenges in Implementing Making Home Affordable Programs
Gao ID: GAO-11-338T March 2, 2011
This testimony discusses our work on the Making Home Affordable (MHA) program, including the Home Affordable Modification Program (HAMP). Since the Department of the Treasury (Treasury) first announced the framework for its MHA program over 2 years ago, the number of homeowners facing potential foreclosure has remained at historically high levels. HAMP, the key component of MHA, provides financial incentives to servicers and mortgage holders/investors to offer modifications on first-lien mortgages. The modifications are intended to reduce borrowers' monthly mortgage payments to affordable levels to help these homeowners avoid foreclosure and keep their homes. Since HAMP's inception, concerns have been raised that the program is not reaching the expected number of homeowners. In two prior reports, we looked at the implementation of the HAMP first-lien modification program, noted that Treasury faced challenges in implementing it, and made several recommendations intended to address these challenges. In addition, our ongoing work examines the extent to which additional MHA programs have been successful at reaching struggling homeowners, the characteristics of homeowners who have been assisted by the HAMP first-lien modification program, and the outcomes for borrowers who do not complete HAMP trial or permanent modifications. These programs include the Second-Lien Modification Program (2MP) for those whose first liens have been modified under HAMP, the Home Affordable Foreclosure Alternatives (HAFA) program for those who are not successful in HAMP modifications, and the Principal Reduction Alternatives (PRA) program for borrowers who owe more on their mortgages than the value of their homes. This testimony is based on the report on HAMP that we issued in June 2010, as well as on preliminary observations from our ongoing work. Specifically, this statement focuses on (1) the extent to which HAMP servicers have treated borrowers consistently and the actions that Treasury and its financial agents have taken to ensure consistent treatment; (2) the status of Treasury's second-lien modification, foreclosure alternatives, and principal reduction programs; (3) the characteristics of borrowers who received HAMP modifications; and (4) outcomes for borrowers who are denied or fall out of HAMP trial or permanent first-lien modifications.
In June 2010, we reported on several inconsistencies in the way servicers treated borrowers under HAMP that could lead to inequitable treatment of similarly situated borrowers. These inconsistencies involved how servicers solicited borrowers for the program, how they evaluated borrowers who were not yet 60 days delinquent on their mortgage payments, and how they handled borrower complaints. In addition, we noted that while Treasury had taken some steps to ensure servicer compliance with program guidance, it had not yet finalized consequences for servicer noncompliance. We made eight recommendations to improve the transparency and accountability of HAMP in June 2010. Treasury stated that it intended to implement some of the recommendations, but little action has been taken to date. Further, as part of our ongoing work, we identified several implementation challenges that had slowed implementation of newer MHA programs, specifically 2MP, HAFA, and the Principal Reduction Alternative (PRA). For example, we found that servicers experienced difficulties in using a required database to identify borrowers who might be eligible for 2MP, contributing to a slow start for this program. We found that borrowers who were in HAMP trial or permanent modifications tended to share certain characteristics, such as reduced income and having high debt levels, and that those who were canceled from trial modifications or redefaulted from permanent modifications tended to be further into delinquency at the time of their modifications. Lastly, we found that many borrowers who were denied or fell out of HAMP modifications had been able to avoid foreclosure to date. But weaknesses in how Treasury reports the disposition paths, or outcomes, for these borrowers make it difficult to understand exactly what has happened to these homeowners.
GAO-11-338T, Troubled Asset Relief Program: Actions Needed by Treasury to Address Challenges in Implementing Making Home Affordable Programs
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United States Government Accountability Office:
GAO:
Testimony:
Before the Subcommittee on Insurance, Housing, and Community
Opportunity, Committee on Financial Services, House of Representatives:
For Release on Delivery:
Expected at 2:00 pm. EST:
Wednesday, March 2, 2011:
Troubled Asset Relief Program:
Actions Needed by Treasury to Address Challenges in Implementing
Making Home Affordable Programs:
Statement of Mathew J. Scirč, Director:
Financial Markets and Community Investment:
GAO-11-338T:
Chairman Biggert, Ranking Member Gutierrez, and Members of the
Subcommittee:
I am pleased to be here today to discuss our work on the Making Home
Affordable (MHA) program, including the Home Affordable Modification
Program (HAMP). Since the Department of the Treasury (Treasury) first
announced the framework for its MHA program over 2 years ago, the
number of homeowners facing potential foreclosure has remained at
historically high levels. HAMP, the key component of MHA, provides
financial incentives to servicers and mortgage holders/investors to
offer modifications on first-lien mortgages. The modifications are
intended to reduce borrowers' monthly mortgage payments to affordable
levels to help these homeowners avoid foreclosure and keep their homes.
Since HAMP's inception, concerns have been raised that the program is
not reaching the expected number of homeowners. In two prior reports,
we looked at the implementation of the HAMP first-lien modification
program, noted that Treasury faced challenges in implementing it, and
made several recommendations intended to address these challenges.
[Footnote 1] In addition, our ongoing work examines the extent to
which additional MHA programs have been successful at reaching
struggling homeowners, the characteristics of homeowners who have been
assisted by the HAMP first-lien modification program, and the outcomes
for borrowers who do not complete HAMP trial or permanent
modifications. These programs include the Second-Lien Modification
Program (2MP) for those whose first liens have been modified under
HAMP, the Home Affordable Foreclosure Alternatives (HAFA) program for
those who are not successful in HAMP modifications, and the Principal
Reduction Alternatives (PRA) program for borrowers who owe more on
their mortgages than the value of their homes.
My statement is based on the report on HAMP that we issued in June
2010, as well as on preliminary observations from our ongoing
work.[Footnote 2] Specifically, this statement focuses on (1) the
extent to which HAMP servicers have treated borrowers consistently and
the actions that Treasury and its financial agents have taken to
ensure consistent treatment; (2) the status of Treasury's second-lien
modification, foreclosure alternatives, and principal reduction
programs; (3) the characteristics of borrowers who received HAMP
modifications; and (4) outcomes for borrowers who are denied or fall
out of HAMP trial or permanent first-lien modifications.
To examine these questions, we spoke with and obtained information
from 10 HAMP servicers of various sizes who collectively had been
designated 71 percent of the TARP funds allocated to participating
servicers. We visited 6 of them for our June 2010 report. In addition,
for our ongoing work, we spoke with and obtained data from 6 large MHA-
participating servicers. We reviewed HAMP program documentation issued
by Treasury, including supplemental directives for the first-lien
program and announcements of new TARP-funded homeowner assistance
programs. To determine the key elements needed to ensure program
stability and adequate program management, we compared documents
obtained from Treasury regarding HAMP program governance and internal
controls to the Government Performance and Results Act of 1993 (GPRA)
and the Standards for Internal Control in the Federal Government.
[Footnote 3] We also analyzed loan-level data from Treasury's HAMP
database, which included data reported by servicers on borrowers
evaluated for HAMP participation through September 30, 2010, to
analyze the characteristics of borrowers who received HAMP
modifications, were canceled from HAMP trial modifications, or
redefaulted from permanent HAMP modifications. We coordinated our work
with other TARP oversight entities, including the Congressional
Oversight Panel, the Office of the Special Inspector General for TARP
(SIGTARP), and the Financial Stability Oversight Board.
The work on which this testimony is based was performed in accordance
with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our 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 our audit objectives.
Summary:
In June 2010, we reported on several inconsistencies in the way
servicers treated borrowers under HAMP that could lead to inequitable
treatment of similarly situated borrowers. These inconsistencies
involved how servicers solicited borrowers for the program, how they
evaluated borrowers who were not yet 60 days delinquent on their
mortgage payments, and how they handled borrower complaints.[Footnote
4] In addition, we noted that while Treasury had taken some steps to
ensure servicer compliance with program guidance, it had not yet
finalized consequences for servicer noncompliance. We made eight
recommendations to improve the transparency and accountability of HAMP
in June 2010. Treasury stated that it intended to implement some of
the recommendations, but little action has been taken to date.
Further, as part of our ongoing work, we identified several
implementation challenges that had slowed implementation of newer MHA
programs, specifically 2MP, HAFA, and the Principal Reduction
Alternative (PRA). For example, we found that servicers experienced
difficulties in using a required database to identify borrowers who
might be eligible for 2MP, contributing to a slow start for this
program. We found that borrowers who were in HAMP trial or permanent
modifications tended to share certain characteristics, such as reduced
income and having high debt levels, and that those who were canceled
from trial modifications or redefaulted from permanent modifications
tended to be further into delinquency at the time of their
modifications. Lastly, we found that many borrowers who were denied or
fell out of HAMP modifications had been able to avoid foreclosure to
date. But weaknesses in how Treasury reports the disposition paths, or
outcomes, for these borrowers make it difficult to understand exactly
what has happened to these homeowners.
Background:
In March 2009, Treasury issued the first HAMP guidelines for modifying
first-lien mortgages in an effort to help homeowners avoid
foreclosure. The goal of the first-lien mortgage modification program
is to reduce struggling homeowners' mortgage payments to more
affordable levels--specifically to 31 percent of the borrower's
income. To reduce mortgage payments, servicers may modify the loan by
lowering the interest rate, extending the amortization period, or
forbearing principal. According to Treasury officials, the program was
intended to offer reduced monthly payments to up to 3 to 4 million
homeowners.
Through December 2010, there were a total of 143 active servicers
under the TARP-funded portion of HAMP. Through December 2010, over 1.7
million HAMP trial modifications had been offered to borrowers, nearly
1.5 million of which had begun HAMP trial modifications.[Footnote 5]
Of the trial modifications begun, approximately 152,000 were active
trial modifications, and roughly 522,000 were active permanent
modifications. Approximately 735,000 trial modifications and around
58,000 permanent modifications had been canceled (fig. 1). As of
December 31, 2010, $1 billion in TARP funds had been disbursed for
TARP-funded housing programs, of which roughly $840 million was
disbursed to servicers for HAMP-related activity. Most of the
disbursements to date have been made for the first-lien modification
program.
Figure 1: GSE and Non-GSE HAMP Trial and Permanent Modifications Made
and Canceled Each Month, through December 2010:
[Refer to PDF for image: multiple line graph]
Date: May 2009 and before;
Trials started: 55,381.
Date: June 2009;
Trials started: 109,296.
Date: July 2009;
Trials started: 119,683.
Treasury announces goal of 500,000 trials by November 1, 2009.
Date: August 2009;
Trials started: 144,326.
Date: September 2009;
Trials started: 134,400;
Permanents started: 4,742.
Date: October 2009;
Trials started: 159,078;
Permanents started: 10,907.
Date: November 2009;
Trials started: 114,923;
Permanents started: 15,775.
Start of Treasury's Conversion Campaign:
Date: December 2009;
Trials started: 118,153;
Permanents started: 35,514.
Date: January 2010;
Trials started: 94,189;
Permanents started: 50,364;
Trials canceled: 60,476;
Permanents canceled: 1,005.
Date: February 2010;
Trials started: 87,475;
Permanents started: 52,905;
Trials canceled: 28,187;
Permanents canceled: 494.
Date: March 2010;
Trials started: 70,193;
Permanents started: 60,594;
Trials canceled: 66,510;
Permanents canceled: 1,380.
Date: April 2010;
Trials started: 47,740;
Permanents started: 68,291;
Trials canceled: 122,467;
Permanents canceled: 865.
Date: May 2010;
Trials started: 25,798;
Permanents started: 47,724;
Trials canceled: 152,056;
Permanents canceled: 2,613.
Date: June 2010;
Trials started: 21,422;
Permanents started: 51,205;
Trials canceled: 91,118;
Permanents canceled: 2,466.
Date: July 2010;
Trials started: 23,958;
Permanents started: 36,695;
Trials canceled: 96,025;
Permanents canceled: 4,089.
Date: August 2010;
Trials started: 22,531;
Permanents started: 33,342;
Trials canceled: 46,699;
Permanents canceled: 6,209.
Date: September 2010;
Trials started: 30,158;
Permanents started: 27,840;
Trials canceled: 36,386;
Permanents canceled: 10,069.
Date: October 2010;
Trials started: 29,124;
Permanents started: 23,750;
Trials canceled: 19,563;
Permanents canceled: 7,116.
Date: November 2010;
Trials started: 28,856;
Permanents started: 29,972;
Trials canceled: 9,622;
Permanents canceled: 8,666.
Date: December 2010;
Trials started: 29,764;
Permanents started: 30,030;
Trials canceled: 5,400;
Permanents canceled: 13,048.
Source: GAO analysis of Treasury data.
[End of figure]
In addition to first-lien modifications, Treasury has announced a
number of TARP-funded housing programs, including those for modifying
second liens held by borrowers with first-lien modifications under
HAMP, reducing principal, offering temporary forbearance for
unemployed borrowers, and providing alternatives to foreclosure (see
table 1). At the current time, with the exception of the Housing
Finance Agency (HFA) Hardest-Hit Fund, the cutoff date for borrowers
to be accepted into TARP-funded programs is December 31, 2012, and
disbursements of TARP funds may continue until December 2017. The
cutoff date and last possible disbursement date for the HFA Hardest-
Hit Fund has yet to be determined.
Table 1: Status of TARP-Funded Housing Programs as of December 2010:
Program: HAMP First-Lien Modification;
Program description: First-lien loan modifications;
Program status:
* Announced in March 2009;
* Implemented in April 2009;
* 143 active non-GSE servicers;
* More than 1.5 million trials started--522,000 active permanent
modifications, 152,000 active trials, and 735,000 cancellations;
* Over $827 million disbursed in incentive payments.
Program: 2MP;
Program description: Second-lien loan modifications for HAMP first-
lien borrowers;
Program status:
* Announced in March 2009;
* Implemented in March 2010;
* 17 servicers have signed agreements;
* $2.9 million in incentive payments made.
Program: HAFA;
Program description: Incentives for short sales or deeds-in-lieu of
foreclosure;
Program status:
* Announced in March 2009;
* Implemented in April 2010;
* $9.5 million in incentive payments made.
Program: HFA Hardest-Hit Fund;
Program description: Funding for state housing finance agencies in the
18 states and Washington, D.C., hardest hit by the foreclosure crisis;
Program status:
* Announced in February and March 2010;
* Implementation varies by state;
* $7.6 billion designated for 19 HFAs.
Program: PRA;
Program description: Principal reduction for HAMP-eligible borrowers
with high loan-to-value ratios;
Program status:
* Announced in March 2010;
* Implemented October 2010.
Program: HAMP Unemployed Borrowers;
Program description: Temporary principal forbearance for unemployed
borrowers;
Program status:
* Announced in March 2010;
* Implemented July 2010;
* No expected TARP funds.
Program: FHA Refinance;
Program description: Principal reduction and loan refinancing into an
FHA loan;
Program status:
* Announced in March 2010;
* Implemented September 2010;
* $11 billion designated.
Source: Treasury.
[End of table]
Servicers Have Been Inconsistent in Soliciting and Evaluating HAMP
Borrowers and More Treasury Action Is 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, in our June
2010 report, we identified several inconsistencies in the way
servicers treated borrowers under HAMP that could lead to inequitable
treatment of similarly situated borrowers.[Footnote 6] First, because
Treasury did not issue guidelines for soliciting borrowers for HAMP
until a year after announcing the program, the servicers we contacted
solicited borrowers differently. A few solicited those who were 31
days delinquent on their payments, but other servicers waited until
borrowers were at least 60 days delinquent. We also noted that many
borrowers had complained they did not receive timely responses to
their HAMP applications and had difficulty obtaining information about
the program. In March 2010, Treasury issued guidelines to address some
of the issues related to communicating with borrowers about the
program, and said it planned to monitor servicers' compliance with the
guidelines.
Second, Treasury's lack of specific guidelines for determining HAMP
eligibility for borrowers current or less than 60 days delinquent, but
in imminent danger of defaulting has led to inconsistencies in how
servicers evaluate them. The 10 servicers who GAO contacted reported
seven different sets of criteria for determining imminent default. Two
servicers considered borrowers in imminent default if they met basic
HAMP eligibility requirements, but other servicers had additional
criteria, such as requiring that a hardship situation has existed for
more than 1 year. Treasury's goal was to create uniform, clear, and
consistent guidance for loan modifications across the servicing
industry, but these differences may result in one borrower's being
approved for HAMP and another borrower with the same financial
situation and loan terms being denied by a different servicer. We
recommended that Treasury establish clear, specific criteria for
determining whether a borrower was in imminent default to ensure
greater consistency across servicers. However, Treasury believes the
impact of these variations on borrowers is inconsequential and has
declined to implement this recommendation. We continue to believe that
further actions are warranted.
In addition, Treasury has not clearly informed borrowers that they can
use the HOPE Hotline 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.[Footnote 7] The HOPE Hotline also has
procedures for referring borrowers who need additional assistance to
the Making Home Affordable Escalation Team. However, it is unclear
whether borrowers are aware of and using the HOPE Hotline to raise
concerns about their servicers and challenge potentially incorrect
denials. We recommended that Treasury (1) more clearly inform
borrowers that the HOPE Hotline may also be used for these purposes
and (2) monitor the effectiveness of the HOPE Hotline as a process for
handling borrower concerns.
Finally, Treasury has taken some steps to ensure that servicers comply
with HAMP program requirements, but has yet to establish specific
remedies for noncompliance with HAMP guidelines. For instance, the
HAMP servicer participation agreement describes actions that could be
taken in response to noncompliance and the HAMP Compliance Committee
monitors servicers' performance and activities. But without
standardized remedies for noncompliance, Treasury risks treating
servicer noncompliance inconsistently and its methods of responding to
incidents of noncompliance lack transparency. In our June 2010 report,
we recommended that Treasury finalize and expeditiously issue
consequences for servicers who do not comply with HAMP requirements.
We made eight recommendations to improve the transparency and
accountability of HAMP in June 2010. Treasury stated that it intended
to implement some of the recommendations, but little action has been
taken to date.
Implementation Challenges Have Affected the Progress of Treasury's
Newer Housing Programs:
The implementation of Treasury's 2MP, HAFA, and PRA programs has been
slow, and limited activity has been reported to date. This slow pace
is attributed in part to several implementation challenges, including
the following.
* Difficulty matching first and second liens for 2MP. Because
eligibility for 2MP required a first-lien HAMP modification, Treasury
contracted with a database vendor to provide data on existing second
liens that corresponded with these modifications. However, the
servicers we contacted noted that even differences in the spelling of
addresses--for example, in abbreviations or spacing--could prevent an
accurate identification. Initial 2MP guidelines stated that servicers
could not offer a second-lien modification without confirming a match
with the database vendor, even if they had serviced both first and
second liens on the same property. In November 2010, Treasury provided
updated program guidance that allowed servicers to offer a 2MP
modification if they could identify a first-and second-lien match
within their own portfolio or had evidence that a corresponding first
lien existed, even if the database had not identified it.
* Extensive program requirements for HAFA. All six of the large MHA
servicers we spoke with identified extensive program requirements as
reasons for the slow implementation of HAFA, including the initial
requirement that applicants first be evaluated for a HAMP first-lien
modification. Because of this requirement, potential HAFA borrowers
had to submit extensive income and other documentation required for a
modification, even if they simply wanted to sell. In cases where a
borrower had already identified a potential buyer before executing a
short-sale agreement with the servicer, the additional time required
for a HAMP first-lien evaluation may have dissuaded the buyer from
purchasing the property. Restrictive short-sale requirements and a
requirement that mortgage insurers waive certain rights may have also
contributed to the limited activity under HAFA. Servicers said that
given these requirements, they did not expect HAFA to increase their
overall number of short sales and deeds-in-lieu. In response to this
concern, Treasury released updated HAFA guidance on December 28, 2010,
to no longer require servicers to document and verify a borrower's
financial information to be eligible for HAFA.
* Voluntary nature of the PRA program. Treasury officials told us that
13 of the 20 largest MHA servicers were planning to offer principal
reduction to some extent, but some servicers we spoke with said they
would limit the conditions under which they would offer principal
forgiveness under PRA. Treasury's PRA guidelines require all servicers
participating in HAMP to consider principal forgiveness for HAMP-
eligible borrowers with mark-to-market loan-to-value ratios (LTV)
greater than 115 percent.[Footnote 8] But servicers are not required
to offer principal reduction, even if the net present value (NPV) is
higher when principal is forgiven.[Footnote 9] For example, one
servicer had developed a "second look" process that used internal
estimates of default rates to determine NPV and did not forgive
principal unless these estimates--not those calculated using program
guidelines--indicated a higher NPV with forgiveness. As a result, only
15 to 25 percent of those who otherwise would have received principal
forgiveness received it, according to this servicer. We recommended in
June 2010 that Treasury report activity under PRA, including the
extent to which servicers determined that principal reduction was
beneficial to mortgage investors but did not offer it, to ensure
transparency in the implementation of this program. Treasury officials
told us they would report PRA activity at the servicer level once the
data were available. We plan to continue to monitor Treasury's
reporting of PRA and other TARP-funded housing programs.
In addition, we found that Treasury could do more to build on the
lessons learned from its first-lien modification program. For example,
we previously reported that Treasury had not sufficiently assessed the
capacity of servicers to implement the first-lien program. More
recently, we observed that Treasury has not obtained all required
documentation to demonstrate that servicers have the capacity to
successfully implement the newer programs. According to Treasury,
Fannie Mae has conducted program-specific readiness reviews for the
top-20 large servicers for 2MP, HAFA, and PRA, including all 17
servicers participating in 2MP. These reviews assess servicers'
operational readiness, including the development of key controls to
support new programs, technology readiness, training readiness,
staffing resources, and program processes and documentation. According
to Treasury's summary of these reviews, of those that had completed
reviews, 4 had provided all required documents for HAFA, and 3 had
provided all required documents for PRA. None of the servicers
provided all required documents for 2MP. As a result, servicers'
ability to effectively offer troubled homeowners second-lien
modifications, foreclosure alternatives, and principal reductions is
unclear. Further, Treasury has not implemented our June 2010
recommendation that it establish goals and effective performance
measures for these programs, nor has it said how it will use any
assessments to hold servicers accountable for their performance.
Treasury also has not established actions it will take in cases where
individual servicers are not performing as expected in these programs.
As we noted in June 2010, without performance measures and goals,
Treasury will not be able to effectively assess the outcomes of these
programs.
HAMP Borrowers Shared Several Characteristics, Including Reduced
Income; Early Data Indicate that Borrowers Who Redefaulted from
Permanent Modifications Were Further Into Delinquency:
Our analysis of HAMP data for borrowers in trial and permanent
modifications indicated that over half of borrowers cited curtailed
income, such as reduced pay, as the primary reason for needing to
lower their mortgage payments (56 percent of borrowers in active
modifications and 53 percent in trial modifications). However, only 5
percent of borrowers in each of these groups cited unemployment as
their primary reason for financial hardship. Borrowers also had high
levels of debt prior to modification with monthly mortgage payments
that were 45 and 46 percent of gross monthly income, respectively, and
total debt levels of 72 and 76 percent of gross monthly income,
respectively. Even after modification, these borrowers continued to
have high debt levels (median back-end DTI ratios of 55 and 57 percent
for those in trial and permanent modifications, respectively). In
addition, borrowers in trial and permanent modifications tended to be
"underwater," with median mark-to-market LTV ratios of 123 percent and
128 percent, respectively.
Borrowers who were either canceled from a trial modification or
redefaulted from a permanent one shared several of these
characteristics, including having high debt levels and being
"underwater" on their mortgages. However, some characteristics
appeared to increase the likelihood that a borrower would be canceled
from a trial modification. For example, borrowers who received a trial
modification based on stated income were 52 percent more likely to be
canceled from trial modifications than those who started a trial
modification based on documented income. In some cases, borrowers who
received trial modifications based on stated income were not able to
or failed to provide proof of their income or other information for
conversion to permanent modification.[Footnote 10] In other cases,
borrowers may have submitted the required documentation but the
servicer lost the documents. In addition, borrowers who were 60 or 90
days or more delinquent at the time of their trial modifications were
6 and 9 percent more likely to have trial modifications canceled,
respectively, compared with borrowers who were not yet delinquent at
the time of their trial modifications. Treasury has acknowledged the
importance of reaching borrowers before they are seriously delinquent
by requiring servicers to evaluate borrowers still current on their
mortgages for imminent default. But, as we noted in June 2010, this
group of borrowers may be defined differently by different servicers.
[Footnote 11]
Borrowers who had high mark-to-market LTV ratios (from 120 to 140
percent) were 7 percent less likely to be canceled from trial
modifications than those with mark-to-market LTV ratios at or below 80
percent, and those with a mark-to-market LTV ratio of more than 140
percent were 8 percent less likely to be canceled. Borrowers who
received principal forgiveness of between 1 and 50 percent of their
total loan balance were less likely to be canceled from trial
modifications compared with those who did not receive principal
forgiveness. In addition, larger monthly payment reductions lowered
the likelihood that a trial modification would be canceled. For
example, borrowers who received a principal and interest payment
reduction of least 10 percent were less likely to be canceled from
their trial modifications than other borrowers.
Our initial observations of over 15,000 non-GSE borrowers who had
redefaulted from permanent HAMP modifications through September 2010
indicated these borrowers differed from those in active permanent
modifications in several respects. Specifically, non-GSE borrowers who
redefaulted on their HAMP permanent modifications tended to have
higher levels of delinquency at the time they were evaluated for a
trial modification (median delinquency of 8 months compared to 5
months for those still in active permanent modifications), lower
credit scores, and lower median percentage of payment reduction
compared with those who were still current in their permanent
modifications (24 percent compared with 33 percent). These borrowers
may have received smaller reductions in their payments because they
had lower debt levels before modification than borrowers who did not
redefault.
Most Borrowers Denied or Canceled from Trial Modifications Have
Avoided Foreclosure to Date, but Limits to Treasury's Data Make
Understanding Their Outcomes Difficult:
We requested data from six servicers on the outcomes of borrowers who
(1) were denied a HAMP trial modification, (2) had their trial
modification canceled, or (3) redefaulted from a HAMP permanent
modification. According to the data we received, of the about 1.9
million GSE and non-GSE borrowers who were evaluated for a HAMP
modification by these servicers as of August 31, 2010, 38 percent had
been denied a HAMP trial modification, 27 percent had seen their HAMP
trial modifications canceled, and 1 percent had redefaulted from a
HAMP permanent modification.[Footnote 12]
According to these servicers' data, borrowers who were denied HAMP
trial modifications were more likely to become current on their
mortgages without any additional help from the servicer (39 percent)
than to have any other outcome. Of those borrowers who were canceled
from a HAMP trial modification, servicers often initiated actions that
could result in the borrower retaining the home. Specifically, 41
percent of these borrowers had received or were in the process of
receiving a permanent proprietary modification, and 16 percent had
received or were in the process of receiving a payment plan. However,
servicers started foreclosure proceedings on 27 percent of borrowers
at some point after the HAMP trial modification was canceled, but only
4 percent of these borrowers completed foreclosure. Compared with
borrowers who were denied, borrowers who had a HAMP trial modification
canceled were less likely to become current on their mortgages (15
percent) or to pay off their loan (4 percent).
Finally, though data are limited, of the borrowers who redefaulted
from a HAMP permanent modification, almost half were reflected in
categories other than proprietary modification, payment plan, becoming
current, foreclosure alternative, foreclosure, or loan payoff. Twenty-
eight percent of borrowers who redefaulted from permanent
modifications were referred for foreclosure at some point after
redefaulting, but, like borrowers denied or canceled from a HAMP trial
modification, the percentage of borrowers who completed foreclosure
remained low relative to other outcomes (less than 1 percent). Unlike
borrowers who were denied or canceled, borrowers who redefaulted were
less likely to receive or be in the process for receiving a permanent
proprietary modification or payment plan after redefaulting, with 27
percent of borrowers receiving or in the process for receiving one of
the outcomes. In addition, less than 1 percent of borrowers who
redefaulted had become current as of August 31, 2010.[Footnote 13]
We also looked at data that Treasury had begun reporting on the
disposition paths of borrowers who were denied or canceled from HAMP
trial modifications. However, weaknesses in how Treasury requires
servicers to report data make it difficult to understand the current
status of these borrowers. First, Treasury's system for reporting the
disposition of borrowers requires servicers to place borrowers in only
one category, even when borrowers are being evaluated for several
possible dispositions, with non-HAMP (proprietary) modifications
reported first. As a result, the proportion of borrowers reported as
receiving proprietary modifications is likely to be overstated
relative to other possible dispositions, such as foreclosure starts.
Further, Treasury does not require servicers to distinguish between
completed and pending actions, so some reported outcomes may not be
clear. For example, we asked six large servicers to separate borrowers
who had a HAMP trial modification canceled into two groups: those who
were being evaluated for permanent proprietary modifications and those
who had actually received them. The servicers' data indicated that 23
percent of these borrowers were in the process of being approved for
proprietary modifications, and 18 percent had received one. At the
same time, Treasury reported that 43 percent of borrowers canceled
from a HAMP trial modification through August 2010 were in the process
of obtaining a proprietary modification.[Footnote 14]
Servicers told us they had been able to offer more proprietary
modifications than HAMP permanent modifications because proprietary
modifications offered greater flexibility. For example, several
servicers told us that their proprietary modification programs had
fewer documentation requirements. Several servicers told us they were
able to offer more proprietary modifications than HAMP modifications
or help borrowers when HAMP could not because their proprietary
modifications had fewer eligibility requirements, such as restrictions
on occupancy type. In addition, while HAMP guidelines require
borrowers to have a mortgage payment exceeding 31 percent of their
income, all of the servicers we spoke with indicated their proprietary
modification programs also served borrowers who had lower payment
ratios. While the number of proprietary modifications has outpaced the
number of HAMP modifications, the sustainability of both types of
modifications is still unclear. For example, proprietary modifications
may not reduce monthly mortgage payments as much as HAMP
modifications, potentially affecting the ability of borrowers to
maintain their modified payments.
In summary, we reported in June 2010 that it would be important for
Treasury to expeditiously implement a prudent design for the remaining
TARP-funded housing programs. Our current work shows there is more
Treasury can do to ensure the effective implementation of these
programs, including ensuring that servicers have sufficient capacity
to implement them, and that borrowers are notified about potential
eligibility for second-lien modifications. We also believe it will be
important for Treasury to have clear and accurate information on the
dispositions of borrowers who are denied or fall out from HAMP
modifications. Without accurate reporting of borrower outcomes,
Treasury cannot know the actual extent to which borrowers who are
denied, canceled, or redefaulted from HAMP are helped by other
programs or evaluate the need for further action to assist this group
of homeowners. We provided a copy of our current draft report to
Treasury for its review and comment. Treasury acknowledged the
report's description of servicers' challenges and appreciated our
assessment of Treasury's housing programs. Treasury indicated that the
draft report raised certain criticisms of the design and
implementation of MHA that were unwarranted. We continue to believe
there are opportunities to improve the transparency, accountability,
and effectiveness of MHA and anticipating the report this month, in
March 2011. We will continue to monitor Treasury's implementation and
management of TARP-funded housing programs as part of our ongoing
oversight of the performance of TARP in meeting its legislative goals.
We are also conducting a broad-based study of the federal government's
efforts to mitigate the impact of foreclosures, which will include an
assessment of how federal foreclosure mitigation efforts or
alternatives might better preserve homeownership, prevent avoidable
foreclosures, and otherwise help resolve troubled mortgages.
Chairman Biggert, Ranking Member Gutierrez, and Members of the
Subcommittee, I appreciate this opportunity to discuss this important
program and would be happy to answer any questions that you may have.
Thank you.
GAO Contact and Staff Acknowledgments:
For information on this testimony, please contact me at (202) 512-8678
or sciremj@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
statement. GAO staff who made major contributions to this statement
include Lynda Downing, Harry Medina, John Karikari (Lead Assistant
Directors); Tania Calhoun; Emily Chalmers; William Chatlos; Grace Cho;
Rachel DeMarcus; Marc Molino; Mary Osorno; Jared Sippel; Winnie Tsen;
Jim Vitarello; and Heneng Yu.
[End of section]
Footnotes:
[1] GAO is required to report at least every 60 days on findings
resulting from, among other things, oversight of the Troubled Asset
Relief Program's (TARP) 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, the efficiency of TARP's operations in using appropriated
funds, and TARP's compliance with applicable laws and regulations (12
U.S.C. § 5226(a)). Under this statutory mandate, we have reported on
Treasury's use of TARP funds to preserve homeownership and protect
home values. See 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)
and GAO, Troubled Asset Relief Program: Further Actions Needed to
Fully and Equitable Implement Foreclosure Mitigation Programs,
[hyperlink, http://www.gao.gov/products/GAO-10-634] (Washington, D.C:
June 2010).
[2] [hyperlink, http://www.gao.gov/products/GAO-10-634].
[3] Government Performance and Results Act of 1993, Pub. L. No. 103-
62, 107 Stat. 285, codified at 5 U.S.C. § 306 (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).
[4] [hyperlink, http://www.gao.gov/products/GAO-10-634].
[5] The government-sponsored enterprises (GSE) Fannie Mae and Freddie
Mac have directed all of their approximately 2,000 servicers to
implement parallel HAMP programs on first-lien mortgages owned or
guaranteed by the GSEs. Roughly 46 percent of borrowers who were in
trial or permanent modifications as of September 30, 2010, had non-GSE
loans and, therefore, fell under the TARP-funded portion of HAMP.
[6] [hyperlink, http://www.gao.gov/products/GAO-10-634].
[7] Fannie Mae, in its role as the MHA program administrator, has
contracted with the Homeownership Preservation Foundation to offer its
HOPE Hotline for incoming borrower calls about HAMP and Treasury's
other MHA programs. Through the HOPE Hotline, borrowers may obtain
information about the programs, assess their potential eligibility, or
discuss their individual situations, including complaints about their
servicer or about potentially incorrect HAMP denials.
[8] Mark-to-market LTV is the unpaid principal balance divided by the
property value at the time of modification.
[9] The NPV model compares expected cash flows from a modified loan to
the same loan with no modification, using certain assumptions.
[10] Treasury has recognized challenges with documentation as a reason
for the low conversion rate to permanent modifications, and as of June
2010, began requiring that servicers verify borrowers' income before
placing borrowers into trial modifications.
[11] [hyperlink, http://www.gao.gov/products/GAO-10-634].
[12] The remaining borrowers included those in active trial and
permanent modifications, those who were still being evaluated for
trial modifications, and those who were offered but declined trial
modifications. Two servicers provided the data as of their closing
date for reporting August 2010 data to Treasury, September 6, 2010,
and September 8, 2010, respectively.
[13] Because borrowers who redefault on a HAMP modification would
still retain the terms of their HAMP modification, we would not expect
many borrowers who redefaulted to receive a proprietary modification.
One servicer, however, reported that 95 percent of those borrowers who
redefaulted from a HAMP permanent modification had an action pending
for a proprietary modification. The servicer explained that it
evaluates the majority of these borrowers for another modification
program after they redefault.
[14] We requested that servicers provide the data as of August 31,
2010, but servicers could report borrowers with a canceled HAMP trial
modification to Treasury until early September 2010 for August 2010
reporting. In addition, servicers may have included loans in our data
request that have not yet been reported to Treasury and, therefore,
would not be reflected in the number of borrowers that Treasury
reports. Lastly, one servicer reported borrowers to Treasury for a
business division not included in our data.
[End of section]
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