Paul Kiel of ProPublica has published a serious critique of the Treasury Department's early oversight of the Home Affordable Modification Program (HAMP) that probably won't surprise anyone who has followed the troubled path of that program.   HAMP, established in 2009, was an effort to stem the rapidly rising flood of foreclosures.  It required mortgage servicers to offer loan modifications to eligible homeowners in order to lower their monthly payments and, theoretically, stay in their homes. The program was given a budget of $50 billion and a goal to modify three to four million mortgages; to date $4 billion has been spent and 1.1 million loans modified.  

Some servicers are independent companies but the largest are owned by the largest banks including Wells Fargo, CitiMortgage, Chase, and Bank of America.  Their role was to review homeowner applications and negotiate the modifications under government rules and supervision.

Working with heavily redacted documents obtained through multiple Freedom of Information Act (FOIA) requests that Treasury did its best to avoid, Kiel paints a picture of a well intention program run by federal employees who appear to have been either scared to death or in the thrall of the big banks they needed to actually run the program.

Documents obtained by Kiel show that the government did not complete a major audit of at least two of the largest servicers, Bank of America and Wells Fargo, until over a year and that audits at other servicers were rare in the first two years after the program began.   During these two years the servicers reviewed 2.7 million applications for modifications and denied two-thirds of them while homeowner complaints about mistreatment mounted.   

Kiel goes into great detail about his quest to obtain relevant documents for his story.  His original FOIA requests were denied and even after an appeal many documents were withheld; in some cases documents of servicers who never objected to their release.

Kiel says, "The documents also show how the Treasury Department coddled servicers that weren't complying with the program's rules. Once a year, servicers are required to certify that they are complying with the program's rules. But servicers define for themselves what it means to comply. A company that admits violating the rules is allowed to merely submit a cover letter with their certification stating the exceptions and how it would fix the problems."

One cover letter, published with the article, is so heavily redacted it is reduced to little more than the inside address, a paragraph addressing the reason for the letter and a signature block; the exceptions and solutions are totally blacked out. 

The actual oversight of HAMP was contracted to Freddie Mac which formed a compliance group nicknamed MHA-C.  Its first reviews of servicers were rejected by Treasury as inadequate because they were "inconsistent and incomplete" and its staff was "unqualified." 

Kiel says that Treasury didn't dispute the fact that no major audits of the biggest banks were completed until well after HAMP's launch but claimed they had begun "unprecedented reviews of servicer compliance with program directives within the first months of program implementation." A single servicer (GMAC) voluntarily provided Kiel copies of its audits and he says the reports show how cursory those earlier reviews could be.  "In December 2009, MHA-C reviewed a sample of files, but when it reported its findings to GMAC, it told the servicer that the report was "being provided for informative purposes only, and no response is required from you at this time." GMAC was not the subject of a major audit until the following July and was never penalized.

The two biggest servicers, Bank of America and Wells Fargo did not receive complete audits until more than a year after the HAMP program began by which time they had already denied over 400,000 modifications. Even where a big bank received earlier audits there was only infrequent oversight.  JPMorgan Chase, the third largest servicer received a major audit within HAMP's first year, but through 2009 and 2010, it only responded to two major audits and CitiMortgage received three.  When audits were conducted, the files reviewed were often months old.  Once the audits were finished and delivered to the servicers, servicers had a month to respond with their plans to address problems.

The robo-signing scandal that broke in September 2010 drew a lot of attention to mortgage servicer failings; that same month tfhe servicers submitted their first annual certifications to Treasury that they were complying with HAMP rules.  Kiel says the certifications were toothless; it was up to the servicer to decide whether it was in "material compliance," according to the certification form. Further, Treasury guidance as to what was "material" read, "This evaluation of materiality may or may not be quantifiable in monetary terms and should include, but is not limited to, consideration of the nature and frequency of noncompliance as well as qualitative considerations, including the impact on Program goals and objectives."

Kiel says if the servicer found that it was, by its own definition, noncompliant, it was required to list the problems and its "action plan" in a separate "cover letter" to be sent with the certification filing. But that was it. There was no penalty.  Kiel has been unable to obtain cover letters from the five largest servicers but of those he did obtain several servicers claimed they had no problems to report.

GMAC was among those who were "unaware" of problems but Kiel says there are reasons to question that statement. Two months earlier, a MHA-C audit found, among other problems, that GMAC had miscalculated homeowner income in more than 80 percent of audited cases.  That same month GMAC became the first servicer to admit to robo-signing. ,

Treasury told Kiel that the certifications were "only one part of a more comprehensive process" that included its audits, and that they did not rely solely on servicers to self-identify and report their weaknesses. Servicers were allowed to define materiality for themselves in the certifications because, she said, a "'one size fits all' approach would not have been practical."

It was only in the wake of the robo-signing scandal that Treasury decided to take punitive action against servicers breaking HAMP's rules. In June 2011 it began withholding program subsidies to the three largest servicers until the banks showed "substantial improvement." Wells Fargo quickly complied but Bank of America and JPMorgan Chase subsidies were only restored as part of the February 2012, $25 billion national servicer settlement. 

When Kiel asked servicers to comment on HAMP oversight the three largest servicers referenced Treasury's most recent assessments that showed all three required only "moderate improvement."  

A Treasury Department spokeswoman said HAMP has brought "an unprecedented level of transparency" to the mortgage servicing industry and servicers are "subject to an unprecedented level of compliance oversight."

Kiel says consumer advocates call that damning by faint praise.  He quotes Diana Thompson of the National Consumer Law Center; "The reason that the level of transparency and accountability is 'unprecedented' is because no one has ever held servicers to account. Just because you have something where before there was nothing, that doesn't mean that something works or is effective. "