More than a year after the creation of the Home Affordable Modification Program (HAMP) "disappointing results have raised questions about program effectiveness" according to a new report by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP.)  The report was sent to Treasury Secretary Timothy Geithner last week over the signature of SIGTARP Neil M. Barofsky.

The report, which is the first of several which will be issued, addresses HAMP's status and whether the program has met participation goals thus far and what conditions the Treasury Department has faced and will face in the future in implementing the program.  In conducting the audit, SIGTARP reviewed HAMP program policies, procedures, and marketing materials from Treasury and other government agencies involved in the program as well as materials from a sample of five participating servicers.  Officials from that servicer sample were also interviewed.  The focus of the audit, however, was the Treasury Department and not the operations of the servicers, 110 of which had signed on to participate in the program by the end of January.

The SIGTARP report outlines several broad reasons for HAMP's disappointing results to date.  First, program rules had not been fully developed before the program started and Treasury has had to revise those guidelines repeatedly, causing confusion and delay.  The Department's decision to allow servicers to start modifications before receiving supporting documentation created a large backlog of trial modifications and many of those will never become permanent.  Third, Treasury has not adequately promoted the program.  SIGTARP called the absence of televised public service announcements "inexplicable."

The HAMP program was designed to assist borrowers who are delinquent in mortgage payments to obtain modifications to those loans which would place the maximum payment amount at 31 percent of monthly income, hopefully permitting borrowers to return to performing status.  The main vehicle for these modifications has been a reduction in interest rate although a few borrowers have also had the term of their loan extended and an even smaller number have seen reductions in the principal balance.

The SIGTARP report said that, while Treasury had a "laudable aspiration" that the program would actually help 3 to 4 million homeowners avoid foreclosure it also has stated that the goal is not tied to how many homeowners actually obtain relief and avoid foreclosure but rather on how many will receive offers for a trial modification.  "Measuring trial modification offers, or even actual trial modifications for that matter," the report says, "is simply not particularly meaningful."  Instead, it recommends that a new goal be developed and tracked; how many people are helped to avoid foreclosure and stay in their homes through permanent modifications.  "Transparency and accountability demand that Treasury establish goals that are meaningful, and that it report its progress in meeting such meaningful goals on a monthly basis.  Continuing to frame HAMPs success around the number of 'offers' extended is simply not sufficient."

Treasury itself refers to the 168,708 permanent modifications achieved as "disappointing" and one official's estimate of a total of 1.5 to 2 million such modifications over the four years the program is designed to run, may be only a small fraction of the total number of foreclosures that will actually occur during that period.  It is that estimate, the report says, and not the still often quoted 3-to-4-million figure that "should inform the debate on whether HAMP is worth the resources being expended or whether the program needs to be revamped to actually help more borrowers."      

A second stated goal, to involve servicers representing coverage of 90 percent of all privately owned mortgages was very nearly reached by the time HAMP issued its first public status report in July, 2009.  At that point, 38 servicers had signed on to the program, a number which covered 85 percent of the target market.  By the end of January the 110 participating servicers represent 89 percent coverage.

Borrower participation, however, has been another matter.  The first trial modifications were started in April, 2009 and through July 2009, 235,247 borrowers had entered the program.  Treasury, unhappy with the numbers, issued a series of changes to accelerate the pace of enrollment including announcement of individual servicer performance, the development of program metrics and a review by Freddie Mac of a sample of modifications.  A goal of one-half million trial modifications by November 1 was also set.  That goal was in fact, exceeded but, when the first public disclosure of permanent modifications was announced it was only 31,000.  Treasury has since announced further efforts to increase these conversions both through increased pressure on and monitoring of servicers, engagement with local groups to increase outreach, and streamlining of the documentation process.  However, a big problem still appears to be failure to provide documentation on the part of borrowers and lack of communication between borrower and servicer.

Since October, conversions to permanent status have increased monthly, going from 3,000 to 52,000.  The report, however, quotes a Treasury official as saying even the current "modest pace" of conversions is not sustainable and the number of trial cancellations will likely increase.

SIGTARP identified two significant hurdles in converting the substantial backlog of trial modifications into permanent status.  Originally servicers were permitted to start a borrower into a trial program with only a stated income or verbal financial information.  In December, HAMP reported that 18 servicers including four out of the five largest were using stated income, scheduling documentation for collection during the trial period.  This has caused significant time and effort on the part of servicers both in collecting data and in identifying and removing ineligible borrowers from trials after they submitted inaccurate information.  "Although use of verbal financial information certainly helped Treasury meet its interim target of achieving 500,000 trial modifications by November 2009; because of this diversion of resources, allowing verbal modifications was arguably counterproductive to attaining permanent modifications" This policy was ended effective April 1, 2010.  

A second problem was caused by a trial period payment policy that will also end in April.  Under the original rules, after the borrower made the first payment on his modified mortgage he then had the full length of the trial period to make further required payments.  Thus the remaining two payments (or three payments in the case of non-defaulted borrowers with a four month trail) could be made on the last day of the trial.  This effectively hid borrowers who were unable or unwilling to keep up new payments and it has been found that about 25 percent of homeowners in trial have not kept payments current.  Many homeowners may have used this policy to deliberately game the system and live rent free during the trial.  As of April 15, borrowers must make their trial period payments every month to be considered current.

Recent data indicates HAMP might confront additional difficulties in bringing new borrowers into the trial program.  Since October, new trials have only averaged about 96,000 per month and January and February had significantly lower rates than November and December.  It is also clear that a significant number of borrowers will fall out of the trial without completing it.  The report quotes one Treasury official as estimating that only 50 to 66 percent of trial modifications will become permanent and another as saying that a 75 percent conversion rate would make it "quite a successful program."

The remainder of SIGTARP's findings and recommendations in its first report will be covered in a second article on Monday.