The Congressional Oversight Panel (Cop) took aim at both the Treasury Department and loan servicers in a report issued Tuesday on the performance - or lack thereof - of the Home Affordable Modification Program (HAMP). The Panel even had a little blame left over to throw at Fannie Mae and Freddie Mac.
COP issued its last report in April and at that time raised serious concerns about the timeliness, accountability, and sustainability of Treasury's efforts, saying that administrators were still struggling to get the program running but that, even when it was operational, it would probably fail to reach the overwhelming majority of homeowners in trouble. Since then, the current report says, Treasury's modest changes "have not resolved the Panel's core concerns."
It now looks, the report says, as though HAMP will prevent only 700,000 to 800,000 foreclosures, far below the Administration's target of 3 to 4 million and a far cry from preventing the 8 to 13 million foreclosures expected by the end of 2012. Even setting the program's goals was poorly handled by Treasury. Initially the Department stated a goal of helping 3 to 4 million homeowners avoid foreclosure and remain in their homes but then the goal became more nebulous. Was that the number of permanent modifications or was it trial modifications started or even trial modifications offered? Subsequently even that last goal was ratcheted down in number.
HAMPs initial premise, COP said, was straightforward. Because foreclosures allow the investor only a small recovery, lenders should generally prefer to avoid that step. HAMP was designed to further incentivize lenders to modify the loan rather foreclose by offering payments to all parties to modify through a reduction in monthly payments. "Yet despite the apparent strength of HAMP's economic logic, the program has failed to help the vast majority of homeowners facing foreclosure."
HAMP did not take into account the complexity of the mortgage relationship. Rather than a one to one borrower/lender situation, most mortgages involve a servicer whose interests may collide with that of both of the other parties. The report, without using the term, points to the misaligned incentives that have been named by various regulators a dozen times in recent weeks as a major problem in averting foreclosures. Those misaligned incentives mean that servicers can make more money and get it faster through a foreclosure than through any kind of intervention or modification. HAMPs attempts to correct this market distortion by offering payments to servicers, the report says, appear to have fallen short, in part because servicers were not required to participate in the program. The servicers could be pressured by Treasury to sign up for the program, the report says, but could not be pressured to actually do the modifications. The existence of second mortgages also stymied foreclosures where the holders found they could profit from blocking the modification of the senior lien.
HAMP failed to collect and analyze data that would explain its shortcomings and does not even have a method for collecting data related to some of the program add-ons. HAMP was also faulted for its failure to hold loan servicers accountable for lost paperwork or refusal to do modifications. They have, the report said not gone much beyond reluctantly clawing back some incentives when the servicers failed to perform. Related to this is Treasury's decision to outsource much of the responsibility for its own servicers' actions to Freddie Mac and Fannie Mae. Both companies have critical business relationships with those servicers and have been too eager to protect those relationships. Freddie Mac was specifically called out in the report for its unwillingness to enforce some of its contractual rights related to foreclosure out of a stated concern it would negatively impact its relationships with servicers who are also valued as the source of loans. The report said that Treasury should prevent such conflicts of interest and make sure servicers are penalized where appropriate.
Little can apparently be done to correct the past mistakes. According to the report Treasuries Authority to restructure HAMP ended on December 3. However, COP says that some problems can still be mitigated. For instance, applying for a modification would be easier if on-line applications were permitted and Treasury should carefully examine the program's history to pin down the factors that define successful loan modifications for future reference. Some success can be reclaimed if Treasury, going forward, carefully monitors and, if necessary intervenes, in cases where borrowers fall behind with payments on their modified mortgages. "Preventing redefaults is an extremely powerful way of magnifying HAMPS impact."
Finally, Treasury should accept that HAMP will not reach its goals. The Department continues to state that the $30 billion allocated to HAMP from the Troubled Asset Relief Program will be spent when it appears that only $12 billion and maybe even as little as $4 billion will actually be expended. "Had Treasury acknowledged this reality before its crisis authority expired, it could have made material changes to HAMP or reallocated the money to a more effective program. Now that option is gone."
The report concludes "Treasury's reluctance to acknowledge HAMP's shortcomings has had real consequences. Absent a dramatic and unexpected increase in HAMP enrollment, many billions of dollars set aside for foreclosure mitigation may well be left unused. As a result an untold number of borrowers may go without help - all because Treasury failed to acknowledge HAMP's shortcomings in time."