This report was updated at 10 a.m. ET on Wednesday, June 30, to include additional information on HAMP.
Potentially "thousands" of troubled homeowners were denied opportunities to lower their monthly mortgage payments under the Obama administration's signature foreclosure-prevention plan due to servicer errors and inadequate oversight by the Treasury Department, a government audit has found.
Mortgage servicers failed to comply with basic guidelines, used different criteria to evaluate borrowers, recorded error rates up to six times their established thresholds, and couldn't provide evidence that potentially eligible homeowners had been solicited for the administration's Home Affordable Modification Program, also known as HAMP.
The errors are partly due to Treasury's failure to issue specific guidelines for servicers to follow, and the administration's lack of quality-control standards. Because servicers aren't required to adhere to the same set of standards, there's a risk that firms aren't identifying practices "that may lead to inequitable treatment of borrowers or harm taxpayers through greater potential for fraud or waste," according to a Thursday report by the Government Accountability Office.
But even if servicers were fraudulently modifying loans or improperly denying modifications to distressed homeowners, Treasury "has yet to establish specific consequences or penalties for noncompliance," the GAO notes. The department has yet to fine any servicers for noncompliance, according to the report.
Already, "Treasury specifically allows some differences in how servicers evaluate borrowers... that could result in inconsistent outcomes for borrowers," the report found.
The end result could be the "inequitable treatment" of struggling homeowners who were looking to an administration for help during the worst economic downturn since the Great Depression. HAMP is the centerpiece of the administration's $75 billion effort to stem the rising tide of foreclosures.
"I find it saddening and frustrating that none of these problems, which we among other people identified to Treasury over a year ago, have been meaningfully addressed," said Diane E. Thompson, a lawyer with the National Consumer Law Center. "And as a result, we lost a major opportunity to stem the foreclosure crisis."
Last Thursday, the House Oversight and Government Reform Committee held a hearing to examine "the overall effectiveness of processes put in place by loan servicers as they implement HAMP and any other loan modification programs that help homeowners avoid foreclosures," according to the panel's announcement. Not a single question was asked about the GAO's troubling findings, according to a transcript of the hearing.
The Treasury Department declined to comment, referring instead to its June 14 letter to GAO. In its letter, Treasury said it had begun to address many of the shortcomings identified by the watchdog. For example, Treasury has created a compliance committee to review results and ensure consistent treatment. Also, the agency has carried out on-site reviews of servicers' performance.
But perhaps most important of all, "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 Assistant Secretary for Financial Stability Herbert M. Allison, Jr. wrote.
Treasury data through May show that homeowners in HAMP saw their median monthly payment drop by about 41 percent, meaning that half the homeowners saw a bigger drop than 41 percent while half experienced a smaller decrease. About 340,000 homeowners have received permanent relief.
More than 16 months after President Barack Obama told a crowd in Mesa, Ariz., of his plan to help up to 4 million homeowners avoid foreclosure through restructured mortgages, nearly 436,000 homeowners have been kicked out of HAMP. Put another way, 28 percent more homeowners have been bounced from the program than are actively enjoying permanent lower monthly payments.
Servicers largely pin the blame on homeowners, who either fail to provide documents required to modify their mortgages, miss monthly payments or lie about their situation, like their income. Treasury has echoed that complaint, but it's also pointed its finger as servicers who were slow to gear up for perhaps the biggest effort ever to modify home mortgages and lower borrowers' monthly payments, and thus at times proved inept to handle the volume.
The GAO's report, however, raises fresh questions about the effectiveness of a government program that repeatedly promised to help millions of distressed borrowers keep their homes, and its overseers entrusted with that responsibility.
Among the problem areas GAO identified in its report:
- Half of the 10 servicers GAO interviewed experienced a 20-percent error rate for calculating borrower income when it came to processing loan modifications, when the servicers' "own established error thresholds" were "often set at 3 to 5 percent." GAO noted that "without accurate income calculations, similarly situated borrowers... may be inappropriately deemed eligible or ineligible" for HAMP modifications;
- Four of the 10 servicers properly test their results to ensure compliance;
- Treasury's compliance unit identified four servicers that "could not always provide evidence that borrowers who were potentially eligible for HAMP had been solicited," as is required;
- Some servicers erroneously charged borrowers "fees prohibited by HAMP guidelines" or failed to reduce borrowers' monthly payments to 31 percent or less of their gross monthly income, a HAMP requirement;
- At least one servicer's review of denied HAMP modifications focuses on whether borrowers were sent denial letters, rather than actually checking to see if homeowners were "appropriately" denied HAMP modifications;
- Treasury's lack of clear consequences "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";
- Seven of the 10 servicers it contacted used different sets of criteria for determining "imminent default".
"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," the GAO found. "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."
But "of concern," GAO noted, was that Treasury's compliance unit found that "15 of the largest 20 participating servicers did not comply with various aspects of the program guidelines" when it came to calculating whether borrowers were eligible for HAMP mods.
The calculation, which requires using things like borrower income, the homeowner's equity in their home, and other inputs to determine eligibility, is called the "net present value" test. In short, if the calculation shows that the owner of the loan -- which includes investors -- would get more money from a modified mortgage than a foreclosure, then the borrower qualifies for a HAMP modification. This complicated computer program has been guarded with relative secrecy by Treasury. Broad outlines describing the test have been publicly released, but specifics remain undisclosed.
Because of errors in running these tests -- and Treasury's "lack of specific guidelines" in ensuring servicers grade themselves in a consistent manner -- the number of borrowers who were denied HAMP modifications "could range from a handful to thousands, depending on the size of the servicer and the extent of the error," GAO reports, citing the Treasury Department.
Treasury is making servicers reach out to those homeowners.
"None of these problems are new," Thompson said. "There is no oversight and no accountability for this program.
"There are thousands of people, maybe more than a million, who have lost their homes. It's too late for them."
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