A federal watchdog reported Monday that the Obama administration's signature anti-foreclosure program sometimes causes people to lose their homes to foreclosure -- a conclusion that had already been reached by some homeowners and their advocates.
The Treasury Department, which administers the Home Affordable Modification Program, did not respond to that claim in its answer to the watchdog's report. But a Treasury official told HuffPost on Tuesday that no one who is current on their mortgage payments can become delinquent because of a HAMP modification.
Consumer advocates heartily disagree.
"Treasury's wrong about that," said Diane Thompson, a lawyer with the National Consumer Law Center. "Everybody comes out of the trial modification period owing more than they did when they went in, and everybody comes out with their credit worse."
Under HAMP, eligible borrowers apply for a modification that typically cuts monthly payments by $500. If they successfully make those payments during a three-month trial period, then their trial modification is supposed to become "permanent" for five years.
Borrowers in HAMP modifications typically receive foreclosure notices during their trial periods. To the utter bafflement of struggling homeowners, mortgage servicers are allowed to proceed with the foreclosure process during HAMP trials, just not to actually foreclose (though consumer attorneys say that such bogus foreclosures do, in fact, happen).
Bank of America staffers repeatedly told Troy Taliancich, for instance, that he he was seriously delinquent because of his reduced HAMP trial payments, but that he should continue to make the reduced payments anyway. Eventually, the bank stopped accepting his payments altogether because he was in foreclosure. Even as he was making the trial payments the bank told him to make, it turned out, the arrears and fees piled up. "I was only a payment behind when I first called," he said. "I could overcome one payment amount if I had known."
Clarissa Gaff, a staff attorney with the Land of Lincoln Legal Assistance Foundation in Alton, Ill., told HuffPost that her clients, Allen and Mary Pierson, became delinquent on their mortgage because of an extended HAMP trial modification that started in the spring of 2009.
"They were current when they started. They were just scraping by, but they were current, and the mod put them behind," Gaff told HuffPost. "Admittedly, they were at imminent risk of default but I think they could have made it [without HAMP]."
The Treasury official (who was willing to have his words paraphrased but not quoted) said that nobody who could possibly make a payment without HAMP is actually eligible for the program, and that documentation requirements tightened in June should prevent ineligible borrowers from getting trial mods. The Treasury official said that HAMP trial applicants were always told they'd be responsible for any unpaid amounts that accrued during the trial period.
The Special Inspector General for the Troubled Asset Relief Program -- the Wall Street bailout that also gave rise to HAMP -- reported Monday that some HAMP applicants, "who may have somehow found ways to continue to make their mortgage payments, have been drawn into failed trial modifications that have left them with more principal outstanding on their loans, less home equity (or a position further 'underwater'), and worse credit scores.
"Perhaps worst of all," SIGTARP's report continued, "even in circumstances where they never missed a payment, they may face back payments, penalties, and even late fees that suddenly
become due on their 'modified' mortgages and that they are unable to pay, thus resulting in the very loss of their homes that HAMP is meant to prevent."
Since June, HAMP applicants have been required to provide solid documentation of their circumstances by coughing up pay stubs and tax forms. Previously, servicers would grant trial modifications over the phone, contributing to what Treasury and HAMP servicers both called an excess of ineligible people in trial mods. Borrowers who are at risk of "imminent default" are still eligible, however, and the hardship criteria are so broad as to include a "change in household financial circumstances" or an "increase in other expenses."
Alan White, a professor at Valparaiso University law school, pointed out that a common complaint from HAMP applicants is that their servicers tell them they can't get help until they fall behind on payments. According to the Making Home Affordable call center report from February (PDF), 10.9 percent of all HAMP complaints arose from servicers telling borrowers they must be delinquent to be eligible for help. It's the fourth-most common HAMP gripe.
"Treasury is just wrong," said White. "I really wish Treasury would stop defending the banks and start acknowledging that they are preventing HAMP from achieving its goals."