WASHINGTON -- The Obama administration announced Friday that as part of a recent $25 billion settlement with big banks, the government will release money withheld from Bank of America and JPMorgan Chase for doing a bad job modifying mortgages under the administration's signature anti-foreclosure scheme.
Banks participating in the Home Affordable Modification Program receive incentive payments for lowering eligible borrowers' payments in order to prevent foreclosure. The program has fallen far short of expectations, and more borrowers have had their modifications canceled than remain in the program.
The Treasury Department, which oversees the program, started withholding incentive payments from several banks last June. On Friday, the department said $81.7 million will be released to Bank of America and $89.1 million will be handed over to Chase.
The administration is letting the banks out of the doghouse not because of vastly improved servicing, but rather as a result of the $25 billion foreclosure fraud settlement struck last month. "As part of the mortgage servicing settlement, Treasury has agreed to release withheld incentives for past deficiencies," Treasury said in a release.
"It's just the latest in an unending series of Treasury capitulations to the banks," said Neil Barofsky, the former Special Inspector General for the Wall Street bailout, $30 billion from which was used to create HAMP. "The servicers' willful disregard of HAMP's rules will now officially go unpunished as Treasury converts what was always nothing more than a slap on the wrist to complete absolution."
The Justice Department said in February that the settlement resolved "allegations that Bank of America defrauded the Home Affordable Modification Program." A Treasury spokeswoman said the department will continue to monitor banks' performance in the mortgage program and that it could withhold payments again in the future.
Borrowers behind on their mortgages or at risk of missing payments on loans taken out before 2009 are eligible for HAMP. The first part of the process is a "trial period" during which homeowners make reduced monthly payments for three months in order to qualify for a permanent modification. Modifications under HAMP typically reduce payments by $500 per month by cutting interest rates and lengthening mortgage terms.
Over the past three years, HuffPost has interviewed dozens of homeowners who said they applied for HAMP and couldn't get half-decent service from their banks. Some have said they made reduced payments as they were told to do. After several months, they were notified they had fallen so far behind on their mortgages that they would have to pay the difference between their reduced payments and what they would have paid normally, or else lose their homes.
President Barack Obama said in 2009 that the initiative would reach 3 to 4 million struggling homeowners, but so far there are only 768,773 active permanent modifications, while 763,692 trial and 182,546 permanent mods have been canceled. The most common reason for cancellations is insufficient documentation, according to Treasury. But homeowners say the real problem is banks losing paperwork.
The administration said Friday that HAMP established a mortgage servicing framework for the the $25 billion settlement between the biggest banks and the government. The deal is supposed to result in nearly $20 billion worth of modifications and reduced principal for homeowners, and will forbid banks from foreclosing improperly.
“The Making Home Affordable Program has established critical standards that have changed the mortgage industry for the better, and the assessments [that resulted in withheld payments] have been a principal tool for measuring that progress,” said Treasury official Tim Massad in a statement. "By shining the spotlight on key practices, we have prompted servicers to improve their implementation of the Making Home Affordable Program. However, there is still more work to be done to ensure that the industry treats all borrowers properly. The implementation of the broader standards required by the settlement, together with our continued compliance efforts, will help bring this about."