Recipients of Loan Mods Redefaulting in Droves
Distressed homeowners are redefaulting in droves on loan modifications received through a government program, costing taxpayers billions and raising questions about the Treasury Department's oversight of mortgage servicers.
Christy Romero, the special inspector general for the Troubled Asset Relief Program, says in a report to Congress scheduled to be released Wednesday that Treasury failed to analyze its own data to determine which borrowers were most at risk of losing their homes to foreclosure after receiving government support.
The watchdog says 46% of homeowners who got help in 2009 through the government's Home Affordable Modification Program have redefaulted on their mortgages, while 38% who received loan mods in 2010 have done so.
"This is a real problem," says Romero. "We want homeowners to get the same help they were promised that was given to banks."
HAMP has been the centerpiece of Treasury's efforts as outlined by Congress through the TARP legislation to "[protect] the interests of taxpayers" and "help families keep their homes."
Homeowners in default on loans held by banks or investorsóbut not those guaranteed by Fannie Mae or Freddie Macócan apply to their mortgage servicer to reduce their monthly payments. Under HAMP, investors, servicers and homeowners are all eligible to receive incentive payments to make the loan more affordable.
When the Obama Administration first unveiled HAMP in 2009, it made lofty claims that lowering mortgage payments would help up to 4 million homeowners avoid foreclosure. But almost immediately doubts were raised about the program's effectiveness, in part because borrowers were routinely denied HAMP modifications and were instead put into servicers' own proprietary programs.
In all, just 865,100 homeowners were active in the HAMP program as of April. Of those, 10% have missed one or two payments but have not yet redefaulted. The overall redefault rate is 26%.
Romero says that the Treasury, which oversees HAMP, needs to do more to help struggling borrowers, especially since the program was extended in May for another two years, through Dec. 31, 2015. She maintains that the Treasury failed to properly structure incentives and penalties to mortgage servicers.
"No servicer has ever paid a penalty for HAMP despite all the misconduct out there," Romero says. "It cannot just be about the carrot, the incentive payments, but must also be about penalties and it's been an ongoing problem that Treasury is really not coming down on servicers for misconduct. They have not taken a hardline approach."
But senior Treasury official said the agency does not have the authority impose penalties.
"We didn't have the power to fine the way a regulatory or law enforcement agency does," said the official on a conference call Tuesday with reporters, on the condition that he not be identified by name.
He added that Treasury's focus has been less on punishment and more on getting servicers to implement the systems needed to process loan modifications.
"The industry clearly was a mess at the beginning. The entire industry was ill-equipped to deal with this crisis," he said. "They didn't know how to modify loans, there were no standards on how to do a successful mod and how to outreach to borrowers."
Though Treasury initially committed to use $50 billion of funds from Tarp for housing support programs, that obligation was reduced in March to $38.5 billion. But just $8.6 billion of those allocated funds, or 22%, have actually been spent on programs aiding borrowers, the report found.
Moreover, taxpayers have lost roughly $815 million in incentive payments made through April 30 on more than 163,000 HAMP modifications that ultimately re-defaulted, according to the Treasury. Though the Treasury has paid $4.4 billion to mortgage servicers and investors to cover more than 600,000 permanent modifications, about 18% of those funds were paid for incentives on modifications that later redefaulted.
Three servicers received more than half of the funds spent on homeowners who redefaulted: Ocwen Loan Servicing, JPMorgan Chase and Bank of America. And 91% of all Tarp funds spent on HAMP permanent modifications that redefaulted were paid to the top 10 servicers.
"Homeowners who receive a HAMP permanent modification but end up losing their how to foreclosure or fall out of the TARP program are not being helped to keep their homes as TARP intended, and taxpayers lose the positive impact these funds were to provide for the individual family and community at large," the report states.
Romero's own analysis found that homeowners are more likely to redefault if they received a less than 5% reduction on their housing expenses; if they are still underwater on their mortgages, owing more than the value of the property; and if they have subprime credit scores and high overall debt.
She made four recommendations on how to improve the program's effectiveness. First, she says that the Treasury needs to conduct in-depth analysis to determine the cause of redefaults, should require servicers to provide additional data, and should make the findings public.
Second, the Treasury should also modify aspects of HAMP and the other TARP housing programs to reduce redefaults. Third, the agency should require that servicers develop and implement an "early warning system," to actively reach out to homeowners at risk of redefaulting. Currently, servicers have no such system in place, Romero says.
Finally, Romero recommended that the Treasury "should permanently withhold incentives" from servicers that do not provide borrowers with alternatives to foreclosure.
Though the Treasury agreed to all the recommendations it still took issue with some of the watchdog's claims, including that HAMP redefaults increase over time and that servicers are not reaching out to borrowers. Mark McArdle, acting chief of Homeownership Preservation at the Treasury, went so far as to post an article on the agency's blog Monday to explain redefaults.
Neil Barofsky, a senior fellow at New York University School of Law, and a former special inspector general of TARP, warned more than three years ago that HAMP's modest goals would be meaningless if the Treasury did not address the risks of redefault, including the need for a comprehensive principal reduction program.
"Sadly, those warnings went unheeded, with struggling homeowners, taxpayers and the broader economy all needlessly suffering as a result," Barofsky says.