The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), which recently criticized Treasury in connection with its implementation of the Capital Purchase Program (CPP), today released a report, dated tomorrow, critically evaluating Treasury’s implementation of the $75 billion Home Affordable Modification Program (HAMP). Although Treasury originally projected that the 4-year program would “help up to 3 to 4 million at-risk homeowners avoid foreclosure,” SIGTARP’s report notes that HAMP has resulted in only 168,708 permanent modifications in its first year (see January and February HAMP data). SIGTARP makes several recommendations for how Treasury could more effectively implement the program, including prominent disclosure of goals, adoption of fair methodologies for evaluating performance against those goals, additional marketing efforts, elimination of reduced supporting documentation requirements and modifications of the program’s structure to minimize the risk of re-default.
SIGTARP’s recommendations are summarized below:
- Treasury should prominently disclose goals and fairly measure performance. Despite Treasury’s statement that HAMP would “help up to 3 to 4 million at-risk homeowners avoid foreclosure” and its website which still states that HAMP was created “to help up to 4 million families avoid foreclosure,” Treasury has been counting the number of offers for trial modification, regardless of whether the offers result in permanent modifications or even actual trial modifications. SIGTARP recommends that Treasury prominently disclose its goals for how many homeowners will actually be helped and that Treasury’s performance be fairly measured against such goals.
- Treasury should engage in a sustained public service announcement campaign. SIGTARP reported that the lack of awareness of potential participating homeowners has contributed to the disappointing results of HAMP. Emphasizing the “inexplicable” absence of any public service television announcements by Treasury more than a year into the program, SIGTARP recommends that Treasury undertake a sustained public service announcement campaign as soon as possible to reach additional potential participants and provide the public with complete, accurate information.
- Treasury should cease allowing alternative forms of supporting documentation. Treasury’s decision to allow trial modifications to proceed without receipt of supporting documentation has created a large backlog of trial modifications that may never be converted into permanent modifications. Treasury has repeatedly revised the requirements for supporting documentation, making it difficult for servicers to keep pace. In addition, Treasury has allowed trial modifications to proceed based only on verbal representations, and borrowers may be “gaming the system” by obtaining modifications with misrepresentations and avoiding monthly payments and foreclosure by intentionally withholding documentation.
- Treasury should modify the program to minimize the risk of re-default. SIGTARP reported that HAMP’s structure is particularly vulnerable to the risk that borrowers will re-default on mortgages modified under HAMP. First, in determining eligibility for a modification, HAMP excludes all non-mortgage debt that would normally be considered in traditional loan underwriting, such as student loans, car payments, credit card debt and second liens, thereby understating the risk of re-default. In addition, interest rates reduced under HAMP may increase after five years to prevailing market rates, resulting in a significant increase in monthly payments. Because wages are projected to increase at a slower rate, SIGTARP reported that structuring interest rates to increase in 5 years could significantly increase the re-default risk.