TARP extension targets foreclosures

Panel expresses doubts about preventative measures

The Obama administration said today it will boost spending on foreclosure prevention as it exercises its authority to extend the $700 billion Troubled Asset Relief Program (TARP) to October.

The move came as a Congressional Oversight Panel issued a report concluding that the administration’s Home Affordable Modification Program (HAMP), which is funded largely by TARP, appears capable of preventing only a fraction of the projected 8 million to 13 million foreclosures anticipated in the next four or more years.

The TARP program had been scheduled to end this year. In a letter to Congressional leaders today, Treasury Secretary Timothy Geithner said the administration still needs the ability to draw on TARP funds in the event of an "immediate and substantial threat to the economy" stemming from continued financial instability.

"Banks are still experiencing significant new credit losses, and the pace of bank failures, which tend to lag economic cycles, remains elevated," Geithner said. There have been 149 bank failures this year through Nov. 30, the oversight panel said, and problems in the commercial real estate sector "are poised to inflict further damage on small and mid-sized banks."

Many Federal Reserve and FDIC programs that have complemented TARP are ending, Geithner said, creating "a financial environment in which new shocks could have an outsized effect" if adequate TARP reserves are not maintained.

In extending the $700 billion TARP program, Geithner said the administration does not expect to tap more than $550 billion authorized by Congress in the Emergency Economic Stabilization Act of 2008.

Up to $175 billion in repayments from banks and others that received emergency aid are expected by the end of next year. The Treasury Department expects to recover all but $42 billion of the $364 billion in TARP funds disbursed through the end of September, he said.

Geithner said new commitments for TARP expenditures in 2010 will be limited to three areas: foreclosure mitigation, providing capital to small and community banks, and a potential increase in commitments to the Term Asset-Backed Securities Loan Facility (TALF) — the TALF is aimed at reviving securitization markets that facilitate commercial mortgage lending and consumer and small business loans.

While TARP helped end last year’s financial panic and restore market confidence, it has been less successful in preventing foreclosures and bank failures, stemming job losses, and stimulating lending, according to the latest report from the Congressional Oversight Panel overseeing the program.

The report questioned the effectiveness of the administration’s foreclosure prevention programs, the Home Affordable Modification Program (HAMP), and the Home Affordable Refinance Program (HARP), which together are aimed at helping as many as 8 million borrowers.

Treasury has designated $75 billion for HAMP, including $50 billion in TARP funds for modifying loans that are not owned or guaranteed by Fannie Mae or Freddie Mac.

The HAMP program, by providing incentives to loan servicers, homeowners, and lenders, is aimed at modifying up to 3 million to 4 million mortgages over the next several years — a goal Treasury Assistant Secretary for Financial Stability Herbert Allison said Wednesday is still achievable.

Testifying before the House Financial Services Committee, Allison said "strong progress" has been made in "ramping up" the HAMP and HARP programs. Over 680,000 borrowers have entered into trial HAMP modifications, and the program is on track to provide a "second chance" for up to 3 million to 4 million borrowers by the end of 2012, Allison said, averaging more than 20,000 trial modifications per week.

Doubts about HAMP

But in its report, the Congressional Oversight Panel questioned how many trial modifications will become permanent.

HAMP’s trial loan modifications provide eligible homeowners with interest-rate reductions, longer loan terms, or forbearance of some principal in order to bring their monthly mortgage payments down to 31 percent of their monthly income.

If borrowers can make those reduced payments for three months —  and provide full supporting documentation, such as proof of income — their trial modification becomes "permanent" (although fixed monthly payments expire after five years, at which point interest rates can increase up to a predetermined cap).

At the end of October, less than one in 20 HAMP trial modifications in effect for at least three months had been converted to permanent modifications, the oversight panel said in its report.

The 4.69 percent "roll rate" from trial modifications to permanent "does not mean that the other 95.31 percent of trail modifications are failures," the report noted, but is cause for concern.

Allison acknowledged the Treasury Department is "disappointed in the permanent modification results thus far," and that the program’s central focus is now "converting borrowers into permanent modifications where they qualify."

About 375,000 borrowers are expected to complete three-month HAMP trial modifications by the end of the year, but surveys of loan servicers show only about 30 percent have submitted the documents needed to qualify for permanent modifications, Allison said.

While housing counselors and homeowners are reporting that loan servicers are losing documents, servicers say homeowners are failing to provide documents "despite repeated outreach," he said.

Last week, the Treasury Department kicked off an initiative to increase the number of permanent HAMP loan modifications, including streamlining the application process for servicers and borrowers, and "punitive measures" for servicers who don’t meet their HAMP program obligations. The Treasury could withhold HAMP incentive payments or even "clawback" payments already made, Allison said.

But the HAMP program is unlikely to meet its goals of preventing 3 million to 4 million foreclosures even if the percentage of trial modifications that become permanent improves, the panel said. That’s because the Treasury Department assumes that 40 percent of borrowers who are offered permanent modifications will redefault over the next five years.

The redefault rate could be much higher, the oversight panel said, noting that 54 percent of loan modifications that servicers made in first-quarter 2008 — before the launch of HAMP — were 60 days delinquent within one year.

It’s too early to say what the redefault rate on permanent HAMP loan modifications will be, the report said. There were 580 permanent modifications made from July to October that had been in place for more than two months, and eight had already redefaulted, the report said.

Help for unemployed, underwater?

Also of concern to the oversight panel is that the HAMP program is not designed to address foreclosures caused by unemployment, or to significantly reduce homeowners’ negative equity.

Unemployed homeowners who have nine months or more of unemployment insurance remaining may qualify for HAMP modifications, Allison said.

In October, the Department of Labor launched an online unemployment benefit estimation tool to help lenders, housing counselors and homeowners determine the amount and duration of unemployment coverage troubled borrowers are eligible to receive (see story).

But the Treasury Department recognizes that unemployment "presents unique challenges" and is "actively reviewing various ideas and suggestions" to improve the HAMP program in this area, Allison said.

He noted that HAMP and HARP are not the only programs geared at helping homeowners. The Federal Reserve and Treasury’s purchases of mortgage-backed securities have helped keep interest rates at historic lows, and more than 3 million homeowners have refinanced their homes in 2009, saving an average $120 per month.

But HARP, which was aimed at helping as many as 4 million borrowers when it was announced in February, has only resulted in 136,271 refinancings through Oct. 31, the oversight committee noted in its report, or about 5 percent of Fannie Mae and Freddie Mac’s refinancings from April 1 to Sept. 30.

HARP was intended to make it easier for "responsible homeowners" whose mortgages are guaranteed by Fannie and Freddie to refinance without obtaining additional private mortgage insurance — even in cases when declining home values had increased their loan-to-value (LTV) ratio.

The program was originally limited to homeowners with 105 percent LTV or less, but expanded in July to allow "underwater" borrowers with LTVs of up to 125 percent to qualify (see story).

Only 12.5 percent of HARP refinancings have involved mortgages where the homeowner has negative equity, the oversight panel found, and only 0.2 percent of HARP refinancings — a total 272 loans — were for borrowers with LTVs greater than 105 percent. The percentage of HARP refinancings with LTVs greater than 105 percent is expected to increase over time, the report said.

The most important way to evaluate HAMP’s success may be to ask whether foreclosures are rising or declining, and whether HAMP and other Treasury programs are making a major dent in those numbers, the report said.

Although there has been a small downturn in the number of new foreclosure filings since July, foreclosures "easily continue to outpace HAMP modifications," the report said.

There were more than twice as many foreclosure starts in October (222,107) as HAMP trial modifications (99,183), plus 94,450 completed foreclosure sales, the report said.

"To keep pace, 95 percent of (HAMP) trial modifications in October would have to convert to permanent modifications with no redefaults on the modifications," the report said.

Since July 2007, there have been more than 2 million foreclosure sales completed, and 5.5 million foreclosure starts, the report said. Current projections for foreclosure range from 8.1 million over the next four years to as high as 13 million over the next five-plus years, the oversight panel reported, citing analyses by Goldman Sachs Global ECS Research and Credit Suisse Fixed Income Research.

"As currently structured, HAMP appears capable of preventing only a fraction of foreclosures," the oversight panel concluded.

Julia Gordon, senior policy counsel at the Center for Responsible Lending, laid out a number of proposals for overhauling the HAMP program in her prepared testimony before the House Financial Services Committee.

Gordon recommended transferring servicing of troubled borrowers’ loans to companies that don’t have conflicts of interest, and automatically converting trial modifications into permanent modifications.

The Center for Responsible Lending also advocates legislation mandating loss mitigation before initiating foreclosure proceedings, an independent appeals process for homeowners, and prohibiting servicers from requiring homeowners to waive their legal rights in order to receive a loan modification.

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