The Obama administration’s Home Affordable Modification Program will far fall short of its goals, and the Treasury Department’s failure to acknowledge this before it lost its authority to reallocate the $30 billion in TARP funds earmarked for the program means most of that money won’t be spent.
That’s the conclusion of the latest report from the Congressional Oversight Panel overseeing the Troubled Asset Relief Program (TARP).
The panel estimates that when all is said and done, Treasury will have spent about $4 billion on HAMP to prevent 700,000 foreclosures — far less than the goal of helping 3 million to 4 million homeowners when the program was launched in spring 2009.
HAMP — which provides financial incentives to loan servicers to modify the loans of troubled borrowers — has fallen short of its goals because many borrowers did not meet eligibility requirements and loan servicers were not required to participate, the report said.
Many attempts to modify loans were also derailed by the presence of second "piggyback" loans that were a popular means of avoiding mortgage insurance during the boom.
So far this year, loan servicers have done twice as many loan modifications outside of the HAMP program as in it, with 81 percent of modifications completed in October done outside of HAMP.
While it’s too late for Treasury to revamp its foreclosure prevention strategy — its authority to restructure HAMP expired on Oct. 3 — the government can "still take steps to wring every possible benefit from its programs," such as enabling borrowers to apply for loan modifications online, the panel said in releasing its report.
Where appropriate, Treasury should also intervene when borrowers are falling behind on HAMP-modified mortgages, the report said. After six months, HAMP modifications have a redefault rate of 10.8 percent, compared to 22.4 percent for non-HAMP loan mods.
"Preventing redefaults is an extremely powerful way of magnifying HAMP’s impact, as each redefault prevented translates directly into a borrower keeping his home," the panel said.
The government has failed to hold loan servicers accountable when they have repeatedly lost borrower paperwork or refused to perform loan modifications, the report concluded.
"Treasury has essentially outsourced the responsibility for overseeing servicers to Fannie Mae and Freddie Mac, but both companies have critical business relationships with the very same servicers, calling into question their willingness to conduct stringent oversight," the report said.
In terms of expenditures, the Treasury Department’s Hardest Hit Fund — which provides TARP funds to state-run foreclosure mitigation programs in 18 states — may actually turn out to be the bigger program.
A total of $7.6 billion in TARP funds has been allocated for the Hardest Hit Fund, with all participating states using at least a portion of those funds to aid unemployed homeowners, the report said.
The Congressional Budget Office (CBO) last month projected that Treasury will spend only $12 billion of the $45.6 billion in TARP funding originally earmarked for housing programs, including HAMP and the Hardest Hit Fund
Testifying before the House Judiciary Committee this month, Phyllis Caldwell, the Treasury Department’s Chief of Homeownership Preservation, defended HAMP, saying it has "transformed the way the mortgage servicing industry deals with alternatives to foreclosure."
Lenders’ loss mitigation strategies changed "dramatically" in the year following the program’s launch, and half of homeowners who apply for HAMP modifications but don’t qualify have received a loan modification outside of the program.
She said HAMP’s "pay-for-success" model — loan servicers receive no incentive payments until borrowers make three successive payments on a loan modification — ensure that spending is limited to high-quality modifications.
Caldwell said guidelines implemented on June 1 require servicers of non-Fannie and Freddie loans to evaluate homeowners for HAMP modifications before referring them for foreclosure.
Servicers must evaluate homeowners who do not qualify for HAMP or who have fallen out of HAMP to see if they qualify for alternative loss mitigation programs or private modification programs.