There’s been a constant flow of anecdotes from housing counselors, homeowners, and the media saying that the federal Home Affordable Modification Program (HAMP), designed to prevent foreclosures by lowering monthly mortgage payments, has major flaws in its implementation. Homeowners and counselors report difficulties in communicating with their servicers and problems with repeated loss of documents or errors in determining eligibility that can bog down the process—or even result in mistaken foreclosure. A recent report from Congress’ investigative arm states that these anecdotes indicate systemic problems in HAMP’s implementation.
The Government Accountability Office’s report “Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs” studies the performances of 10 HAMP servicers who account for 71 percent of HAMP funds in regards to their performance on consistent and equitable treatment of borrowers, as well as the US Department of Treasury’s “actions to address the challenges of trial modification conversions, negative equity, redefaults, and program stability.” In its investigation, the GAO found several inconsistencies in the enforcement of guidelines, as well as lack of clarity in the guidelines themselves, that likely result in the inequitable treatment of borrowers.
Corroborating housing counselor and media reports, the GAO found that 56 percent of complaints to the homeowner help hotline were about difficulty reaching or hearing back from servicers. As mentioned previously, these communications issues can lead to serious errors in determining eligibility or deciding to proceed with foreclosure actions.
When assessing borrower eligibility, HAMP guidelines instruct servicers to project future income streams of a loan modification vs. no loan modification, taking into account the possibility of foreclosure. If the income stream of a loan modification is higher, the servicer must offer the modification. This projection, called a Net Present Value (NPV) calculation, is a crucial step in the eligibility process. However, 15 of the 20 largest servicers did not comply fully with HAMP guidelines for the NPV model. Additionally, half of the ten servicers studied by the GAO reported errors in calculating borrower income in more than 20 percent of modifications. This suggests that borrowers with similar characteristics could be judged eligible or ineligible based on their servicer, when they should be treated the same under HAMP guidelines.
The GAO report noted several implementation problems and lack of clarity in guidelines from the Department of Treasury that contribute to inconsistent treatment of borrowers or otherwise undermine the implementation of HAMP. For example, HAMP is open to borrowers who are in imminent danger of defaulting on their mortgages, not only those who are currently in default. However, Treasury does not have consistent standards for what constitutes “imminent default.” The GAO found that among the ten largest servicers they investigated, there were seven different methods of defining “imminent default.” Much like the inconsistent application of NPV guidelines, this means that borrowers in similar financial situations could be approved or denied based on their servicer, resulting in inconsistent treatment of borrowers.
Importantly, Treasury has not clearly established consequences for noncompliance with HAMP. Since October of 2009, Treasury has been drafting a policy to establish consequences for servicer noncompliance, but the policy has not been finalized. Currently, Treasury is reviewing cases of noncompliance on a case-by-case basis, but without a policy that explains which disciplinary actions will be taken under which circumstances, this process could result in inconsistent treatment of noncompliant servicers. No financial penalties have yet been levied against servicers.
The GAO is also concerned that Treasury’s Homeownership Preservation Office, which administers HAMP, is not adequately staffed. Despite the aforementioned implementation issues and a July 2009 recommendation from GAO to fill vacancies, Treasury has reduced HPO staff from 36 to 29 full-time positions without formally assessing staffing levels.
HAMP has potential if implemented well
Despite these hurdles, there are indications that HAMP can be effective at keeping homeowners in their homes. Recent numbers from the Office of the Comptroller of the Currency and the Office of Thrift Supervision show that HAMP modifications are less likely to be delinquent than overall modifications, with 7.7 percent of HAMP modifications 60 or more days delinquent after 3 months versus 11.3 percent of overall modifications. HAMP modifications are likely to be more sustainable in the long term than modifications overall and, therefore, could have a larger impact on reducing foreclosures. Because of this, it is critical to ensure that the program has consistent standards that are implemented thoroughly so that borrowers have an equal chance to qualify for the program, no matter who their servicer is. The GAO’s recommendations can improve HAMP’s consistency and accountability. These recommendations include:
• Establish clear and specific criteria for determining whether a borrower is in imminent default;
• Develop additional guidance for servicers on their quality assurance programs;
• Finalize and issue consequences for servicer noncompliance with HAMP requirements as soon as possible.
Several Chicago-area initiatives are underway to increase the accountability of servicers in HAMP. Woodstock Institute convened a meeting yesterday with a representative from a major loan servicer and regional housing counseling organizations to better understand different industry decision-making processes for loan modifications. Additionally, Housing Action Illinois recently launched a Servicer Accountability Initiative that will track the outcomes of individual loan modification cases in the Chicago region. To do this, Housing Action Illinois is evaluating the progression of cases being worked on by HUD-certified housing counseling agencies, how likely servicers are to work with a counseling agency, and how successful servicers are in carrying out their loss mitigation procedures to service troubled loans.