More trouble brewing with HAMP

The Financial Times reported yesterday that the New York Fed is investigating a whistleblower letter from Goldman Sachs’ servicing unit, Litton Loan. The charge? Litton failed to review borrowers’ HAMP modifications in a “denial sweep” strategy meant to quickly work through a backlog of applications. FT reports:

The person familiar with Litton said he had examined loans that met the criteria for a government modification, but were denied it, sometimes because Litton employees made mistakes in how they calculated the borrower’s income. Other loans were denied the modification on the grounds that documents were missing, even though Litton’s computer system reflected receipt of the necessary paperwork, the person added.

While servicers are being investigated by state Attorneys General and federal regulators for their foreclosure practices, this is one of the first inquiries specifically into HAMP. It will be interesting to see how the investigation unfolds, given that HAMP is a voluntary program and the government has limited means of enforcing compliance—few, if any, of which they’ve tried to employ thus far. Yves Smith at Naked Capitalism hypothesizes that investigators will take a broader consumer protection approach: “For instance, when the banks provided statements to consumers about how HAMP worked and then failed to adhere to them, that can probably be characterized as a consumer fraud.”

While the investigation is a positive surprise, the allegations underlying them are not. We’ve been hearing countless tales from frustrated housing counselors of homeowners sending in HAMP packets for the seventh or eighth time, only to be denied for “missing documents.” While servicers chalk those experiences up to employee error and overwhelming demand, these allegations raise suspicions that at least one servicer purposely used obfuscation as a strategy to lighten their workload.

A GAO survey of counselors released today reinforces that point:

Roughly 76 percent of the 394 counselors characterized borrowers' overall experiences with HAMP--from the time they first inquired to the point at which they received a decision--as "negative" or "very negative." In contrast, less than 9 percent of counselors described borrowers' overall experience with HAMP as "positive" or "very positive." Roughly 40 percent of the 312 counselors that provided written comments on their experiences with HAMP said that they had experienced difficulties working with servicers. Roughly 39 percent said paperwork had been lost or needed to be resubmitted....

Roughly 60 percent of the counselors said the frequency for denial was "often" or "sometimes." Of these, over half of the counselors said that a substantial number of these denials were related to servicers' miscalculations of borrowers' gross monthly income.

Clearly, the problem is bigger than Litton, which has a reputation for being one of the better-run servicers. One investigation won’t be enough to make HAMP work. Depressingly, the GAO survey reports that Treasury still has not finalized a policy for penalizing noncompliance with HAMP, which they have been drafting since October 2009, and its absence was criticized by the GAO in July 2010. If we’re serious about combating foreclosures, at the very least we need a program that can effectively enforce compliance. Here’s to hoping that the NY Fed investigation will inspire Treasury to pay closer attention to holding servicers accountable.