Treasury penalizes servicers not performing up to standards: April HAMP Analysis

The latest report on the Obama Administration’s foreclosure prevention program includes the news that Treasury has, for the first time, taken punitive action against servicers who exhibit poor performance on the Home Affordable Modification Program (see our previous analyses). HAMP has been beset by difficulties, most notably that the 608,615 permanent modifications active today fall far short of the 3-4 million homeowners that Treasury aimed to reach. Consumer advocates have called for Treasury to take action against servicers who lose borrowers’ documents, give them conflicting or counterproductive advice, and erroneously reject borrowers from the program. We are pleased to see that Treasury is withholding incentive payments from three servicers in need of substantial improvement: Bank of America, Chase, and Wells Fargo.

In order to encourage servicers to put borrowers into permanent modifications, Treasury makes incentive payments to servicers for every successful permanent modification. Treasury also makes incentive payments for every successful short sale or deed-in-lieu performed under the Home Affordable Alternatives Program. These incentive payments will be withheld from Bank of America, Chase, and Wells Fargo for second quarter 2011 and could even be permanently withheld if the servicers fail to improve next quarter.

What did these servicers do that was so wrong? We’ve heard the horror stories from homeowners, but Freddie Mac, which handles compliance for HAMP, performed a systematic review of the top 10 largest servicers’ performance and graded them on certain metrics. The metrics include the percentage of HAMP approval decisions that Freddie Mac disagrees with or is unable to determine the servicer’s reasoning, the percent of loans where the servicer’s calculation of the borrower income differs from Freddie Mac’s by more than five percent, and effectiveness of internal quality controls.

The results of the audit, included as part of this month’s HAMP report, are not good. For example, Freddie Mac found that Chase made mistakes calculating the borrowers’ incomes on 31 percent of the loans in the sample, while Wells Fargo made mistakes on 27 percent of the incomes and Bank of America made mistakes calculating 22 percent of the incomes (for reference, Freddie Mac’s benchmark was errors on five percent of loans or less). Income plays an important role in determining whether a borrower is eligible for the program, since mortgage payments must be higher than 31 percent of monthly income in order to qualify. That’s a huge fraction of homeowners who could have been unnecessarily denied the possibility of saving their homes. Additionally, all three banks got low scores for their internal controls for identifying and contacting homeowners, homeowner evaluation and assistance, and program management and reporting.

We hope that the withholding of incentive payments will push servicers to follow HAMP’s guidelines and substantially expand the number of homeowners they are helping. We also encourage Treasury to look for meaningful improvements in these servicers’ processes before restoring the incentive payments.

The result of these poor HAMP practices can be seen in the Chicago area’s underwhelming numbers of modifications. HAMP continues to grow very slowly, with 38,594 active trial and permanent modifications in the region in April 2011, up 2.8 percent from last month’s 37,599.

Trial modifications marked new lows for the fourth month in a row, dropping by 0.62 percent to 6,870 from 6,913 in March. After a slight increase in permanent modifications last month, permanent modification growth cooled off.  Chicago region permanent loan modifications rose by 3.38 percent from March to April, compared to 5.52 percent from February to March and 3.4 percent from January to February (see charts A and B).

Nationally, trial modifications dropped faster (-1.04 percent) than they did in the Chicago region (-0.62 percent).  Permanent modifications grew at about the same rate in Chicago (3.38 percent) as they did nationally (3.7 percent). Permanent modifications make up 82.2 percent of the Chicago region’s total active modifications, while permanent modifications make up 81.74 percent of total active modifications nationally.