Oversight Panel Blasts Treasury For Loan Modification Failure

December 15, 2010 – The Congressional Oversight Panel (COP) was created by Congress during the height of the financial crisis to oversee the handling of $700 billion given to the US Treasury to stabilize the U.S. economy.   Part of COP’s responsibility is to issue regular reports on the Treasury’s actions and to guarantee that Treasury’s actions are in the best interest of the American people.

COP fulfilled its mission today by issuing a blistering report that cited numerous problems and shortcomings by the US Treasury in preventing foreclosures under the Home Affordable Modification Program (HAMP).  The specific failures cited by COP against the Treasury include the following:

The Panel now estimates that, if current trends hold, HAMP will prevent only 700,000 foreclosures — far fewer than the three to four million foreclosures that Treasury initially aimed to stop, and vastly fewer than the eight to 13 million foreclosures expected by 2012.

While HAMP’s most dramatic shortcoming has been its poor results in preventing foreclosures, the program has had other significant flaws. For example, despite repeated urgings from the Panel, Treasury has failed to collect and analyze data that would explain HAMP’s shortcomings, and it does not even have a way to collect data for many of HAMP’s add-on programs. Further, Treasury has refused to specify meaningful goals by which to measure HAMP’s progress, while the program’s sole initial goal — to prevent three to four million foreclosures — has been repeatedly redefined and watered down.

Treasury has failed to hold loan servicers accountable when they have repeatedly lost borrower paperwork or refused to perform loan modifications. Treasury has essentially outsourced the responsibility for overseeing servicers to Fannie Mae and Freddie Mac, but Freddie Mac in particular has hesitated to enforce some of its contractual rights related to the foreclosure process…

Treasury should acknowledge that HAMP will not reach the expected number of homeowners and should provide a meaningful framework for evaluating the program in the future. Treasury continues to state that HAMP will expend $30 billion in Troubled Asset Relief Program funding, yet the Panel’s estimate based on Congressional Budget Office figures is that HAMP will likely spend only around $4 billion. Had Treasury acknowledged this reality before its crisis authority expired, it could have reallocated the money to a more effective program.

COP noted that the original goal of the HAMP program was to mutually aid both banks and homeowners.  If a loan could be modified to become affordable to a homeowner, the ultimate losses to the bank would be less than if the property was foreclosed.

The HAMP program seemed doomed from the start as competing interests between banks, homeowners, loan servicers, investors and second mortgage holders resulted in a complex web of conflicting interests.  In addition, many homeowners in default were simply trying to live in homes without the income necessary to properly service their debt, having obtained the properties under “no income no asset” loan programs.

Short of reducing the homeowner’s mortgage debt to a tiny fraction of what was owed, there was no feasible way to structure a workable loan modification.   Even when modifications were granted to homeowners who had some ability to pay, the re-default rate was huge (see Government’s Effort To Stop Soaring Mortgage Defaults A Failure).

The COP report blames the Treasury for just about everything except the Kennedy assassination.   Perhaps the COP should have spent some time evaluating whether the program ever made any sense in the first place.

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