Congress Questions HAMP’s Trial-Period Fallout

About one in three borrowers engaged in the Home Affordable Modification Program (HAMP) furnish complete documentation by the end of their three-month trial period, the Treasury's assistant secretary for financial stability, Herbert Allison, told the House Financial Services Committee Tuesday.

More than 680,000 borrowers have entered trial modifications, he testified, with roughly 375,000 modifications expected to convert to permanency by the end of the year.

Molly Sheehan, senior vice president of housing policy for JPMorgan Chase's lending division, testified that about 29% of borrowers in trial periods do not make all of their trial payments. Of the remaining 71% of borrowers who do make all their payments, about 20% do not submit all the required documentation, 31% submit documentation with errors (e.g., missing signatures, outdated information) and 20% submit all the documents and are eligible for underwriting.

"The focus of our immediate attention is finding ways to assist the 51 borrowers out of 100 that are missing some or all of the documentation required under HAMP or where the documents are incomplete, not current enough or otherwise not acceptable under the HAMP rules," Sheehan said in prepared testimony.

Chase, as one of HAMP's seven largest shops, is among the program participants most affected by the Obama administration's "conversion drive" campaign announcement last week. As part of the campaign, Fannie Mae and Treasury will send "SWAT Teams" to the largest servicers' operations. The teams will then report to the administration, on a daily basis, the servicers' progress in meeting their internally developed conversion action plans.

Bank of America's credit loss mitigation strategies executive, Jack Shakett, told lawmakers that approximately 65,000 customers have made more than three trial modification payments on time and have modifications that are set to expire on Dec. 31. About 50,000 of those borrowers have either failed to submit all the documentation or have submitted documents with discrepancies that "require an additional response from the customer," he testified.

"For the 15,000 customers who have provided all required information, we are experiencing a high conversion rate, with denials predominantly resulting from either income differences from what was stated by the borrower at the time of trial modification or discovery that the property is no longer owner-occupied," Shakett's prepared testimony explained.

Lawmakers were unified in their disappointment with HAMP, but opinions vary on the best of course of action moving forward.

‘Taxpayer-funded foreclosure mitigation programs have been an abject failure,’ said Rep. Jeb Hensarling, R-Texas. ‘Throwing more money at programs that do not work is absolutely insane.’

Rep. Emanual Cleaver, D-Mo., suggested the weak program results necessitate punitive actions against servicers.

"We're putting [servicers] on notice,’ Treasury's Allison said. "We will exact penalties … and be publicly outspoken about who's performing well and who's not.’

On Thursday, the Treasury will release its monthly HAMP performance report that will, for the first time, include data on permanent modifications. The January report, Allison said, will include operational metrics, such as hold times and response times, to measure each servicer's performance.

Last week, in announcing the conversion drive, Treasury's assistant secretary for financial institutions, Michael Barr, said "Some of the firms ought to be embarrassed, and they will be."

While the administration has blamed servicers for poor performance, and servicers say borrowers are not cooperating, other stakeholders blame HAMP's structure. The program has three fatal flaws, according to testimony from Amherst Securities Group's senior managing director, Laurie S. Goodman.

Servicers were not equipped to handle HAMP's origination-like functions, the program only considers borrowers' first-mortgage payments, taxes and insurance, while neglecting other debts. The program also does not emphasize the re-equification of the borrower, she said.

"We believe that beating up on servicers to "do more' poorly designed modifications won't solve the problem," Goodman testified. "The program as implemented is addressing the wrong issue."

Principal reductions should be moved higher up the HAMP waterfall, she argued, saying investors would support such writedowns. To reduce the likelihood that borrowers would strategically default in order to lower their unpaid balances, a proper plan would create "significant frictions that would make a strategic default unattractive" (e.g., shared-appreciation features, impact on credit scores, limiting the ability to borrow against the mortgaged property).

HAMP also needs to involve a realistic mechanism for extinguishing second liens, Goodman added.

"It should be noted that second liens have thus far, under HAMP, been treated with kid gloves," she testified.

House Democrats are looking to tack several mortgage-specific amendments onto the financial services reform legislation moving through the lower chamber this week. One proposal from Rep. Maxine Waters of California would direct $3 billion of Troubled Assets Relief Program funds toward mortgage relief for unemployed borrowers, the Washington Post reported this week.

"While our key focus is on helping as many borrowers as quickly as possible under the current program, Treasury recognizes that unemployment presents unique challenges and is still actively reviewing various ideas and suggestions," Allison said at the hearing, noting specifically the Homeowners' Emergency Mortgage Assistance Program in Pennsylvania.

House Judiciary Committee Chairman John Conyers, D-Mich., will also reportedly propose a bankruptcy cramdown amendment, which Financial Services Committee Chairman Barney Frank has already said he would support in a full House vote.

The financial services industry, which helped defeat a cramdown bill in the Senate early this year, maintains that judicial intervention of this order will only hurt the market.

"Enacting cramdown legislation would make things worse by adding even more risk to the mortgage market," a letter from 10 trade groups, including the Mortgage Bankers Association and the Financial Services Roundtable, says, according to a Bloomberg report. "The massive potential losses generated by judicial modification will directly impact Fannie Mae, Freddie Mac and the government mortgage guarantee agencies, and could well reverse recent gains in credit sector growth."

SOURCES: House Financial Services Committee, Washington Post, Bloomberg


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