The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has issued a report sharply criticizing mortgage servicers for failing to keep up with the volume of applications for mortgage modifications through the Home Affordable Modification Program (HAMP) – as well as the Treasury Department for failing to do a better job of overseeing servicers' HAMP activities.
The watchdog agency has been critical of how servicers and the Treasury are handling the program for the past several years, saying more can be done to boost participation rates and root out fraud.
The report fingers JPMorgan Chase, Citigroup Inc. and Ocwen Loan Servicing as having the largest backlogs of HAMP applications, as of May. Those institutions are processing only a fraction of the applications they receive each month, the office of the special inspector general says in the report.
‘Without a timely review of their eligibility to even get into a HAMP trial modification, struggling homeowners left in limbo hoping to get help from [the Troubled Asset Relief Program's] HAMP program may not pursue other foreclosure alternatives and, with options narrowing over time, may be at risk for foreclosure,’ the report states, adding that homeowners applying for HAMP should be getting responses back from servicers within one month of initial inquiry.
Most applicants are waiting on average three to six months to get a response, according to the report. The number of borrowers waiting for a response rose to 221,000 in May, a 65% increase compared to November 2013.
Ocwen, which has a backlog of about 61,000 applications, ‘will face significant challenges’ catching up, according to the report.
Servicers had, as of May, approved 1.4 million permanent mortgage modifications under HAMP since the program was launched in 2009 – but about 5.5 million applications have been denied, according to the report. Since Jan. 1, 2011, approximately 166,000 homeowners in the 19 Hardest Hit Fund (HHF) states were denied HAMP modifications due to incomplete applications, and another 75,000 were denied due to insufficient income or negative net present value.
Back in April, MortgageOrb asked HOPE NOW, a voluntary, private-sector alliance of mortgage servicers, investors, mortgage insurers and nonprofit counselors that provides statistics on mortgage modifications, if it had complete data on denial rates for modifications. The response was that the organization does not track the number of denials. The Consumer Financial Protection Bureau (CFPB) doesn't track denials by type either, a representative recently confirmed.
Several mortgage servicers, however, confirmed that the primary reason for these denials is lack of documentation, which results in incomplete applications. New regulations imposed by the CFPB may be partly to blame, as servicers are now required to collect significantly more data in order to complete the modification underwriting process in a compliant manner.
Some of the more problematic documentation that is required includes the following:
- Rental income: Many borrowers will say they get paid in cash and don't have verified rental income;
- Social Security income: Many borrowers cannot locate their receipts; and
- Bank statements: Very often, borrowers do not send all bank statements when requested.
Another document often not fully completed is the Request for Mortgage Assistance. The borrowers typically fail to complete the income/assets portion, hardship is overlooked and they fail to sign the documents advising the information is accurate.
‘After almost five years, HAMP continues to face considerable challenges, including getting new homeowners into permanent mortgage modifications and keeping homeowners in those modifications from redefaulting,’ the SIGTARP report states. ‘Overall, only one in six homeowners [who] applied for HAMP received a permanent modification [since the program was launched]. Additionally, the number of homeowners entering HAMP has steadily declined from 512,712 in 2010 to just 141,920 in 2013.’
The federal government announced in June that it was extending HAMP for at least another year, through 2016, in an effort to help more underwater and delinquent homeowners. So far, the program has helped about 1.3 million homeowners but has fallen far short of expected participation rates.
One area of concern, as outlined in the report, is the high default rate among borrowers in the program.
‘Already, 398,222 homeowners have not been able to keep up with their mortgage payments even though payments were lowered by HAMP,’ the report states. ‘Overall 29 percent of homeowners in HAMP have already fallen out of the program. However, the bulk of homeowners in HAMP who started participating in the program in 2009 and 2010 are falling out of the program at ever more alarming rates. Approximately half of all homeowners who entered HAMP in 2009 have fallen out of the program. Homeowners who entered the program in 2010 have redefaulted at a rate of 40 percent.’
So what's the solution to making HAMP work better? The report suggests that the Treasury Department ‘use its other TARP programs such as the Hardest Hit Fund (HHF), to help homeowners who are facing difficulty getting into HAMP, staying in HAMP, or who are facing a rate increase on their HAMP modification.’
‘There is a lack of coordination between the HHF programs and HAMP,’ the report states. ‘If better coordinated, HHF and HAMP could systemically help improve results for homeowners and better meet Treasury's obligation to assist a greater number of homeowners. Many HHF states continue to experience high rates of foreclosures, likely the result of continuing high levels of unemployment and underwater mortgages. HHF can help support the HAMP program, which provides the best long-term affordable solution for homeowners under TARP.’
The report suggests that ‘with a little extra help from HHF programs,’ many of the homeowners who were denied HAMP modifications could have obtained them.
‘Over the past four years, HHF housing counselors could have assisted homeowners in completing applications and helped to lower the number of rejected modifications due to incomplete applications,’ the report states.
‘As the majority of HAMP homeowners will start experiencing payment increases before Dec. 31, 2016, there is still time for them to get help from HHF,’ the report adds. ‘HHF programs will be active until the end of 2017. Given that Treasury has already determined that those homeowners are worth investing TARP funds, Treasury and the housing finance agencies should look for ways that HHF programs can assist homeowners [who] may struggle with payment increases. Providing HHF unemployment assistance to HAMP homeowners [who] struggle with chronic unemployment or underemployment may be one way to prevent foreclosures.’
Although the FHFA recently announced that it is extending HAMP through 2016, the SIGTARP report says an extension ‘is not enough on its own to bring about meaningful change, particularly as hundreds of thousands of homeowners who got into HAMP, fell prematurely out of the program.’
With approximately $15.7 billion in TARP funds for HAMP sitting unspent, the Treasury ‘has ample resources to help the tens of thousands of homeowners still applying each month for a HAMP modified mortgage,’ the report adds.
As in the past, the special inspector general suggests that in order to arrive at meaningful HAMP reform, the Treasury needs to explore ways to improve the program, ‘rather than relying on servicers to act differently than they acted in the past.’ It points to SIGTARP's enforcement efforts in stamping out ‘alleged misconduct by HAMP servicers,’ including the recent enforcement action against SunTrust, which allegedly ‘made material misrepresentations and omissions to homeowners in HAMP solicitations,’ and which allegedly ‘did not have adequate personnel, infrastructure, or technological resources in place to process the paperwork, render decisions, and communicate with and about homeowners, as represented in 2009 and 2010.’
Beside tighter alignment between the HAMP and HHF programs, the report outlines 10 previously recommended actions the Treasury can undertake to bolster the performance of HAMP, including monitoring the top 10 HAMP servicers' performance ‘against acceptable performance benchmarks in â�¦ the length of time it takes for trial modifications to be converted into permanent modifications, the conversion rate for trial modifications into permanent modifications, the length of time it takes to resolve escalated homeowner complaints, and the percentage of required modification status reports that are missing,’ and ensuring that ‘all servicers participating in [HAMP] comply with program requirements by vigorously enforcing the terms of the servicer participation agreements, including using all financial remedies such as withholding, permanently reducing, and clawing back incentives for servicers who fail to perform at an acceptable level.’
In addition, the Treasury ‘should stop allowing servicers to add a risk premium to Freddie Mac's discount rate in HAMP's net present value test, and further ‘should ensure that servicers use accurate information when evaluating net present value test results for homeowners applying to HAMP and should ensure that servicers maintain documentation of all net present value test inputs.’
‘To the extent that a servicer does not follow Treasury's guidelines on input accuracy and documentation maintenance, Treasury should permanently withhold incentives from that servicer,’ the report adds, making the point that the Treasury currently has never brought punitive action against any servicer for running the program in a sloppy or non-compliant manner, other than sometimes holding back payments.
The Treasury should also ‘require servicers to improve their communication with homeowners regarding denial of a HAMP modification so that homeowners can move forward with other foreclosure alternatives in a timely and fully informed manner.’ If a servicer fails to communicate in a timely manner, again, the ‘Treasury should permanently withhold incentives from that servicer.’
The Treasury should also play an active role in determining whether servicers' actions are resulting in HAMP re-default rates. These recommendations were originally made by SIGTARP back in 2011.
SIGTARP also offers several new recommendations, including having the Treasury conduct ‘research and analysis into the causes of HAMP redefaults, and characteristics of redefaults,’ so that it can ‘modify’ HAMP and the other TARP housing programs appropriately.
In addition, the Treasury should ‘require servicers to develop and use an 'early warning system' to identify and reach out to homeowners that may be at risk of redefaulting on a HAMP mortgage modification, including providing or recommending counseling and other assistance and directing them to other TARP housing programs.’
What's more, the Treasury should require servicers to offer available ‘alternative assistance options under TARP such as the HHF and HAMP Tier2,’ in addition to notifying borrowers of other alternatives to foreclosure, such as a short sale or deed in lieu.
Finally, but perhaps most interestingly, SIGTARP suggests the Treasury ‘should increase the amount of the annual incentive payment paid to each homeowner who remains in HAMP.’
‘[The] Treasury should require the mortgage servicer to apply the annual incentive payment earned by the homeowner to reduce the amount of money that the homeowner must pay to the servicer for the next month's mortgage payment (or monthly payments if the incentive exceeds the monthly mortgage payment), rather than to reduce the outstanding principal balance of the mortgage,’ the report states.
To view the full report, click here.