The Treasury Department should reevaluate the voluntary nature of its recently announced principal-reduction program, according to the Troubled Asset Relief Program Special Inspector General's (SIGTARP) quarterly report to Congress.
Because the decision to cut principal balances is left to the discretion of servicers, similarly situated borrowers may receive unequal treatment, SIGTARP says. Under current Treasury guidance for the as-yet launched program, servicers are not required to forgive principal on a loan even if the option produces a favorable net present value (NPV). The compensation model for servicing operations may also present a conflict of interest for servicers, giving them incentive not to perform principal reductions.
"[A]s currently structured, there may be a built-in incentive for services to try to bring a mortgage current through a traditional non-principal-reducing mortgage modification under HAMP, even when the NPV test indicates that principal forgiveness would be in the best financial interest of both the investor and borrower," Neil Barofsky, the special inspector general, says in the report.
SIGTARP further notes that the discretionary nature of the principal forgiveness program runs counter to the Treasury's modus operandi for HAMP, to date, saying, "Treasury has made mandatory performance its preferred course."
The Treasury deferred commenting on SIGTARP's recommendations until 30 days after today's issuance of the report.
SIGTARP credited the Treasury for taking steps to expand HAMP participation and address redefault risks, saying that the new revisions, as a whole, "constitute a potentially important step forward for homeowner relief." Nonetheless, the TARP watchdog criticized the Treasury's late March announcement of the HAMP changes, which also included a mandatory forbearance program for unemployed borrowers and a new Federal Housing Administration refinance program geared toward underwater borrowers. SIGTARP compared the rollout to HAMP's initial debut, which was stymied by stakeholder confusion.
"Time pressures have led to servicer complaints in the past about unclear and frequently revised HAMP guidelines," the report says. "Unfortunately, early indications provide cause for concern that the new revisions may aggravate those problems rather than improve them."
Servicers, including at least one large shop, told SIGTARP they were not consulted about the formulation or implementation of the HAMP enhancements.
SIGTARP additionally suggests that the HAMP revisions could lead to greater occurrences of fraud. Higher Home Affordable Foreclosure Alternative incentives could prompt more incidents of property flopping. Moreover, SIGTARP recommended the Treasury adopt valuation guidelines for its principal forgiveness program that more closely resemble FHA appraisal standards. The Treasury has indicated that the property values will be derived from a computer model that does not require visual home inspections.
"No program of this type and scale can be considered well designed without robust protections of taxpayer funds against the predation of criminals, particularly given the inconsistent treatment of home valuation across the different principal forgiveness programs," SIGTARP says.
The Treasury has not yet commented on SIGTARP's valuation recommendation, but it has instructed SIGTARP that it will soon launch a public service campaign that will alert borrowers to the fraud risks associated with each new program.