Foreclosure Mitigation: Agencies Could Improve Effectiveness of Federal Efforts with Additional Data Collection and Analysis
Published: 2012-06-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Historically high foreclosure rates remain a major barrier to the current economic recovery. To assist policymakers and housing market participants in evaluating foreclosure mitigation efforts, GAO examined (1) the federal and nonfederal response to the housing crisis, (2) the current condition of the U.S. housing market, and (3) opportunities to enhance federal efforts. To address these objectives, GAO analyzed government and mortgage industry data, including loan-level data purchased from a private vendor; reviewed academic and industry literature; examined federal policies and regulations; and interviewed housing industry participants and observers.
section_title: What GAO Found
paragraphs: In an effort to help the millions of homeowners struggling to keep their homes, a range of federal programs have offered relief in the form of loan modifications and refinancing into loans with lower interest rates, among other things. Under Treasurys Home Affordable Modification Program (HAMP), initiated in early 2009, servicers have modified almost 1 million loans between 2009 and 2011. During the same period, servicers modified nearly 1 million additional loans under programs administered by the Departments of Agriculture (USDA) and Veterans Affairs (VA), Federal Housing Administration (FHA), and Fannie Mae and Freddie Mac (the enterprises). Servicers have also modified about 2.1 million loans under nonfederal loan modification programs resulting in a total of about 4 million modifications between 2009 and 2011. However, a large number of borrowers have sought assistance, but were unable to receive a modification. For example, approximately 2.8 million borrowers had their HAMP loan modification application denied or their trial loan modification canceled. Further, the volume of federal modifications has declined since 2010. Recent efforts have expanded refinancing programs. However, low participation rates in FHAs program raise questions about the need for Treasurys financial support, which could reach a maximum of $117 million.
In spite of these efforts, the number of loans in foreclosure remains elevated, and key indicators suggest that the U.S. housing market remains weak. GAOs analysis of mortgage data showed that in June 2011 (most current data available for GAOs use and analysis) between 1.9 and 3 million loans still had characteristics associated with an increased likelihood of foreclosure, such as serious delinquency and significant negative equity (a loan-to-value ratio of 125 percent or greater). These loans were concentrated in certain states, such as Nevada and Florida. Further, more recent indicators such as home prices and home equity remain near their postbubble lows. As of December 2011, total household mortgage debt was $3.7 trillion greater than households equity in their homesrepresenting a significant decline in household wealth nationwide.
Despite the scope of the problem, most stakeholders GAO interviewed said that enhancing current foreclosure mitigation efforts would be preferable to new ones. GAO found that agencies could take steps to make their programs more effective. Collectively, FHA and the enterprises had 1.8 million loans in their portfolios that were 90 days or more past due as of December 2011. GAO found that most of the agencies and enterprises, with the exception of USDA, had stepped up their efforts to monitor servicers outreach to struggling borrowers. However, not all the agencies were conducting analyses to determine the effectiveness of their foreclosure mitigation actions. Experiences of Treasury and the enterprises and GAOs econometric analysis strongly suggest that such analyses can improve outcomes and cut program costs. For example, GAOs analysis showed that the size of payment change, delinquency status, and current loan to value ratio, can significantly influence the success of the foreclosure mitigation action taken. In contrast, not all federal agencies consider redefault rates and long-term costs when deciding which loan modification action to take. Nor have they assessed the impact of loan and borrower characteristics. In some cases, agencies do not have the data needed to conduct these analyses. GAO found some evidence to suggest that principal forgiveness could help some homeownersthose with significant negative equitystay in their homes, but federal agencies and the enterprises were not using it consistently and some were not convinced of its merits. In addition, there are other policy issues to consider in how widely this option should be used, such as moral hazard. The Federal Housing Finance Agency (FHFA), for instance, has not allowed the enterprises to offer principal forgiveness. Treasury recently offered to pay incentives to the enterprises to forgive principal, and FHFA is reevaluating its position. Until agencies and the enterprises analyze data that will help them choose the most effective tools and fully utilize those that have proved effective, foreclosure mitigation programs cannot provide the optimal assistance to struggling homeowners or help curtail the costs of the foreclosure crisis to taxpayers.
section_title: What GAO Recommends
paragraphs: GAO recommends that: Treasury reevaluate the need for its financial support of FHAs refinance program; USDA increase its efforts to monitor servicers outreach tostruggling borrowers; FHA, VA, and USDA collect and analyze
information needed to fully assess the effectiveness and costs of their foreclosure mitigation efforts; andFHFA expeditiously finalize analysis on whether to allow the enterprises to offer HAMP principal forgiveness modifications. Treasury, FHA, VA and FHFA agreed to consider or concurred with the reports recommendations. USDA provided additional information in its comments. In response, we clarified the text and recommendation on USDAs monitoring of servicers outreach efforts.

section_title: Letter
paragraphs: Problems in the housing market associated with historically high  delinquencies and foreclosures remain a key hurdle to recovery from the  current U.S. economic slowdown. The Emergency Economic Stabilization  Act of 2008 (EESA) provided the Department of the Treasury (Treasury)  with $700 billion to use under the Troubled Asset Relief Program (TARP)  to, among other things, preserve homeownership, prevent avoidable  foreclosures, and protect home values. Since EESA’s passage, a series  of congressional acts and initiatives introduced by the administration have  expanded federal efforts to mitigate foreclosures. The centerpiece of  these efforts has been the 2009 Home Affordable Modification Program  (HAMP), which is being implemented by Treasury’s Office of  Homeownership Preservation. Foreclosure mitigation programs  administered by other federal agencies, such as the U.S. Department of  Housing and Urban Development (HUD) as well as Fannie Mae and  Freddie Mac (the enterprises), have continued and in many cases have  been expanded. In addition, state and local governments, nonprofits, and  mortgage lenders and servicers have initiated programs to mitigate  foreclosures. Loan modification programs have been a key component of  both federal and nonfederal mitigation efforts to moderate the foreclosure  crisis. Limited research is available on the effectiveness of these efforts,  however, and the probability of loans remaining current after a  modification is not well understood. Information on the outcome of these  efforts is central to helping ensure that federal foreclosure mitigation  programs efficiently and effectively preserve homeownership, prevent  avoidable foreclosures, and protect home values.
This report is based upon our continuing analysis and monitoring of  Treasury’s activities in implementing EESA, which provided us with broad  oversight authorities for actions taken under TARP and required that we  report at least every 60 days on TARP activities and performance. To  fulfill our statutorily mandated responsibilities, we have been monitoring  and providing updates on TARP programs, including HAMP, and this  report expands on that work. In addition, to assist policymakers and  housing market participants in evaluating the impact and effectiveness of  current federal foreclosure mitigation efforts, we examined (1) the federal  and nonfederal response to the foreclosure crisis, (2) the number of loans  potentially at risk of foreclosure and the current condition of the U.S.  housing market, and (3) opportunities to enhance the effectiveness of  current foreclosure mitigation efforts.
To examine the response to the foreclosure crisis, we looked at programs  administered by Treasury; HUD; the U.S. Departments of Agriculture  (USDA) and Veterans Affairs (VA); and two housing government- sponsored enterprises (the enterprises)—the Federal National Mortgage  Association (Fannie Mae) and the Federal Home Loan Mortgage  Corporation (Freddie Mac). We identified and reviewed each program’s  purpose as well as the associated statutes, regulations, requirements,  and guidance. We obtained summary data from Treasury, HUD, USDA,  VA and the enterprises and reviewed selected reports to identify, among  other things, costs associated with these efforts. We also reviewed  reports issued by these agencies, the enterprises, and the Federal  Housing Finance Agency (FHFA) that describe the volume,  characteristics, performance, and costs of foreclosure mitigation efforts  and actions that occurred for the period of January 2009 through  December 2011. We did not independently confirm the accuracy of the summary data we obtained. However, we took steps to ensure that the  data we used were sufficiently reliable for our purposes, such as  interviewing officials familiar with the data and corroborating key  information.
To further examine the federal and nonfederal response to the housing  foreclosure crisis, we analyzed loan-level servicing data we obtained from  CoreLogic, Inc. These data provide wide coverage of the entire  mortgage market—approximately 65 percent to 70 percent of prime loans  and about 50 percent of subprime loans, according to CoreLogic officials.  Due to the proprietary nature of CoreLogic’s estimates of its market  coverage, we could not directly assess the reliability of these estimates.  However, we have used CoreLogic data in prior reports in which we  concluded that the data we used were sufficiently reliable for our  purposes. Nevertheless, because of limitations in the coverage and  completeness of the data, our analysis may not be representative of the  mortgage market as a whole. For this engagement, we reviewed  documentation on the process CoreLogic used to collect its data. We  discussed this process and the interpretation of different data fields with  CoreLogic representatives. In addition, we conducted reasonableness  checks on data elements to identify any missing, erroneous, or outlying  data. We concluded that the data we used were sufficiently reliable for  our purposes.
We restricted our analysis to first-lien mortgages for the purchase or the  refinancing of one-to-four family houses located in the 50 states and the  District of Columbia that were active during the period from January 2007  through June 2011. Although this data set did not contain direct information about the presence of modifications, we developed a set of  algorithms to infer if a loan had been modified. We confirmed the  accuracy of our algorithms by using our methodology to analyze data  provided by the Office of the Comptroller of the Currency (OCC) that  included known modifications (see app. III for a more detailed discussion  of our approach). We conducted analyses on a 15 percent random  sample of the CoreLogic data set to examine the volume, characteristics,  and performance of loan modifications executed by both federal and  nonfederal programs.
To examine the extent to which loans were associated with an increased  likelihood of foreclosure, we identified key characteristics associated with  an increased likelihood of foreclosure by reviewing our prior work and  other studies, and interviewing housing market participants and  observers. These included housing market trade associations, such as  the Mortgage Bankers Association (MBA), Center for Responsible  Lending, National Association of Consumer Advocates, Amherst  Securities, NeighborWorks America, HOPE NOW, and the National  Community Reinvestment Coalition. Further, we conducted additional  analyses on the full CoreLogic data set (not a sample). Again, we took  steps to ensure that the data we used were sufficiently reliable for our  purposes, such as conducting reasonableness checks on data elements.  To examine the current condition of the U.S. housing market, we  identified and analyzed key national indicators. To identify the indicators,  we reviewed a wide range of publically available information and  interviewed housing market participants and observers. To describe the  indicators, we reviewed information in several publicly available reports.
To examine opportunities to enhance the effectiveness of current  foreclosure mitigation efforts, we identified and reviewed the goals of  federal foreclosure mitigation efforts as well as statutes, requirements,  and guidance associated with these efforts. To describe the costs  associated with federal efforts and specific foreclosure mitigation actions  we obtained summary data from Treasury, HUD, USDA, VA and the  enterprises. Again, we did not independently confirm the accuracy of the  summary data we obtained. However, we took steps to ensure that the  data we used were sufficiently reliable for our purposes, such as  interviewing officials familiar with the data. We also reviewed relevant  principles of federal budgeting that resulted from federal credit reform. We  also obtained viewpoints from a wide range of housing market  participants and observers. For example, we met with officials from  Treasury, HUD, FHFA, Fannie Mae, Freddie Mac, VA, and USDA to  understand their foreclosure mitigation efforts. Further, we conducted an  econometric analysis of redefault among modified loans by analyzing a  sample of loan-level data we obtained from CoreLogic as well as loan- level data we obtained from Treasury on HAMP loans. Again, we took  steps to ensure that the data we used were sufficiently reliable for our  purposes, such as conducting reasonableness checks on data elements.  Appendix V contains a detailed summary of the methodology for this  analysis as well as the results.
We conducted this performance audit from October 2010 through June  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on the audit objectives. For additional information  on our scope and methodology, see appendix I.
subsections: section_title: Background
subsections: section_title: Current Housing Situation
paragraphs: As we previously reported, factors such as a rapid decline in home prices  throughout much of the nation, weak regional labor market conditions in  some states where foreclosure rates were already elevated, along with  the legacy of eased underwriting standards, wider use of certain loan  features associated with poorer loan performance, and growth in the  market for private label residential mortgage-backed securities,  contributed to the increase in loan defaults and foreclosures beginning in  late 2006. The nation’s economy was in recession between December  2007 and June 2009. During this period, the elevated unemployment rate  and declining home prices worsened the financial circumstances for many  families and, with it, their ability to make their mortgage payments.  Analysis by federal agencies, the Federal Reserve System, and housing  market observers attribute the continued increase in foreclosures  between 2008 and 2011 to several factors, including, continued  depreciation in home values, elevated numbers of unemployed  nationwide, and weaknesses in the servicing industry’s response to the  large number of delinquent borrowers.
section_title: The Mortgage Market
paragraphs: When individuals purchase residential real property with borrowed funds,  they usually enter into a contractual agreement in which they agree,  among other things, to make payments to the originating lender for a  period of time. To secure their debt, lenders obtain a lien on the  underlying property as collateral against borrower default. The lien holder  has the right to seize the property should the borrower fail to pay. The  residential mortgage market can be divided into several loosely defined  segments that are determined, in part, by a borrower’s credit quality.
Prime mortgages are made to borrowers with strong credit histories  and provide the most competitive interest rates and mortgage terms.
Near-prime mortgages (also called Alt-A mortgages) generally serve  borrowers whose credit histories are close to prime, but the loans  often have one or more high-risk features such as limited  documentation of income or assets.
Subprime mortgages are generally made to borrowers with blemished  credit and feature higher interest rates and fees than the prime and  near-prime markets.
Government-insured or government-guaranteed mortgages primarily  serve borrowers who may have difficulty qualifying for prime  mortgages. These mortgages generally feature interest rates  competitive with prime loans, but borrowers must purchase mortgage  insurance or pay guarantee fees. HUD’s Federal Housing  Administration (FHA), VA, and USDA operate the main federal  programs that insure or guarantee mortgages, which protect lenders  against losses in the event of default.
Originating lenders generally sell or assign their mortgages to other  financial institutions that securitize them rather than hold them in their  portfolios. The purchasers of these mortgages package them into pools  and issue securities (known as mortgage-backed securities, or MBS). The  pooled mortgages serve as collateral, and the securities pay interest and  principal to their investors, which include other financial institutions,  pension funds, and other institutional investors. The secondary market  consists of several types of securities. Ginnie Mae securities are backed  by government-insured or government-guaranteed mortgages (FHA,  USDA, and VA). Securities issued by the enterprises are backed by  mortgages that meet the requirements for purchase by Fannie Mae and   Finally, private label securities—activity levels for which  Freddie Mac.have dropped dramatically since 2007—are backed by mortgages that  typically do not conform to Fannie Mae or Freddie Mac purchase  requirements because they are too large or do not meet their underwriting  criteria. Investment banks bundled most subprime and Alt-A loans into  private label residential MBS, or RMBS.
section_title: Delinquency, Default, and Foreclosure
paragraphs: Common measures of loan performance are delinquency, default, and  foreclosure rates, which show the percentages of loans that fall into each  category. A loan becomes delinquent when a borrower does not make  one or more scheduled monthly payments. Loans in default are generally  delinquent by 90 or more days—the point at which foreclosure  proceedings become a strong possibility.
Foreclosure is a legal process that a mortgage lender initiates against a  homeowner who has missed a certain number of payments. The  foreclosure process, which is usually governed by state law and varies  widely by state, generally falls into one of two categories—judicial  foreclosure, which proceeds through the courts, or nonjudicial  foreclosure, which does not require court proceedings. The foreclosure  process has several possible outcomes but generally means that the  homeowner loses the property, typically because it is sold to repay the  outstanding debt or repossessed by the lender. The legal fees, foregone  interest, property taxes, repayment of former homeowners’ delinquent  obligations, and selling expenses can make foreclosure extremely costly  to lenders.
Foreclosures have been associated with a number of adverse effects on  homeowners, communities, the housing market, and the overall economy.  Homeowners involved in a foreclosure are often forced to move out and  may see their credit ratings plummet, making it difficult to purchase  another home. A large number of foreclosures can have serious  consequences for neighborhoods. For example, research has shown that  foreclosures depress the values of nearby properties in the local  neighborhood. In addition, our past work showed that vacant properties— often the aftermath of the foreclosure process—can be broken into and  vandalized, illegally occupied, or used by people engaging in criminal  activities, increasing the risk of fires or other public safety hazards.  Creditors, investors and servicers can incur a number of costs during the  foreclosure process (e.g., maintenance and local taxes) and can incur a  net financial loss as a result of the shortfall between the ultimate sales  price and the mortgage balance and carrying costs. Large numbers of  foreclosures can significantly worsen cities’ fiscal circumstances, both by  reducing property tax revenues and by raising costs to local government  associated with maintaining vacant and abandoned properties. More  broadly, avoiding preventable foreclosures has been viewed as a key  component of stabilizing home prices and restoring confidence in housing  for prospective home buyers and existing homeowners. As noted by the  Federal Reserve System, house prices have fallen an average of about  33 percent from their 2006 peak, resulting in a decline of about $7 trillion  in household wealth and an associated ratcheting down of aggregate  consumption.
section_title: Options to Avoid Foreclosure
paragraphs: Options to avoid foreclosure include repayment plans, forbearance plans,  loan modifications, short sales, and deeds-in-lieu of foreclosure (DIL).  Eligibility for different options often varies by the borrower’s delinquency  status. With repayment plans, forbearance plans, and loan modifications,  the borrower retains ownership of the property. With short sales and  deeds-in-lieu, the borrower does not.
With a repayment plan, the borrower agrees to pay a certain amount  in addition to the regularly scheduled mortgage payment for a  specified number of months as a way to catch up on delinquent  payments and fees.
With a forbearance plan, an investor agrees to reduce or suspend  payments for a specified period of time, during which a portion of the  principal balance does not accrue interest. Forbearance may be used  in response to a serious event, such as illness, that has caused the  homeowner to miss several loan payments. Usually, the investor will  require the borrower to make up the difference at a later time, often  through a repayment plan.
The investor may offer a loan modification when the borrower can no  longer afford the monthly payments on the original mortgage but can  afford reduced payments. Loan modification involves making  temporary or permanent changes to the terms of the existing loan  agreement, either by capitalizing the past due amounts, reducing the  interest rate, extending the loan term, reducing the total amount of the  loan through principal forgiveness or forbearance, or a combination of  these actions. sum of the principal, accrued interest, and other expenses owed.  Short sales are often the first nonhome retention workout option  considered, because the investors do not have to take ownership of  the property.
Under DIL, the mortgage holder opts to accept ownership of the  property in place of the money owed on the mortgage. The  homeowner voluntarily gives the investor the keys to the property and  executes a deed to transfer title to the investor. The investor agrees to  release the debtor from any liability on the outstanding mortgage  balance. Mortgage holders generally will not accept a DIL if there are  other liens on the property, as foreclosure may be necessary in order  to gain clear title—that is, a title with no other claims on the property.  A DIL may be combined with a lease agreement in an arrangement  called a deed-for-lease, which allows the borrower to remain in the  home as a renter.
section_title: Responses to the Foreclosure Crisis Have Focused on Loan Modifications and Other Home Retention Options
paragraphs: Federal and nonfederal responses to the foreclosure crisis have been  varied and have included a range of new efforts and expanded use of  existing programs. In contrast to the traditional focus of putting borrowers  into temporary repayment plans or forbearance agreements, federal and  nonfederal foreclosure mitigation efforts have shifted to modifying the  terms of existing loans to make the payments more affordable. With the  move toward lowering monthly mortgage payments, the collective  performance of modified loans has improved. The key federal effort has  been HAMP, which was initiated in early 2009 using TARP and enterprise  funds. In addition, the enterprises, federal agencies, and servicers have  expanded their existing modification programs in an effort to reach  additional borrowers. Although not typically viewed as a foreclosure  mitigation effort, federal refinancing programs have been introduced and  expanded to help borrowers unable to refinance due to declines in home  values take advantage of lower interest rates in order to make their  mortgage payments more affordable, such as the Home Affordable  Refinancing Program (HARP). In addition, federal and nonfederal efforts  also looked to provide temporary relief and expand usage of nonhome  retention programs that facilitate short sales and deed-in-lieu of  foreclosure, such as Treasury’s Home Affordable Foreclosure  Alternatives (HAFA) program, to allow borrowers to transition to more  affordable housing and avoid foreclosure. Finally, recent federal and state  enforcement actions require the five largest U.S. servicers to take actions  to assist struggling homeowners. Additional details related to specific  federal and nonfederal efforts are available in appendix II.
subsections: section_title: Modification Activity Peaked in Early 2010 as More Borrowers Received Payment Reductions
paragraphs: In total, servicers completed more than 4 million loan modifications under  various federal and proprietary programs between January 2009 and  December 2011, according to estimates published by HOPE NOW, a  mortgage industry association.in 2009, the mortgage industry permanently modified more loans in 2010,  nearly 1.8 million. In 2011, however, the volume of modifications  subsequently declined to 1 million. Modification activity peaked in the  second quarter of 2010 before declining. In fact, loan modification activity  during the second quarter of 2010 was more than double the volume of  modifications completed in the fourth quarter of 2011, nearly 500,000  modifications compared to about 242,000.
After completing 1.2 million modifications  Over time, servicers have also begun providing borrowers with larger  reductions in their monthly mortgage payments by using different types of  modifications. Using CoreLogic data—CoreLogic provides coverage of  approximately 65 percent to 70 percent of prime loans and about 50  percent of subprime loans—we found that in 2007 most modifications of  prime loans and a substantial number of subprime modifications resulted  in an increase in monthly mortgage payments, corresponding to the time  when most modifications involved capitalizing past due amounts—that is,  adding past due amounts to the remaining mortgage balance and  reamortizing (see fig. 1).remaining term and sometimes with a term extension), left borrowers  paying more each month. However, by the third quarter of 2008, an  increasing proportion of modifications involved other actions that lowered  payments to make them more sustainable in the long term. These actions  included reducing interest rates, extending loan terms, and reducing  principal through principal forgiveness or forbearance. Further, beginning  in the first quarter of 2010, more than half of both prime and subprime  modifications involved payment reductions of 20 percent or more. In  addition, in 2010 and the first half of 2011 about a quarter of all prime and  subprime modifications included payment reductions of more than 40  percent, compared to 8 percent of prime modifications and 11 percent of  subprime modifications completed between January 2007 and December  2009.
These added amounts (sometimes over the   Servicers participating in HAMP are required to  Treasury reported that between its inception in early 2009 and December  2011, about 933,000 permanent HAMP modifications had been started  (see table 1), but almost as many have had their trial or permanent  modifications canceled. More than half of these—about 481,000—came  through the enterprises’ HAMP efforts. About 763,000 permanent  modifications were active as of December 2011. In addition, about 79,000  trial (not permanent) modifications were active as of December 2011.  According to Treasury, the median monthly payment reduction for  borrowers in an active permanent modification as of December 2011 was  about $531, or 37 percent of the median monthly payment prior to  modification. As of December 2011, Treasury had spent about $1.8 billion  on HAMP incentive payments to servicers, investors, and borrowers for  first-lien modifications on nonenterprise loans. Meanwhile, Fannie Mae reported paying about $880 million in servicer and borrowers incentives,  and Freddie Mac paid or accrued $685 million in servicer and borrower  incentives for HAMP modifications since program inception through  December 2011. Although HAMP has assisted many borrowers, a large  number of borrowers have been unable to receive a HAMP permanent  modification. According to Treasury, about 1.9 million borrowers had their  HAMP loan modification application denied, as of December 2011.  Further, more than 930,000 homeowners have had their trial or  permanent loan modifications canceled. Servicers had canceled  761,961 trial modifications, and the vast majority of these (717,390) had  trial start dates prior to June 1, 2010, when Treasury implemented a  verified income requirement. Since Treasury implemented this  requirement, 86 percent of trial modifications have converted to  permanent modifications.
The enterprises have not received incentive payments from Treasury for PRA or the  other components of the Making Home Affordable program, including HAMP.  In January  2012, Treasury announced that it would pay PRA incentives to the enterprises for HAMP  PRA modifications of enterprise loans; however, as of June 2012, FHFA does not allow  Fannie Mae and Freddie Mac to forgive principal as part of a HAMP modification. and exceeds the NPV result under the standard waterfall. As of  December 2011, about 5 percent of active permanent HAMP  modifications (a total of about 40,000 loans) and 19 percent of permanent  first-lien modifications started that month received reductions in their  principal balances under PRA. Treasury had paid $8.8 million in PRA  incentives to participating servicers as of December 2011.
Treasury announced a series of changes to its HAMP program in January  2012 intended to help reach additional borrowers at risk of foreclosure.  Effective June 1, 2012, these modifications, referred to as HAMP Tier 2  modifications, will be made available to borrowers who do not meet the  eligibility or underwriting requirements under the original HAMP  guidelines (now referred to as HAMP Tier 1). These HAMP Tier 2  modifications will capitalize past due amounts, adjust the interest rate to  the market rate plus a risk adjustment, and extend the loan term to 480  months from the date of the modification. In cases where the mark-to- market loan-to-value (LTV) ratio exceeds 115 percent, the servicer must  forbear principal equal to the lesser of (a) an amount that would create a  post-modification mark-to-market LTV ratio of 115 percent using the  interest bearing principal balance or (b) an amount equal to 30 percent of  the gross post-modified unpaid principal balance of the mortgage loan  (inclusive of capitalized past due amounts). If these changes reduce the  borrower’s monthly principal and interest payment by at least 10 percent  and result in monthly payments that are between 25 percent and 42  percent of the borrower’s monthly gross income, the modification may be  offered.
Both Fannie Mae and Freddie Mac have provided loan modifications  outside of the HAMP program for mortgages they hold or guarantee.  Servicers of Fannie Mae and Freddie Mac loans may use enterprise  programs for borrowers who have been evaluated for HAMP but do not  qualify or who received a HAMP modification but have redefaulted. Both  of the enterprises delegated authority to their largest servicers to offer  modifications according to a standard set of waterfall steps. This  modification structure was aimed at making monthly payments more  affordable. According to Fannie Mae and Freddie Mac data, non-HAMP  modifications resulted in median monthly payment reductions of about 26  percent ($279) and 11 percent ($132), respectively, in fiscal year 2011.
In addition, the enterprises offered incentives of $800 per completed  modification. Fannie Mae and Freddie Mac modified nearly 580,000 loans  between January 2009 and December 2011 through their non-HAMP  programs.
FHFA, which is the regulator and conservator, has direct supervisory authority over  Fannie Mae’s and Freddie Mac’s activities. and Freddie Mac made these requirements and servicing practices  effective for all loans on October 1, 2011.
FHA, VA, and USDA offer their own loan modification options for troubled  mortgages. which typically involve capitalizing past due amounts and limited interest  rate reductions and term extensions—each agency has implemented an  expanded modification program with features similar to HAMP. Each of  these agencies requires servicers to evaluate borrowers for the  established loss mitigation options first before considering them for the  newer expanded modification programs. None of these programs use the  Treasury NPV model to evaluate whether the loan should be modified,  instead relying on servicers to make that determination. In addition,  Treasury does not share the cost to investors of modifying loans under  these programs, although FHA and USDA servicers and borrowers may  be eligible for incentive payments from Treasury.
See appendix II for a more detailed description of the various foreclosure mitigation  efforts offered by FHA, VA, and USDA. lien is paid in full.resulted in average monthly payment reductions of about 19 percent  in fiscal year 2011, compared to reductions of about 11 percent under  its standard modification program. FHA completed more than 370,000  standard modifications and 13,000 FHA-HAMP modifications between  January 2009 and December 2011.The claims payments to servicers  for these modifications totaled $446 million, and the servicer  incentives’ totaled $294 million.
According to FHA data, FHA-HAMP modifications  In January 2010, VA issued guidelines for VA-HAMP, which will be  available until Treasury’s HAMP expires. This program follows  Treasury’s HAMP procedures for calculating the target monthly  payment and uses the same waterfall (capitalization, interest rate  reduction down to 2 percent, term extension, and principal  forbearance) to achieve the necessary payment reduction to reach the  targeted monthly payment (31 percent of income). Servicers  completed about 30,000 modifications of VA loans between January  2009 and December 2011. The incentives for servicers associated  with these modifications totaled about $15 million in costs to VA.
In August 2010, USDA published a final rule outlining procedures for  special loan servicing (SLS). SLS procedures are a permanent part of  USDA’s loss mitigation efforts. These procedures expand its  modification efforts by allowing for term extensions of up to 40 years  from the date of modification (compared to the remaining term under  the traditional modification program), further interest rate reductions,  and if necessary, a mortgage recovery advance to cover past due  amounts and other costs, such as canceled foreclosure fees. In  addition, forborne principal may be included in this advance. USDA  reimburses the servicer for advancing the funds for the mortgage  recovery advance, which is payable when the borrower sells the  property or pays off the loan (similar to FHA-HAMP). USDA approved  servicing plans for nearly 13,000 traditional modifications and 143  SLS modifications between January 2009 and December 2011. USDA  does not offer servicers incentives for modifying loans. According to  USDA’s guidance, servicers are required to use the following waterfall  in considering a loss mitigation action: repayment agreement, special  forbearance, loan modification, SLS loan modification, preforeclosure  sale (short sale) or deed-in-lieu of foreclosure.
Although Treasury does not share the cost of modifying loans with  investors under FHA-HAMP and USDA’s SLS, it has put in place  performance incentives that reward participating servicers and borrowers  for certain modifications that remain current under these programs.  Servicers must have entered into agreements with Treasury to participate  in these incentive programs. According to Treasury, it offered VA the  opportunity for its servicers and borrowers to receive incentive payments  under MHA. However, VA officials told us that implementing this feature  increased the complexity of its loan modification program and VA was  concerned that veterans may be denied modifications. As a result, VA  decided to issue its guidelines for VA-HAMP without the additional  incentives. As of December 2011, Treasury had paid $5 million in servicer  and borrower incentives using TARP funds for FHA-HAMP modifications  that remained current, but had not made any incentive payments for  USDA SLS modifications.
Treasury’s Housing Finance Agency Innovation Fund for the Hardest Hit  Housing Markets (known as the Hardest Hit Fund or HHF program) has  committed $7.6 billion of TARP funding to 18 states and the District of  Columbia for programs such as loan modification programs, among other  things, to meet the distinct challenges struggling homeowners in their  state are facing. For example, California devoted more than $770 million  for reducing principal balances for low-to-moderate income borrowers  with current LTV ratios greater than 115 percent. Arizona, Michigan,  Nevada, North Carolina, Ohio, and Rhode Island are among the states  with modification programs that include principal reduction.
section_title: Servicers Have Also Focused on Loan Modification Programs to Help Address the Foreclosure Crisis
paragraphs: To estimate the total number of permanent loan modifications through servicers’  proprietary efforts, we subtracted the modifications completed under federal agencies and  the enterprises (as reported by the federal agencies and the enterprises) from the total  modifications estimated by HOPE NOW. Between January 2009 and December 2011,  HOPE NOW estimated there were about 4 million permanent modifications. The HOPE  NOW estimates are from a survey of HOPE NOW members, which include approximately  37 million loans and which have been extrapolated to the entire first-lien industry. HOPE  NOW reports data on HAMP modifications and “proprietary modifications.” According to a  HOPE NOW official, proprietary modifications in their survey include modifications  completed through the enterprises, other federal efforts, as well as modifications  completed on loans held in lenders’ portfolios or in private label securities. monthly mortgage payments to be at least 31 percent of their income  prior to modification, some servicers have a lower threshold for their  proprietary programs. As a result, proprietary loan modification  programs may reach homeowners who are ineligible for HAMP and other  federal programs.
section_title: Refinancing Programs Have Shifted to Reach Borrowers with Little or Negative Equity, but Associated Costs Relative to Participation Raise Questions
paragraphs: Refinancing a mortgage is not typically viewed as an action to mitigate a  foreclosure, although it can reduce borrowers’ monthly mortgage  payments and thereby result in more sustainable mortgage loans. A  number of federal and nonfederal programs are in place to help  homeowners who are current on their mortgages but cannot refinance  because of declining home values. Generally, these programs offer  refinancing options that include accepting higher LTV ratios than have  typically been allowed and lowering refinancing costs.
The primary federal refinance effort has been the Home Affordable  Refinance Program (HARP). It was announced alongside HAMP in  February 2009 as a way to provide for borrowers who were current on  their mortgage payments but unable to refinance because the declines in  home values had left them with little or no equity in their homes. HARP  was intended to allow these borrowers to benefit from reduced interest  rates in order to make their mortgage payments more affordable. Only  mortgages owned or guaranteed by Fannie Mae and Freddie Mac are  eligible. Initially, HARP targeted borrowers with current LTV ratios  between 80 percent and 105 percent, but FHFA revised those  requirements to include borrowers with current LTV ratios up to 125  percent in July 2009. The standard mortgage insurance requirements for  these refinance loans were relaxed so that borrowers who did not have  mortgage insurance on their existing loan did not have to purchase it for  their refinanced loan, something that would typically be required for a loan  with an LTV ratio of more than 80 percent. HARP has resulted in  approximately 1 million refinances as of December 31, 2011.Approximately 91 percent of HARP refinances have gone to borrowers  with current LTV ratios between 80 percent and 105 percent. According to  Fannie Mae, borrowers who refinanced in 2011 under its HARP effort  saved an average of $151 on their monthly mortgage payments.Fannie Mae and Freddie Mac expected that the program would have  minimal net costs to them.
To respond to continued weakness in the housing market, including the  large number of borrowers with negative equity, FHFA announced  changes to HARP in October 2011. These changes included removing  the LTV cap to reach more underwater borrowers—those with current  LTVs of more than 125 percent. Delivery fees the enterprises charged to  lenders and that may be passed on to the borrower were also reduced. In  addition, the enterprises eliminated representations and warranties tied to  the original loan. FHFA also extended the program’s expiration date to  December 31, 2013.
While HARP is available only to borrowers with loans owned or  guaranteed by Fannie Mae or Freddie Mac, several other refinance  efforts were put in place to reach other borrowers. For example, Treasury  worked in conjunction with FHA to establish the FHA Refinance for  Borrowers in Negative Equity Positions (FHA Short Refinance), which is   This program took effect in  partially supported using TARP funds. September 2010 and provides an opportunity to borrowers who are  current on their mortgage payments and have loans not insured by FHA  with current LTV ratios greater than 100 percent to refinance into an FHA- insured mortgage. In order to qualify, investors must write down at least  10 percent of the outstanding principal and achieve an LTV ratio of no  more than 97.75 percent.
Through December 2011, FHA Short  Refinance has had limited success, reaching 646 borrowers. During the  subsequent 5 months, however, program volume doubled to 1,303 loans.  Although no borrowers who have refinanced under the program had  defaulted as of December 31, 2011, Treasury had paid approximately  $5.5 million in administrative fees to maintain an $8 billion letter of credit  facility that will be used to pay Treasury’s portion of claims on losses  associated with loans refinanced under the program. The letter of credit is  expected to be in force through September 2020—approximately 8 more  years—and the administrative fees associated with this letter of credit  could reach a maximum of $117 million. However, participation in the  program was initially estimated at 1 million borrowers, and even with  FHA’s recently announced changes to the program, whether participation  will reach the levels initially projected is not clear. With participation to  date much lower than expected and future participation unknown, the  costs to Treasury of maintaining the letter of credit facility may not be  justified. As noted in our Standards for Internal Control in the Federal  Government, program managers are responsible for achieving objectives  of the agency while making effective and efficient use of the entity’s  resources.
Federal agencies and the enterprises have other existing refinance  programs, and although the aim of these programs is not necessarily to  provide relief to struggling borrowers, some have features that lend  themselves to being used by such borrowers. For example, an FHA  streamlined refinance without an appraisal may help existing borrowers  with negative equity that are current on their mortgage but struggling to  make their mortgage payments because it allows lenders to refinance the  entire outstanding principal balance. VA’s Interest Rate Reduction Refinancing Loan requires no appraisal or credit underwriting, and  borrowers may qualify with VA approval even if they are delinquent.
Under the HHF program, several states are using funding for refinance  programs that help borrowers with negative equity or second mortgages.  For example, Ohio set aside $50 million to help borrowers refinance into  mortgages with a reduced principal balance and lower monthly payments.  Servicers receive up to $25,000 per borrower for each refinance. North  Carolina has a program that would provide interest-free loans of up to  $30,000 to refinance certain second mortgages.
section_title: Other Home Retention Efforts Provide Temporary Relief to Borrowers
paragraphs: Not all borrowers in financial distress need the terms of their mortgages  changed (loan modification) or a new mortgage (refinance). Short-term  relief may be sufficient for some borrowers to relieve a temporary shortfall  in funds. Treasury’s Home Affordable Unemployment Program (UP)  provides assistance to borrowers whose hardship is related to  unemployment. A borrower who is unemployed and requests assistance  under HAMP (nonenterprise program only) must be evaluated for and, if  qualified, must receive an UP forbearance plan before being considered  for HAMP unless the servicer determines that a HAMP modification is the  better alternative for the borrower. No TARP funds are used to support  the UP program. Under UP, servicers must provide qualified borrowers  with a forbearance period during which their mortgage payments are  temporarily reduced or suspended for a minimum of 12 months. Upon  completion of the forbearance period, borrowers must be evaluated for  other loan workout programs. UP has resulted in nearly 18,000  forbearance agreements.
Other federal agencies and the enterprises also have existing programs  to provide temporary relief to borrowers. These programs may be formal  or informal and typically take the form of forbearance agreements and  repayment plans. FHA and USDA encourage servicers to use these  options informally early in the delinquency to prevent borrowers from ever  becoming 90 days delinquent. Fannie Mae and Freddie Mac reported that  about 257,000 repayment plans and forbearance agreements had been  completed under their existing programs since January 2009. FHA  servicers provided repayment plans to about 440,000 borrowers and  special forbearance agreements to about 67,000 borrowers. In addition,  servicers may advance funds to bring loans current, and FHA paid partial  claims totaling $415 million to servicers to reimburse them for almost  47,000 such advances. Servicers reported that successful repayment  plans and special forbearance agreements reached about 28,000 VA  borrowers, while USDA approved special forbearance servicing plans for  more than 5,000 borrowers. FHA extended the minimum term of its  special forbearance program for unemployed borrowers from 4 months to  12 months, effective August 2011. In January 2012, Freddie Mac and  Fannie Mae announced changes to the forbearance options servicers can  offer to unemployed borrowers, which increase the minimum forbearance  period to 6 months, extendable for up to an additional 6 months if the  borrower is still unemployed.
Two recently established programs use federal funds to provide  temporary relief to borrowers but are administered at the state level.  Under HHF, several states have established programs to provide ongoing  mortgage payment assistance to qualified borrowers who are  unemployed or underemployed. Other programs provide one-time loans  to qualified borrowers to resolve their delinquencies, which may be  forgiven after a period of time (e.g., 3 years for California’s program). The  Emergency Homeowners Loan Program (EHLP) was authorized under  the Dodd-Frank Wall Street Reform and Consumer Protection Act,  allowing HUD to provide short-term loans to unemployed borrowers to  help meet their mortgage obligations in the 32 states and Puerto Rico that  did not receive Hardest Hit Fund dollars. The program was designed to  provide mortgage payment relief (up to $50,000 total) to eligible  homeowners experiencing a drop in income of at least 15 percent to  cover past-due mortgage payments as well as a portion of the  homeowner’s mortgage payment for up to 24 months. HUD permitted five  states with similar programs already in place—Connecticut, Delaware,  Idaho, Maryland, and Pennsylvania—to direct their EHLP allocations to  these programs. NeighborWorks America, a federally chartered nonprofit  organization, administers EHLP for the remaining 27 states and Puerto  Rico. Applications for funds under EHLP were due in September 2011.  HUD reported that, as of September 30, 2011, slightly more than half of  the $1 billion allocated to the program had been obligated. As of  December 27, 2011, more than 5,500 EHLP loans had been closed and  nearly 6,000 EHLP loans were in the process of being closed.
section_title: Programs that Facilitate Short Sales and Deeds-in- Lieu of Foreclosure Have Been Implemented or Expanded
paragraphs: When borrowers cannot afford to keep a property even with the  assistance that a modification or temporary relief program would provide,  they may seek alternatives that will allow them to transition to more  affordable housing and avoid foreclosure. These alternatives are  generally less expensive than going through the foreclosure process and  often take less time. Treasury implemented the Home Affordable  Foreclosure Alternatives (HAFA) program, which provides incentives for  short sales and deeds-in-lieu of foreclosure as alternatives to foreclosure  for borrowers who are unable or unwilling to complete the HAMP first-lien  modification process. Borrowers, tenants, and certain other non-borrower  occupants are eligible for relocation assistance of $3,000 and  nonenterprise servicers receive a $1,500 incentive for completing a short  sale or deed-in-lieu of foreclosure. In addition, investors are paid up to  $2,000 for allowing short-sale proceeds to be distributed to holders of  subordinate mortgages on the property. Servicers who participate in the  HAMP first-lien modification program are required to evaluate certain  borrowers for HAFA, including those who do not pass the NPV test or  who default on a HAMP modification. Deed-for-lease agreements, where  the borrower is allowed to rent the property after giving up ownership of  the property, are permitted but not required under HAFA. Treasury has  provided about $100 million in HAFA incentive payments for  approximately 26,000 short sales and deeds-in-lieu as of December  2011.
Existing programs at the enterprises, FHA, VA, and USDA provide  opportunities beyond HAFA for short sales and deeds-in-lieu. These  programs are typically the final options for avoiding foreclosure. Fannie  Mae and Freddie Mac reported completing almost 300,000 short sales  and deeds-in-lieu since January 2009, of which only about 1,600 were  HAFA transactions. FHA paid claims on more than 55,000 short sales  and 3,000 deeds-in-lieu between January 2009 and December 2011.  During the same period, servicers completed about 13,000 short sales  and about 2,000 deeds-in-lieu on VA loans, while USDA approved almost  3,400 short sales and about 230 deeds-in-lieu.
In some cases, state programs funded under Treasury’s HHF program  include foreclosure alternatives and transition assistance for borrowers  who cannot afford to keep their homes. For example, California and  Rhode Island have programs to provide borrowers who are losing their  homes through short sales or deeds-in-lieu with funds to secure new  housing.
section_title: Recent Federal and State Enforcement Actions Require Servicers to Assist Struggling Homeowners
paragraphs: In April 2011, OCC, the Federal Reserve, and the Office of Thrift  Supervision (now part of OCC) sent consent orders to 14 servicers  outlining changes they needed to make to their servicing processes to  provide better service to borrowers.establishing compliance programs for their loss mitigation and loan  modification activities and dedicating resources to communicating with   These changes included  borrowers in ways that avoid confusion and provide continuity (e.g.,  through providing a single point of contact).
A recent joint federal government and state attorneys general agreement  with the five largest servicers in the United States requires these  servicers to provide financial relief to homeowners struggling to make  their mortgage payments and implement new mortgage loan servicing  standards.investigation looking at alleged misconduct related to the origination and  servicing of single family residential mortgages. The settlement requires  the servicers to collectively dedicate $20 billion toward various forms of  financial relief to homeowners, including: reducing the principal on loans  for borrowers who are delinquent or at imminent risk of default and owe  more on their mortgages than their homes are worth; refinancing loans for  borrowers who are current on their mortgages but who owe more on their  mortgage than their homes are worth; forbearance of principal for  unemployed borrowers; antiblight provisions; short sales; transitional  assistance; and benefits for service members. These servicers are  required to pay an additional $5 billion in cash to the federal and state  governments, which will be used to repay public funds lost as a result of  servicer misconduct and to fund housing counseling, among other things.  In addition to the financial commitment, servicers must implement new  standards for servicing mortgages and handling foreclosures, and take   The settlement was the result of a federal and state  steps to better ensure information provided in federal bankruptcy court is  accurate.
section_title: Millions of Loans Face Elevated Risk of Foreclosure and Indicators Show Housing Market Remains Weak
paragraphs: Based on our analysis of CoreLogic data that cover approximately 65  percent to 70 percent of the prime and approximately 50 percent of the  subprime mortgage market, we found that as of June 2011, 1.9-3.0 million  loans had characteristics associated with an increased likelihood of  foreclosure, including delinquency and significant negative equity (current  LTV ratios of 125 percent or higher). As our data do not cover the whole  mortgage market, the actual number of loans with an increased likelihood  of foreclosure is probably larger.Banker Association (MBA) data, as of June 2011, approximately 4 million   For example, according to Mortgage  loans had been delinquent for 60 days or more.housing market conditions—including default and foreclosures—show  that the housing market remained weak through 2011. Approximately 8  percent of loans were in default 90 days or more or in foreclosure as of  the end of 2011, according to MBA data. Other key housing market  indicators, such as home prices and home equity, remained near their  recent lows.
subsections: section_title: Foreclosure May Remain High Primarily Due to the Large Number of Delinquent Loans
paragraphs: Based on our analysis of CoreLogic data, we found that 1.9-3.0 million  loans—1.6-2.6 million prime (7 to 11 percent) and between 312,000- 449,000 subprime loans (38 to 55 percent)—had characteristics that were associated with an increased likelihood of foreclosure, as of June 2011.For example, we considered loans where the borrower had missed two or  more payments—that is, had been delinquent 60 days or more—to be at  an increased risk of foreclosure. As of June 2011, approximately 1.6  million prime loans (7 percent) and 312,000 subprime loans (38 percent)  were 60 days or more delinquent (see fig. 4). In addition to those loans  that were 60 days or more delinquent, we identified other characteristics  that were associated with an increased likelihood of foreclosure, such as  certain levels of negative equity (owing more on a mortgage loan than the  property is worth), high mortgage interest rate, or certain loan origination  features. As of June 2011, approximately 1 million additional prime (5  percent) and 136,000 additional subprime loans (17 percent) were current  or less than 60 days delinquent but had two or more of these additional  characteristics.
The number of borrowers with characteristics associated with an  increased likelihood of foreclosure remained largely unchanged between  June 2009 and 2011 for prime loans while the number of subprime loans  declined (see fig. 4). Among prime loans, the total number of loans with  delinquency or two or more other characteristics associated with an  increased likelihood of foreclosure decreased by less than 1 percent  between June 2009 and 2011. In contrast, during the same period the  total number of subprime loans with characteristics associated with an  increased likelihood of foreclosure decreased by approximately 30  percent. However, this decline is in part a result of the decreasing overall  number of surviving subprime loans between June 2009 and 2011.
Not all borrowers with characteristics associated with an increased  likelihood of foreclosure will require foreclosure mitigation assistance or  respond to offers of assistance. Our analysis of CoreLogic data and  officials with the enterprises and a federal agency revealed that some  borrowers with characteristics associated with an increased likelihood of  foreclosure continue to pay on time or, if they are delinquent, become  current without intervention. Also, according to FHA and Treasury  officials, some borrowers do not answer servicers’ outreach efforts to  provide foreclosure mitigation assistance.
Appendix IV provides additional data on the results of our analysis for each of the  characteristics. likely to be Fannie Mae or Freddie Mac loans and more likely to be  held in portfolio or private label securities than the overall population  of prime loans. We were unable to analyze the investors associated  with subprime loans because the loan-level data for this segment of  the market do not contain reliable information about the loan’s  investor.
Negative Equity: Negative equity is also associated with an  increased likelihood of foreclosure, particularly when the loan is  delinquent or has other characteristics associated with an increased  likelihood of foreclosure.  Within the data we analyzed, a total of 1.2  million prime (5 percent) and 157,000 subprime loans (19 percent) in  June 2011 had significant negative equity (a current LTV ratio of 125  percent or greater) and additional characteristics associated with an  increased likelihood of foreclosure, including delinquency. Among  loans with significant negative equity, more than one-third of prime  loans (420,000) and more than half of subprime loans (93,000) were  60 days or more delinquent in June 2011. For those borrowers with  limited ability to sell or refinance a home for a price that will cover the  full mortgage, missed payments increase the likelihood of foreclosure.
Negative Equity and Unemployment: As we have previously  reported, housing market stakeholders have suggested a relationship  between unemployment and negative equity and the increased  likelihood of foreclosure. Borrowers who are unemployed and have  significant negative equity in their homes are unlikely to be able to sell  them at a price high enough to cover the mortgage and move  elsewhere to seek work. In June 2011, approximately 67 percent of  prime and subprime loans we analyzed with negative equity were  located in areas with high local unemployment (10 percent or greater).
Mortgage Interest Rate: Borrowers with a high mortgage interest  rate—150 basis points or 1.5 percentage points or higher above the  market rate—have an increased likelihood of foreclosure as the high  interest rate results in relatively higher monthly payments and may  indicate other problems that have limited a borrower’s ability to  refinance. 1 million prime (5 percent) and 230,000 subprime loans (83 percent)  had a high mortgage interest rate and additional characteristics that  are associated with an increased likelihood of foreclosure, such as  delinquency. Of loans with a high mortgage interest rate and  additional characteristics, 40 percent of prime and 29 percent of  subprime loans had significant negative equity (LTV of 125 percent or  greater). Researchers have found that borrowers with significant  negative equity have a limited ability to refinance to lower interest  rates and lower monthly payments as a result of tightened  underwriting standards that require low LTV ratios.
GAO, Nonprime Mortgages: Analysis of Loan Performance, Factors Associated with  Defaults, and Data Sources, GAO-10-805 (Washington, D.C.: Aug. 24, 2010). See also  Demyanyk, Koijen, and Van Hemert, “Determinants and Consequences of Mortgage  Default” pg. 16 and Shane M. Sherlund, “The Past, Present, and Future of Subprime  Mortgages,” Federal Reserve Board Finance and Economics Discussion Series, no. 2008- 63 (Washington, DC.: Nov. 2008)
Origination Loan Features: We have previously reported on the  strong association between certain loan origination features— including low credit score and high LTV at the time of origination—and  an increased likelihood of foreclosure. As of June 2011, of the loans  we analyzed, approximately 899,000 prime (4 percent) and 314,000  subprime loans (65 percent) had a combination of certain loan  origination features (credit score of 619 or below or LTV of 100  percent or higher) and other characteristics associated with an  increased likelihood of foreclosure, including delinquency. Of loans  with these certain origination features, approximately 16 percent of  prime (407,000 loans) and almost half of subprime loans (201,000)  were delinquent 60 days or more.
Florida and Nevada were among the states with the largest percentage of  loans (prime and subprime loans combined) with an increased likelihood  of foreclosure (see fig. 5). Of the loans we analyzed in June 2011, as  many as 40 percent of loans in Nevada and 29 percent of loans in Florida  had characteristics associated with an increased likelihood of foreclosure.  California had a lower proportion of loans with characteristics associated  with an increased likelihood of foreclosure compared to six other states— Arizona, Florida, Illinois, Michigan, Nevada, and Rhode Island. But  California had the largest number of loans with these characteristics. In  addition, several states—Arizona, California, Florida, Michigan, and  Nevada—had relatively large proportions of loans within the CoreLogic  data set with significant negative equity and additional characteristics,  including delinquency, associated with an increased likelihood of  foreclosure. In particular, over 10 percent of loans in Nevada and  approximately 10 percent of loans in Florida had significant negative  equity and were delinquent 60 days or more.
The number of seriously delinquent loans—those in default 90 days or  more or in foreclosure—remained high in December 2011. According to  MBA data, approximately 8 percent of loans were seriously delinquent  nationwide, a fourfold increase compared with the number of such loans  in June 2006, near the beginning of the current housing crisis. In  comparison, during the prior 5 years from 2000 through 2005,  approximately 2 percent of loans were seriously delinquent—substantially  fewer than the current number. Continued high levels of serious  delinquencies suggest that the volume of future foreclosures will likely  remain high as these troubled mortgages are resolved.
Serious delinquency data covers both loans that have entered but not   We  completed foreclosure and loans in default for 90 days or more.found that the number of loans in foreclosure in December 2011 was  slightly below the peak levels in March and December 2010 but remained  elevated with approximately 4 percent of loans in foreclosure (see fig. 6).  Similarly, the volume of loans in default in December 2011 experienced a  drop below their peak levels, with less than 4 percent of loans in default in  comparison to about 5 percent in December 2009. Further, the volume of  loans in default and in foreclosure during the most recent recessionary  period have been extraordinarily high compared to the previous two  recessions.
In addition to the high volume of loans in foreclosure and default in  December 2011, other key national indicators of the housing market, such  as home prices, home equity, and unemployment, suggest that the  housing market has not yet begun to recover. Decreases in home prices  have played a central role in the current crisis and continue to be well  below their peak nationwide. According to CoreLogic’s Home Price Index,  as of June 2011 home prices across the country had fallen 32 percent  from their peak in April 2006 (see fig. 7). The decrease follows a 10-year  period of significant home price growth, with the index more than doubling  between April 1996 and 2006. During periods in 2009 and 2010, home  prices showed some slight improvement, but in early 2011 home prices  fell again and reached their lowest level since 2002. Home prices rose  slightly in June 2011 but remained well below the 2006 levels.
Home values have declined faster than home mortgage debt. As a result,  homeowners have lost substantial equity in their homes. As of December  2011, national home equity (the difference between aggregate home  value and mortgage debt owned by homeowners) was approximately  $3.7 trillion less than total home mortgage debt (see fig. 8). In part  because of the decline in home prices, households collectively lost  approximately $9.1 trillion (in 2011 constant dollars) in home equity  between 2005 and 2011. In contrast, aggregate home mortgage debt—a  measure of the value of household-owned real estate debt—continued to  increase by an additional $1.2 trillion between 2005 and 2007, reflecting  the continued looseness of the credit markets early in the crisis as  mortgage originations to low-credit quality borrowers continued to  expand. Home mortgage debt has fallen slightly from its highest point in  2007 to approximately $10 trillion in 2011—a development that a study by  the Federal Reserve Bank of New York attributed to consumers paying  down debt and lenders’ tightened lending standards.2007, steep declines in house values left the nation’s homeowners, for  the first time since the data were kept in 1945, holding home mortgage  debt that surpassed the equity in their homes.
Studies of housing market conditions we reviewed and some agency  officials with whom we spoke identified the current sustained high  unemployment rate as a key factor in the housing market’s continued  poor performance. The unemployment rate more than doubled between  April 2006—the peak period of home price increases when it stood at 4.7  percent—and October 2009, when it reached its highest level since 1984  of 10.1 percent. Although the rate had declined to less than 9 percent at  the end of 2011, it has remained above 8 percent since February 2009— the longest sustained period at this level since 1948. In addition, the gap  between the standard unemployment measure and a more  comprehensive measure that includes underemployed and discouraged  workers grew significantly between April 2006 and December 2011.This increase suggests that a growing number of workers have been  employed below their capacity, a development that may result in their  being unable to meet future mortgage obligations and will further  contribute to reduced housing demand, additional foreclosures, and  falling home prices.
In contrast to other indicators of the housing market we analyzed, home  affordability was at record-high levels at the end of 2011, reflecting the  decline in home prices and historically low interest rates. Based on our  review of economic data, home affordability appeared to have increased  72 percent between March 2006 and December 2011. Improved home  affordability may encourage new buyers to purchase homes and thus  increase demand for housing and provide support for home values.  However, according to the Federal Reserve and Joint Center for Housing  Studies at Harvard University, many potential homebuyers have been  reluctant or unable to purchase a home due to fear of further home price  declines, uncertain income prospects, and difficulties obtaining mortgage  credit. Further according to Census data on household growth, average  annual household growth from 2008 through 2011 was less than half that  of 2000 through 2007; although the most recent data indicate an increase  in household formation in 2011 compared to growth in 2008 through  2010.
section_title: Enhancing Current Federal Foreclosure Mitigation Efforts Could Improve Their Effectiveness
paragraphs: Most stakeholders we contacted said that enhancing existing federal  foreclosure mitigation efforts was the most appropriate action to take to  facilitate the recovery of the housing market, and we found that  opportunities existed for federal agencies to improve the effectiveness of  their efforts. Our analysis of available data indicated that a large number  of struggling homeowners could be eligible for federal foreclosure  mitigation programs and a large number with FHA insured or enterprise- backed loans are at an increased risk for foreclosure because of their  delinquency status. As the following examples illustrate.
Treasury estimated that as of December 31, 2011, about 900,000  borrowers could be eligible for its HAMP modification program. This  number included loans that were 60 days or more delinquent and  were serviced by participating HAMP servicers that appeared to meet  the program’s eligibility requirements.
Fannie Mae and Freddie Mac collectively had about 1.1 million loans  that were seriously delinquent as of the quarter ending on December  31, 2011.
FHA reported that about 711,000 of its loans were seriously  delinquent for the month of December 2011. Furthermore, between  March 2010 and June 2011 FHA’s serious delinquency rate ranged  between 8.2 and 8.8 percent but between June and December 2011,  it climbed about 1.4 percentage points to 9.5 percent.
Although federal agencies and the enterprises have taken steps to help  ensure that servicers reached struggling borrowers, not all agencies were  conducting the necessary analyses to determine which of their  foreclosure mitigation actions were most effective. Specifically, we found  that not all federal agencies consider current data on redefault rates and  evaluate the total costs of various loan modification actions to weigh the  tradeoffs between assisting borrowers to retain their homes and  protecting taxpayers’ financial interests. As a result, agencies may not be  making the best use of foreclosure mitigation funds. Additionally, not all  federal agencies analyze loan and borrower characteristics that could  influence the success of these actions. Doing so would help in  determining which actions would be most successful both in aiding  homeowners and in containing costs. We also found some evidence to  suggest that principal forgiveness as a mitigation tool could help some  borrowers—those with significant negative equity—but that federal  agencies and the enterprises were not using it consistently and some  were not convinced of its overall merits. Moreover, there are other policy  issues to be considered when determining how widely this option should  be used, including moral hazard (borrowers strategically defaulting to  become eligible for assistance).
Stakeholders provided us with a variety of reasons for not introducing  new federal programs at this time. Specifically, most stakeholders said  that introducing entirely new initiatives at this stage could be  counterproductive. Such initiatives, they said, would create additional  uncertainty in the market and could further delay a recovery because of  the time and costs that would be involved in implementing them. Further,  some stakeholders noted that support for new initiatives that required  additional federal funding would be difficult to implement in the current  budgetary environment. Stakeholders also said that not all borrowers who  were at risk of foreclosure would be able to avoid foreclosure through any  action and that some borrowers might not be interested in doing so. For  example, Treasury officials said that some underwater borrowers could  have already decided that foreclosure was in their best economic interest  and may not want or seek assistance. Finally, some industry observers  have argued that foreclosure mitigation efforts hinder the housing  market’s recovery by simply delaying unavoidable foreclosures.
subsections: section_title: Most but Not All Federal Agencies and the Enterprises Have Increased Efforts to Reach Struggling Borrowers Early in a Delinquency
paragraphs: All of the federal agencies—Treasury, FHA, VA, and USDA—as well as  the enterprises have policies in place for servicers to follow once a  borrower becomes delinquent. These policies are consistent with the  results of our econometric analysis of CoreLogic and HAMP data that  found that reaching borrowers early on, when they had missed fewer  payments, resulted in more successful loan modifications. For instance,  the redefault rate for loans that were delinquent less than 60 days at the  time of modification was 9 percent, but the redefault rates for loans that  were delinquent 90 days or more was 17 percent. The rate was even  higher for those already in foreclosure—19 percent. In general, the  agencies and the enterprises require servicers to make contact with  delinquent borrowers, identify the reason for the delinquency, and provide  borrowers information on available options to help them resolve the  delinquency. However, Treasury and FHA officials said that servicers  were unable to reach many borrowers, which may hinder efforts to  provide foreclosure mitigation actions. For example, servicers have  reported to FHA that about 13 percent of the delinquent borrowers they  attempt to contact do not respond. As a result, with the exception of  USDA, these agencies and the enterprises have taken a number of steps  to reach more borrowers and monitor servicers’ ability to reach struggling  borrowers.
In 2010, Treasury began airing nationwide public service  announcements and conducting homeowner events across the  country in order to raise the profile of its foreclosure mitigation  programs and help struggling homeowners contact their servicers.  Based upon the results from on-site and remote compliance reviews,  Treasury began to rate the largest servicers’ procedures and controls  for reaching out to delinquent borrowers as part of its MHA Servicer  Assessments.eligible borrowers were contributing factors to Treasury’s decision to  withhold servicer incentive payments from certain servicers.
Issues related to identifying and contacting potentially
FHA requires servicers to report monthly on delinquent borrowers,  including the extent of the delinquency and the most recent action the  servicer has taken. In 2011, FHA piloted a scorecard designed to  comprehensively evaluate servicers’ loss mitigation activity, including  their compliance with servicing guidelines and regulations. Further,  FHA has been identifying best practices for reaching borrowers. For  example, one servicer reported having increased success contacting  borrowers earlier in a delinquency using text messages and email  instead of telephone calls and letters, and FHA has shared this  practice with other servicers.
In 2011, Fannie Mae and Freddie Mac revised the procedures  servicers must follow when contacting borrowers to help ensure that  all those eligible know about the options that may be available to  them. The enterprises have also developed a performance metric to  track servicers’ compliance with these requirements. Further, they  recently implemented changes to HARP program requirements by  eliminating the maximum LTV ratio and allowing servicers to solicit  borrowers who may be eligible for the program. In addition, the  enterprises have required servicers to report monthly on delinquent  borrowers, including on the extent of the delinquency and the most  recent action the servicer has taken.
VA assigns a staff member to each case after a borrower becomes 60  days delinquent to monitor the servicer’s efforts and provide  assistance to the borrower. The VA staff member performs an  “adequacy of servicing” review if the delinquency is not resolved  before the borrower becomes 120 days past due on the loan. If  servicing is found to be adequate at that point, VA will continue to  perform these reviews every 90 days until the delinquency is resolved.  If the VA staff member determines that the servicer has not taken  adequate steps to reach and assist the borrower, the VA staff member  will try to contact the borrower directly and then may work with the  servicer to identify the best foreclosure mitigation action.
In contrast, USDA does not require servicers to report information about  their efforts to reach borrowers, and its systems are not set up to  determine whether servicers are complying with USDA’s requirements.  For example, servicers report monthly on loans that are at least 30 days  delinquent, but USDA does not require servicers to report on efforts to  contact the borrower early in the delinquency or on the extent to which  they have offered informal foreclosure mitigation options. Once a loan is  90 days delinquent, servicers must submit servicing plans to USDA that  outline recommended foreclosure mitigation actions, which USDA has to  approve. But if a servicer determines that no foreclosure mitigation  actions are appropriate, it does not need to submit a servicing plan.  According to USDA officials, they would not have information on the  servicer’s efforts to reach the borrower or offers of informal actions and  may not become aware of the servicer’s decision not to offer a formal  foreclosure mitigation action until after the loan goes into foreclosure and  the servicer files a claim. USDA officials said that they review each loss  claim to determine whether the servicer followed requirements for  evaluating the borrower for foreclosure mitigation options. However, the  absence of comprehensive and timely information limits USDA’s ability to  assess and identify opportunities to improve servicers’ efforts to reach  struggling borrowers and prevent foreclosures.
The enterprises and Treasury have adopted additional changes to  policies and procedures with the goal of expanding the reach of existing  programs to additional borrowers. The enterprises’ standard modification  programs, which were announced in mid-2011 under FHFA’s Servicer  Alignment Initiative, are intended to help ensure that borrowers who do  not qualify for HAMP Tier 1 modifications are treated consistently at the  next step in the evaluation process. Before these programs were put in  place, terms of non-HAMP modifications varied among the enterprises  and were set independently by Fannie Mae or Freddie Mac. Treasury’s  recently announced HAMP Tier 2 modification largely aligns with the  enterprises’ standard loan modification and is intended to expand HAMP  to a larger pool of potentially eligible borrowers. This change provides  servicers and borrowers with consistency across programs, regardless of  the investor (i.e., Fannie Mae or Freddie Mac, private-label security  owner, private lender). Further, this change could simplify servicers’  operations, improve their efficiency, and enhance their capacity, all of  which have been long-standing concerns.
section_title: FHA, VA, and USDA Have Not Done the Analyses Needed to Minimize Costs and Assess the Effectiveness of their Actions
paragraphs: Treasury and the enterprises incorporate analysis of long-term costs into  their loss mitigation program design and management through redefault  models and analysis, but the other agencies do not. The models that  Treasury and the enterprises use incorporate data on the likelihood of  redefault for different loan and borrower characteristics and are tailored to  their particular pools of borrowers and costs. Specifically, the models  incorporate data on redefault rates that are associated with loan and  borrower characteristics, such as borrower income and expenses,  delinquency status, current LTV, borrower credit score, and size of  monthly payment reduction. Treasury and the enterprises use the results  from these analyses to determine the eligibility requirements and loan  modification terms for their loan modification programs. As part of this  analysis, Treasury and the enterprises analyze redefault rates—one of  the most common measures of the effectiveness of foreclosure mitigation  efforts—for various types of foreclosure mitigation actions. According to  Fannie Mae and Freddie Mac officials, recent changes to their non-HAMP  loan modification programs—particularly the introduction of a trial period  plan—resulted from analysis of differences in redefault rates and the size  of monthly payment reduction between their various loan modification  actions.
Our own analysis of the performance of loans identified certain loan and  borrower characteristics that reduce the likelihood of redefault. When  controlling for observable borrower and loan characteristics, our analysis  of CoreLogic data found that greater reductions in monthly mortgage  payments reduced the 6-month redefault rate (see fig. 9).that reducing monthly mortgage payments by 40 to 49 percent resulted in  the lowest 6-month redefault rates. Specifically, loans with monthly  payment reductions of 40 to 49 percent had redefault rates of 12  percent—as compared to a redefault rate of 20 percent for loans that  received a payment reduction of less than 10 percent. Larger reductions  in the monthly payment—that is, 50 percent or more—did not result in  further improvement in the 6-month redefault rate.
According to our analysis, payment reductions for the majority of FHA and  VA loan modifications were smaller than payment reductions for other  types of modified loans. As figure 10 illustrates, 45 percent of FHA- modified loans and about 40 percent of VA-modified loans had payment  reductions of less than 10 percent of the original mortgage payment. In  contrast, the majority of modifications for enterprise-prime loans,  nonenterprise-prime loans, and subprime loans had resulted in payment  reductions greater than 20 percent, and in some cases were much larger.  For example, more than half of enterprise-prime modified loans and 39  percent of subprime loans had payment reductions of 30 percent or more  of the original monthly mortgage payment. Furthermore, our analysis  found that the predicted 6-month redefault rate for FHA-modified loans  was several percentage points higher than for the other loan types—for  example, FHA’s rate was 22 percent, while the rate for subprime loans  was 17 percent. However, the predicted 6-month redefault rate for VA- modified loans was 15 percent, which was similar to other loan types.
According to our analysis of CoreLogic data, modifications resulting in  payment reductions can involve one action or a combination of actions,  such as lowering the interest rate, reducing the loan balance (through  forgiving or forbearing principal), capitalizing past due amounts, and  extending the term of the loan. Some of these actions were much more  commonly used than others—for example, interest rate reductions and  capitalization were used far more frequently than reducing the loan  balance (see fig. 11). Further, our analysis indicated that the predicted 6- month redefault rates could differ depending on the action used.  Modifications that included balance reductions had a redefault rate of 11  percent, while modifications that included a rate reduction, capitalization,  or term extension had redefault rates of 15, 16, and 18 percent,  respectively. Our analysis of HAMP data indicated that the baseline 12- month redefault rate for all modified loans was 15 percent. Among HAMP  loans that received principal forbearance, the rate was slightly lower—12  percent. However, the rate for HAMP loans that received principal  forgiveness was even lower—8 percent. See appendix V for a detailed  description of the relationship between the modification action type and  loan performance.
Further, loan modifications for borrowers with significant negative equity  (LTV of 125 percent or higher) can be as effective as modifications for  borrowers with equity in their home. For example, the lowest redefault  rates for both borrowers with significant negative equity and borrowers  with LTV less than 95 percent are achieved with payment reductions of  40 to 49 percent (see fig 12).
We also found that certain borrower and loan characteristics affected  redefault rates. For instance, borrowers who were the most delinquent at  the time of modification had higher redefault rates than less delinquent or  current borrowers. Borrowers who were delinquent 90 days or more had a  redefault rate of 17 percent, and those already in foreclosure had a  redefault rate of 19 percent. But the rate for borrowers who had been  delinquent for less than 60 days was 9 percent. Furthermore, modified  loans with certain characteristics were more likely to redefault: loans in  areas where the unemployment rate had increased since modification,  loans receiving higher interest rates at modification, or loans that were  originated with adjustable rather than fixed rates.
Generally, federal agencies are responsible for helping ensure that loss  mitigation programs reduce taxpayers’ costs. For example, FHA requires  and USDA encourages servicers to use foreclosure mitigation actions to  minimize losses from loans going to foreclosure. Similarly, one of the core  values of VA is to be a good steward of financial resources that taxpayers  provide to the agency. In addition, in estimating costs of loan guarantee  programs, agencies are required to consider the long-term costs of the  loan guarantee on a net present value basis. Long-term costs include  payments by the government to cover defaults and delinquencies, among  other things. Further, according to the Office of Management and Budget  loss mitigation actions should be used only if they are likely to be less  expensive than the cost of default or foreclosure. And, as noted earlier,  both the Treasury and the enterprises analyze the performance of  modified loans and consider loan and borrower characteristics to better  understand the long-term costs of various loan modification actions.  Finally, as we previously reported, agencies could use performance  information to identify problems, take corrective action, and improve  programs. Evaluating the costs of various loan modification actions  enables agencies to more effectively weigh the tradeoffs between helping  borrowers keep their homes and protecting taxpayers’ interests.
FHA officials stated that they considered loan performance and long-term  costs in the initial design of the program in 1996. However, FHA has not  updated its analysis of loan performance and long-term costs since this  time to reflect changes to its loss and foreclosure mitigation activities— including the introduction of FHA-HAMP—or the housing market. In  addition, FHA officials told us that they had not assessed the extent to  which individual servicers considered long-term costs in making decisions  about offering loss and foreclosure mitigation options to borrowers.Recently, FHA began to require trial modification payment periods for  certain foreclosure mitigation actions. FHA expects this will reduce  redefault rates.
FHA has recently begun to calculate redefault rates for specific home  retention actions and plans to examine these data in the future. FHA  officials stated that they regularly monitor redefault rates of delinquent  loans as part of their oversight of servicer activities. For example, FHA set  an annual performance goal beginning in fiscal year 2010 for its  combined home retention actions and has used the results of this  monitoring to provide oversight and training to servicers to reduce  redefault rates. However, this goal is for the actions in the aggregate and  does not take into account individual actions, such as FHA’s standard  loan modification and the FHA-HAMP modification. Further, FHA has not  used this information to analyze the effectiveness of its programs.  Recently, FHA began to calculate redefault rates for specific home  retention actions and plans to continue to calculate and examine these  data in the future.
FHA currently collects limited data on loan and borrower characteristics at  the time of a foreclosure mitigation action. FHA collects information such  as delinquency status and the amount of the new principal and interest  payment for some modified loans. However, it does not currently collect  other key information on borrowers—such as borrower income and  expenses at the time of foreclosure mitigation action. Analyses of the  characteristics of modified loans and their borrowers could help in  adjusting loss mitigation policies. Further, this information could be used  to help identify which foreclosure mitigation action would be most  appropriate for a borrower. According to FHA officials, servicers are  required to provide only minimal data on loan and borrower  characteristics at the time of a foreclosure mitigation action, as the  responsibility for determining eligibility for loss mitigation activities rests  with the servicer and not FHA. In October 2011, a contractor began  work to assess FHA’s oversight of servicers’ loss mitigation activities. The  assessment identified loan and borrower characteristics commonly  collected within the industry, which include current LTV as well as  information needed to calculate the change in monthly payment, among  other things. The assessment concluded that FHA should collect  additional loan-level data from servicers to enable FHA to analyze the  performance of modified loans.
FHA is considering changes to its current approach that may facilitate the  analysis of long-term costs. In December 2010, a team of consultants  assisting the agency to establish the Office of Risk Management advised  FHA to use an NPV model to help identify appropriate loss mitigation  options and maximize the economics of modifications. In March 2012,  FHA indicated that it planned to develop a loss model to inform its loss  mitigation approach. The use of a loss model would help the agency  better understand its programs’ long-term costs. FHA officials told us that  they planned to reassess the sequence of their foreclosure mitigation  actions, including the point at which borrowers would be evaluated for an   However, as of April 2012, FHA had not  FHA-HAMP loan modification.decided to use an NPV model. FHA officials raised concerns about using  an NPV approach.  Specifically, they noted that FHA policy requires  servicers to work with all delinquent borrowers to find long-term solutions  that, if possible, permit the borrower to retain homeownership. Further,  FHA does not use results from analyses to provide the basis for not  offering assistance to struggling homeowners.  Incorporating an NPV  model into FHA’s foreclosure mitigation toolkit would not preclude  servicers from working with all delinquent borrowers or offering  assistance.  Instead, it would likely provide greater clarity about the  predicted economic outcome of specific foreclosure mitigation actions and  would help servicers better prevent avoidable foreclosures.  Further,  incorporating an NPV model would help balance the tradeoffs between  assisting borrowers to keep their homes and helping ensure the lowest  cost to the taxpayer.
VA also has not incorporated analyses of long-term costs into its loss  mitigation programs. Although VA collects some information about the  performance of modified loans and modified loan characteristics, it does  not currently analyze its portfolio to understand differences in  performance based on type of loss mitigation actions or for loan and  borrower characteristics.data servicers provide on loan performance and other loss mitigation  actions to determine redefault rates and has not used the information   The agency also does not currently evaluate  servicers report on loan and borrower characteristics to determine the  optimal change in monthly payment amounts for future modifications.  Finally, VA requires servicers to collect data on borrowers’ income and  expenses but not to report the data to the agency. According to VA  officials, VA monitors the effectiveness of its loss mitigation activities on a  case-by-case basis by assigning a VA loan technician to oversee  situations that cannot be resolved and work directly with the borrower, if  required.
Finally, USDA has not incorporated analyses of long-term costs into its  foreclosure mitigation program, which is designed to have the least  upfront cost to the government. As a result, USDA does not require  servicers to consider long-term costs in determining which mitigation  options to offer borrowers. It collects loan-level data from servicers on  loan performance and type of action taken. Further, when servicers  submit a request to provide a loss mitigation action to a borrower, they  provide data on certain loan and borrower characteristics, including the  monthly payment amount after the action, verified income and expenses,  and the property value (which could be used to calculate LTV). However,  USDA has not analyzed these data, in part because the data are provided  through two different reporting systems and would have to be matched in  order to be useful. Although the agency had not previously tried to  match data, USDA officials said that it would be possible to match data on  individual borrowers. Further, USDA officials stated that their loss  mitigation data collection systems were outdated and noted that the  agency had plans to update them to allow the agency to more  systematically capture data on their loss mitigation activities. However,  USDA officials were uncertain of the timetable or availability of funding to  implement these changes.
Because FHA does not analyze the performance of loss mitigation  activities by loan and borrower characteristics and VA and USDA do not  analyze the performance of these activities by type of home retention  action or loan and borrower characteristics, these agencies have a limited  understanding of the ultimate costs of their loss mitigation programs. As a  result, their loss mitigation activities may not be effectively balancing the  tradeoffs between assisting borrowers to keep their homes and helping  ensure the lowest cost to the taxpayer. If these agencies better  understood the performance and ultimate costs of each home retention  action, they could, for example, decide that it was in their best financial  interest, as well as the borrowers, to change the order in which their loss  mitigation options were offered or to adjust their eligibility requirements.  And by collecting additional data and conducting more comprehensive  analyses, they could better inform decision makers, helping them to  ensure that federal foreclosure mitigation programs are as effective as  possible and, at the same time, limiting long-term costs. Such efforts  would be key to helping address the ongoing problems of the housing  market, including the high volume of seriously delinquent loans that face  an elevated risk of foreclosure.
section_title: Some Evidence Suggests That Principal Forgiveness Could Be an Effective Foreclosure Mitigation Action in Certain Circumstances, but Experience with This Tool Is Limited
paragraphs: To date, principal forgiveness as a method of addressing defaults and  foreclosures among borrowers that have significant negative equity has  played a limited role in foreclosure mitigation efforts. Principal forgiveness  involves reducing the amount the borrower owes on a mortgage without  requiring that the amount of the reduction be repaid. As a result, this  action not only lowers the borrower’s monthly mortgage payment but  allows underwater borrowers the opportunity to rebuild equity in their  homes more quickly. Our analysis found that, although the redefault rate  for the loans that received principal forgiveness was lower than the  overall pools of modified loans, the effects of changing the amount of  principal forgiven on loan performance were inconclusive. However,  private investors and lenders that hold loans in their portfolio have used  principal forgiveness, suggesting that this foreclosure mitigation tool may  be effective in certain circumstances.
Between 2009 and 2011, the prevalence of principal forgiveness among  modified loans ranged from about 3 to 13 percent, and averaged about 6  percent (see fig 13). During the fourth quarter of 2011, about 9 percent  (9,867) of modifications included principal forgiveness—up from about 3   In contrast,  percent during the first quarter of 2011, according to OCC.more than three-quarters of all modifications during the fourth quarter of  2011 included capitalization or rate reduction, more than half received a  term extension, and almost a quarter of modifications included principal  forbearance. Principal forgiveness was more prevalent among HAMP  modifications (about 16 percent) than among all modifications (about 9  percent). At the same time, OCC data indicated that the prevalence of  principal forgiveness varied by market segment and investor. Specifically,  principal forgiveness was more prevalent among subprime loans (about  13 percent) than prime loans (7 percent). Further, principal forgiveness  was used primarily for loans held in portfolio or serviced for private  investors. FHFA does not permit the enterprises to use principal  forgiveness as a loan modification action. HUD, USDA, and VA are not  authorized to support principal forgiveness.
Our analysis of Treasury data for the HAMP program (including Fannie  Mae and Freddie Mac loans) found that the 12-month redefault rate for  loans that received principal forgiveness was 8 percent, while the rate for  loans receiving principal forbearance was 12 percent. Both of these  figures are lower than the overall redefault rate for all HAMP loans, which  was 15 percent. Our analysis of HAMP data, when controlling for  observable borrower and loan characteristics, found that the effect of  principal forgiveness on the redefault rate was inconclusive. However,  larger balance reductions through principal forbearance were found to  lower the redefault rate. The inconclusive results are likely attributable to  the fact that principal forgiveness has been used sparingly. While  principal forgiveness has always been allowed under HAMP, Treasury did  not start offering incentives to investors to forgive principal until October  2010. Since few HAMP modifications have incorporated principal  forgiveness, our ability to fully examine the impact of this action on  redefault rates was limited. For the CoreLogic data, we analyzed the  performance of loans that received a balance reduction, either through  principal forgiveness or principal forbearance, and found that loans that  received a balance reduction were less likely to redefault. Specifically,  the overall 12-month redefault rate of modified loans (loans comparable  to HAMP loans) was 26 percent. In contrast, the redefault rate of loans  that received a balance reduction was 15 percent.
Treasury has taken recent action to further encourage servicers to use  principal forgiveness. As discussed earlier, since October 2010 Treasury  has required servicers to evaluate severely underwater HAMP applicants  for its Principal Reduction Alternative, which provides investors in  nonenterprise loans with incentive payments when forgiving principal as  part of a HAMP modification. In January 2012, Treasury announced that  HAMP would be modified to further encourage investors to offer principal  reductions by increasing the incentives payments. In the past, investors  received between 10 and 21 cents on the dollar to write down principal on  loans. As of March 2012, Treasury began paying 30 to 63 cents on the  dollar.
FHFA, the conservator and regulator of Fannie Mae and Freddie Mac,  has not allowed them to use their own funds to offer principal forgiveness.  FHFA has argued that it has a statutory responsibility to preserve and  conserve the assets and property of the regulated entities. At the same  time, FHFA noted that it has a statutory responsibility to maximize  assistance for homeowners to minimize foreclosures while taking into  consideration the cost to taxpayers of any action undertaken. FHFA  performed an initial analysis comparing the effectiveness of principal  forbearance to principal forgiveness as a loan modification tool in  December 2010 and updated it in June and December 2011 using  Treasury’s HAMP Net Present Value (NPV) model. The agency  concluded that although both forgiveness and forbearance reduce the  borrower’s payment to the same affordable level, forbearance achieves  marginally lower losses for the taxpayer than forgiveness. These  analyses have provided the basis for FHFA’s current policy decision to  not permit the enterprises’ use of principal forgiveness. However, some  housing market observers have been critical of FHFA’s approach to  evaluating the utility of principal forgiveness. For example, one industry  observer noted that FHFA’s analysis assessed the costs of writing down  all loans in the enterprises’ portfolios with negative equity instead of the  possibility of using principal forgiveness for some borrowers and a  forbearance strategy for others based on the borrowers’ and loans’  characteristics. For example, one Treasury official has been quoted as  stating that principal forgiveness may have the best result for borrowers  above 120 LTV ratios that can prove some type of hardship. Other  concerns raised by industry observers included FHFA’s use of information  obtained at loan origination rather than current data (i.e., Fair Isaac  Corporation (FICO) credit scores, income, etc.) and not following HAMP  modification rules for the extent of the monthly payment reduction, which  require a 31 percent debt-to-income target rather than a prescribed LTV  reduction.
In January 2012, Treasury announced that it would pay incentives to the  enterprises if FHFA allowed servicers to forgive principal as part of  Fannie Mae and Freddie Mac HAMP modifications, a change that could  significantly alter FHFA’s position. Shortly after Treasury’s  announcement, FHFA began to conduct analyses to reevaluate the use of  principal forgiveness as a foreclosure mitigation tool. FHFA updated its  earlier analyses by incorporating the impact of receiving incentive  payments from Treasury and altered its analyses to address some of the  critiques made of its previous approach. Specifically, FHFA indicated that  it made adjustments to the loan origination data to better reflect likely  changes in borrowers’ FICO scores and housing payment debt-to-income  ratios, and used zip code as opposed to state-level indices to more  accurately identify high LTV borrowers. In addition, FHFA officials told us  that they used a 31 percent debt-to-income target in their updated  analyses. According to FHFA officials, they also modified their current  analysis to fully consider HAMP and HAMP PRA modification rules. FHFA  officials told us that they believed that this change addressed the critique  about using a mutually exclusive approach of using principal forgiveness  versus forbearance for all loans with negative equity.
As of June 2012, FHFA had not made a final decision on allowing the  enterprises to engage in HAMP principal forgiveness modifications.   According to FHFA, its preliminary analysis, as of April 2012, showed a  positive benefit of $1.7 billion to the enterprises of accepting $3.8 billion in  Treasury incentive payments for performing loan modifications involving  principal forgiveness. Further, FHFA noted any savings, from the  perspective of the federal government, would be negligible due to the  draw on the Treasury. However, all TARP-funded housing programs are  expenditures, including incentives paid to the nonenterprise investors,  servicers, and borrowers. Further, the payment of incentives to the  enterprises for principal forgiveness modifications would be paid out of  the $45.6 billion that Treasury has already obligated to be used for  preventing avoidable foreclosures and preserving homeownership.  FHFA’s estimate was based on the nearly 700,000 loans in Fannie Mae’s  and Freddie Mac’s portfolios considered to be eligible for a HAMP loan  modification that were severely underwater (current LTV greater than  115) as of June 30, 2011, and were either already in delinquency status  or loans that could become delinquent within 6 months. According to  FHFA, the actual number of borrowers who would receive principal  forgiveness would likely be lower due to other eligibility requirements and  because eligible borrowers may choose not to participate. Additionally,  FHFA noted that HAMP principal forgiveness modifications would not  expand the number of borrowers who are eligible to obtain modifications  under HAMP because the eligibility requirements are the same.
Separately, the enterprises assessed the feasibility of principal  forgiveness, but their analyses focused on different issues and produced  different results. Before Treasury announced that it would pay incentives  to the enterprises, Fannie Mae assessed the affect of principal  forgiveness on loan modifications through two small pilot programs, but  found that the pilots did not provide any indication that performance  varied between modifications with and without principal forgiveness.  However, Fannie Mae analysis did not address the financial impact to the  enterprise of receiving Treasury HAMP PRA incentive payments. Freddie  Mac prepared estimates of the savings that principal forgiveness might  provide using the HAMP NPV model by assuming principal forgiveness to  a 105 percent LTV. Given the underlying assumptions, it found that for  100,000 borrowers, the inclusion of the recently proposed Treasury  incentive payments could offset losses to the enterprises by  approximately $480 million as opposed to performing a loan modification  without subsidies from Treasury.
Aside from the direct financial impact to the enterprises of receiving  incentive payments for participating in HAMP’s PRA , FHFA and the  enterprises have raised concerns about borrowers strategically defaulting  to become eligible for principal forgiveness—moral hazard—as well as  the additional costs and time this approach would require. Nonetheless,  there remain techniques for mitigating its impact on borrower behavior,  most notably requiring that the borrower already be in default and prove a  financial hardship. All three entities also pointed to the costs for  developing information systems and the time it would take the enterprises  and its servicers to implement principal forgiveness. For example,  according to Fannie Mae officials, these costs could be as high as tens of  millions of dollars and could require up to 22 to 24 months. FHFA noted  that it was still evaluating the direct operational costs associated with  adopting principal forgiveness under HAMP and that those costs were not  trivial. However, FHFA has not indicated whether those direct costs are  likely to be greater than the $1.7 billion in financial benefits that it  determined would likely accrue to the enterprises from receiving Treasury  HAMP PRA incentive payments. Moreover, as noted by FHFA, the  anticipated benefit of principal forgiveness is that, by reducing  foreclosures relative to other modification types, losses to the enterprises  would be lowered and house prices would stabilize faster, thereby  producing broader benefits to all market participants.
section_title: Conclusions
paragraphs: Despite the unprecedented scale of federal and nonfederal efforts to help  borrowers facing potential foreclosure, key indicators suggest that the  U.S. housing market remains weak and that high foreclosure levels will  likely persist in the foreseeable future. While these efforts resulted in  more than 4 million loan modifications between January 2009 and  December 2011, the volume of modifications has declined since 2010  and millions of borrowers have sought but have been unable to receive a  permanent modification. Specifically, our analysis of mortgage data  showed that 1.9-3 million loans still had characteristics associated with an  increased likelihood of foreclosure, such as serious delinquency and  significant negative equity (LTV ratio of 125 or higher), as of June 2011.  Further, Treasury estimated that there were 900,000 borrowers who were  seriously delinquent and potentially eligible for its HAMP modification  program as of December 31, 2011. Another almost 2 million FHA, Fannie  Mae, and Freddie Mac loans also were seriously delinquent. In addition,  indicators such as home prices and home equity remain near their  postbubble lows. And finally, as of December 2011, total U.S. household  mortgage debt was $3.7 trillion greater than households’ equity in their  homes.
Despite their efforts, neither federal agencies nor nonfederal entities have  been able to come up with a clear path for resolving the foreclosure crisis.  A number of factors have hindered foreclosure mitigation efforts, including  competing priorities (e.g., balancing short-term versus long-term costs,  mitigating moral hazard) and ongoing developments, such as declining  house values, and a high unemployment rate. Ultimately, what will likely  be required will be a variety of approaches aimed at removing various  obstacles to existing foreclosure mitigation strategies. Comprehensive  data-gathering and analysis will also be needed to help ensure that  federal foreclosure mitigation programs are effective and also limit fiscal  costs and the potential for negative long-term consequences from  government intervention.
Our analysis found that several agencies and the enterprises could do  more to better manage the costs associated with foreclose mitigation  efforts and step up their efforts to reach and help borrowers, specifically  the following,
Treasury has not reassessed its need for the letter of credit on FHA’s  Short Refinance program, which will not likely reach the number of  borrowers that it initially estimated it would help. For this reason,  Treasury may not need to maintain an $8 billion letter of credit for the  program and thus may be able to cut costs by reducing or eliminating  the fees associated with the letter.
One of the key findings of our econometric analysis of the CoreLogic  and HAMP loan-level data was that loan modifications should be  made before borrowers become seriously delinquent on their  mortgage payments in order to obtain the best results. Although  USDA requires servicers to attempt to work with borrowers before  they become seriously delinquent, USDA does not collect information  from servicers about these efforts. Moreover, its monitoring and data  collection to ensure that servicers are complying with its requirements  to reach distressed borrowers before they become seriously  delinquent are limited. Collecting and analyzing data would provide  USDA with a more complete picture of how well servicers are  reaching distressed borrowers and preventing avoidable foreclosures.
FHA, VA, and USDA have not fully analyzed the costs and benefits of  their foreclosure mitigation actions to help ensure that both borrowers  and taxpayers benefit from efforts to keep homeowners in their  homes. Although FHA has begun to calculate redefault rates for  specific home retention actions, it has not used this information to  assess the effectiveness of its foreclosure mitigation efforts. Doing so  is particularly important since FHA loan modifications typically do not  reduce borrower’s monthly payments to the levels that our analysis  indicated result in more sustainable modifications. Further, VA and  USDA do not routinely calculate redefault rates for specific types of  home retention actions—such as their various loan modification  programs—although additional efforts to calculate this performance  data would provide these agencies with better information to manage  their foreclosure mitigation efforts. In addition, our analysis of the  performance of loans identified key loan and borrower characteristics  that reduced the likelihood of redefault. Specifically, we found that the  size of payment change as well as the current LTV and delinquency  status at the time of modification greatly influenced the success of a  loan modification. However, FHA, VA, and USDA have not assessed  the impact of loan and borrower characteristics on the performance of  their foreclosure mitigation efforts. In some cases, these agencies do  not have the data needed to conduct these analyses. In contrast,  Treasury and the enterprises routinely calculate and evaluate this  performance information. For example, the enterprises based recent  changes to their non-HAMP loan modification programs on their  analysis of the size of monthly payment reductions on redefault rates.  Without these types of analysis and data, FHA, VA and USDA cannot,  on a regular basis, evaluate the merits of the different home retention  actions and use the information to identify opportunities to improve  program performance.
Finally, several federal agencies and the enterprises continue to make  changes and enhancements to their foreclosure mitigation efforts to assist  borrowers struggling to avoid foreclosure. For example, Treasury recently  announced a number of changes to HAMP to increase the number of  borrowers helped by the program, including targeting efforts to help  underwater borrowers by tripling the incentives paid to investors for  principal forgiveness and offering incentive payments to the enterprises  for loan modifications that include principal forgiveness. In response,  FHFA is currently reevaluating its prohibition against the use of Fannie  Mae and Freddie Mac funds for principal forgiveness. Although permitting  the enterprises to offer principal forgiveness would not expand the  numbers of borrowers eligible for a HAMP modification, FHFA’s  preliminary analysis indicated that the Treasury incentive payments would  result in a positive benefit to the enterprises of $1.7 billion as opposed to  performing traditional HAMP modifications for severely underwater  borrowers. FHFA and the enterprises have noted that there would be  various costs associated with adopting a principal forgiveness program  that have not yet been fully determined, thus, delaying a decision on  whether the enterprises will engage in principal forgiveness. Given the  December 31, 2013, deadline for entry into a HAMP permanent loan  modification and the lead time required for the enterprises to implement a  principal forgiveness program, it is critical that FHFA take the steps  needed to expeditiously make a decision about allowing the enterprises to  engage in HAMP principal forgiveness modifications. As estimated by  FHFA, nearly 700,000 severely underwater borrowers could potentially be  eligible if the enterprises were to offer HAMP modifications with principal  forgiveness.
As the enhanced efforts pick up speed, it may be possible to identify  further enhancements that would help both struggling homeowners and  the overall economy. However, the ability of federal agencies and the  enterprises to make such determinations is unclear, unless they collect  and analyze the data needed to demonstrate the success and cost- effectiveness of individual actions. This information can help program  managers and policymakers decide what further steps, if any, to take in  their efforts to mitigate the foreclosure crisis.
section_title: Recommendations
paragraphs: To help ensure Treasury is making effective and efficient use of its  resources, Treasury and FHA should update their estimates of  participation in the FHA Short Refinance program given current  participation rates and recent changes to the program. Treasury should  then use these updated estimates to reassess the terms of the letter of  credit facility and consider seeking modifications in order to help ensure  that it meets Treasury’s needs cost-effectively.
In order to better ensure that servicers are effectively implementing the  agency’s loss mitigation programs and that distressed borrowers are  receiving the assistance they need as early as possible before they  become seriously delinquent, we recommend that the Secretary of the  Department of Agriculture require servicers to report information about  their efforts to reach distressed borrowers. For example, servicers could  report on their efforts to reach borrowers and whether borrowers have  responded to outreach from the servicer regarding early delinquency  interventions and are receiving informal foreclosure mitigation actions.  Further, the Secretary of USDA should determine the extent to which  distressed borrowers have not been reached and assess whether  changes are needed to help ensure servicers are complying with USDA’s  loss mitigation requirements.
To more fully understand the strengths and risks posed by foreclosure  mitigation actions and protect taxpayers from absorbing avoidable losses  to the maximum extent possible, we recommend that FHA, VA, and  USDA conduct periodic analyses of the effectiveness and the long-term  costs and benefits of their loss mitigation strategies and actions. These  analyses should consider (1) the redefault rates associated with each  type of home retention action and (2) the impact that loan and borrower  characteristics have on the performance of different home retention  actions. The agencies should use the results from these analyses to  reevaluate their loss mitigation approach and provide additional guidance  to servicers to effectively target foreclosure mitigation actions. If FHA, VA,  and USDA do not maintain data needed to consider this information, they  should require services to provide them.
We recommend that FHFA expeditiously finalize its analysis as to  whether Fannie Mae and Freddie Mac will be allowed to offer HAMP  principal forgiveness modifications.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested comments on a draft of this report from Treasury, HUD,  USDA, VA, FHFA, Fannie Mae, Freddie Mac, OCC, Federal Reserve,  FDIC, and the Consumer Financial Protection Bureau (CFPB). We  received formal written comment letters from Treasury’s Assistant  Secretary for Financial Stability, HUD’s Acting Assistant Secretary for  Housing (Federal Housing Commissioner), VA’s Chief of Staff, and  FHFA’s Senior Associate Director of the Office of Housing and Regulatory  Policy; these are presented in appendixes VI through IX. We also  received e-mail comments from USDA that are discussed below. Lastly,  we received technical comments from Treasury, HUD, FHFA, Fannie  Mae, Freddie Mac and FDIC that are incorporated as appropriate in the  report. OCC, the Federal Reserve, and CFPB did not provide any  comments on the draft report.
Treasury, HUD, VA, and FHFA each agreed to consider or concurred with  the recommendations and indicated that action was either under way or  planned in response to our recommendations. In its written comments,  FHFA noted that savings to the federal government would likely be  negligible if the enterprises offered modifications under the HAMP  Principal Reduction Alternative because of the incentive payments  Treasury would have to provide. In response, we added additional  information to the report noting, as we have in prior reports, that all  TARP-funded housing programs are expenditures, including incentives  paid to investors other than the enterprises, servicers, and borrowers.  Further, incentives to the enterprises for principal forgiveness  modifications would be paid out of the $45.6 billion that Treasury has  already obligated for preventing avoidable foreclosures and preserving  homeownership. FHFA also noted that the draft report did not discuss the  issue of principal forgiveness modifications with respect to FHA, USDA,  and VA. We included additional text in the report to note that FHA, USDA,  and VA each cited limitations related to their authority to forgive loan  principal as part of a foreclosure mitigation action. Moreover, as the draft  report notes, FHA, VA, and USDA have not fully analyzed the costs and  benefits of their foreclosure mitigation actions to help ensure that both  borrowers and taxpayers benefit from efforts to keep homeowners in their  homes. Therefore, we recommended that these agencies analyze the  effectiveness and the long-term costs and benefits of their loss mitigation  strategies and actions.
Although USDA did not provide a formal written comment letter, e-mail  comments from Rural Development noted that USDA generally concurred  with the information applicable to USDA in the report. Further, USDA  provided additional data on the types of information that servicers were  required to report on their foreclosure mitigation efforts. In response, we  clarified the text of the report and the associated recommendation to  provide additional examples of data that would enhance USDA’s ability to  monitor servicers’ borrower outreach and foreclosure mitigation efforts.
We are sending copies of this report to interested congressional  committees, Treasury, HUD, USDA, VA, FHFA, Fannie Mae, Freddie  Mac, OCC, Federal Reserve, FDIC, CFPB, Special Inspector General for  TARP, and members of the Financial Stability Oversight Board. We also  will make this report available at no charge on the GAO website at  http://www.gao.gov.
If you or your office have any questions about this report, please contact  me at (202) 512-8678 or sciremj@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. Key contributors to this report are listed in appendix  VII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report focuses on foreclosure mitigation efforts. Specifically, this  report examines (1) the federal and nonfederal response to the housing  crisis, (2) the number of loans potentially at risk of foreclosure and the  current condition of the U.S. housing market, and (3) opportunities to  enhance the effectiveness of current foreclosure mitigation efforts.
To examine the response to the housing crisis, we identified key federal  and nonfederal efforts to mitigate foreclosures, focusing our review on  those that provided direct assistance to homeowners:
Department of the Treasury’s efforts, including the Home Affordable  Modification Program (HAMP), HAMP-Principal Reduction Alternative  (PRA), Federal Housing Administration Refinance of Borrowers in  Negative Equity Positions (FHA Short Refinance, joint program with  the Department of Housing and Urban Development (HUD)), Home  Affordable Unemployment Program (UP), and Home Affordable  Foreclosure Alternatives (HAFA) Program.
HUD’s efforts, mainly through FHA, including special forbearance  agreements, standard modifications, FHA-HAMP, FHA Short  Refinance (joint program with Treasury), partial claims short sales,  and deeds-in-lieu of foreclosure.
Department of Agriculture’s (USDA) efforts, including special  forbearance, traditional modifications, special loan servicing, short  sales, and deeds-in-lieu of foreclosure.
Department of Veterans Affairs’ (VA) programs, including repayment  plans, special forbearance agreements, standard modifications, VA- HAMP, short sales, and deeds-in-lieu of foreclosure.
Efforts of the Federal National Mortgage Association (Fannie Mae)  and the Federal Home Loan Mortgage Corporation (Freddie Mac),  including repayment plans, forbearance agreements, standard loan  modification programs, Home Affordable Refinance Program (HARP),  short sales, and deeds-in-lieu of foreclosure.
Efforts implemented by states but supported by federal funds, such as  Treasury’s Housing Finance Agency Innovation Fund for the Hardest  Hit Housing Markets (Hardest Hit Fund) and HUD’s Emergency  Homeowners Loan Program (EHLP).
Efforts implemented by mortgage servicers, commonly known as  proprietary foreclosure mitigation efforts.
For federal efforts, we identified and reviewed statutes, regulations,  requirements, guidance, and press releases. Further, to examine these  foreclosure mitigation efforts, we obtained viewpoints from a wide range  of housing market participants and observers, including federal officials  from HUD, USDA, VA, and Treasury, as well as the Office of the  Comptroller of the Currency (OCC), Federal Housing Finance Agency  (FHFA), Board of Governors of the Federal Reserve System (Federal  Reserve), Federal Deposit Insurance Corporation (FDIC), and Consumer  Financial Protection Bureau (CFPB). In addition we met with staff from  two government-sponsored-enterprises, Fannie Mae and Freddie Mac  (the enterprises). We also met with housing market trade associations,  including the Mortgage Bankers Association (MBA), Mortgage Insurance  Companies of America, Association of Mortgage Investors, American  Securitization Forum, and National Association of Realtors. Finally, we  met with housing market observers and participants, such as CoreLogic,  the Center for Responsible Lending, the National Association of  Consumer Advocates, Amherst Securities, NeighborWorks America,  HOPE NOW, and the National Community Reinvestment Coalition.
To describe the volume, characteristics, and costs associated with federal  efforts and specific foreclosure mitigation actions (such as loan  modifications), we obtained summary data from Treasury, HUD, USDA,  VA and the enterprises. We did not independently confirm the accuracy of  these data. However, we took steps to ensure that the data we used were  sufficiently reliable for our purposes, such as reviewing existing  information about data quality, interviewing officials familiar with the data,  and corroborating key information. We also reviewed reports generated  by Treasury, HUD, USDA, VA, the enterprises, and FHFA describing the  volume, characteristics, performance, and costs of foreclosure mitigation  efforts and actions that occurred for the period of January 2009 through  December 2011. To examine the volume, characteristics and  performance of nonfederal foreclosure mitigation efforts, we reviewed  publically available data reported by HOPE NOW (an industry  association) and servicers (through OCC’s Mortgage Metrics Reports)We did not independently confirm the accuracy of the summary data we  obtained from these sources. However, we took steps to ensure that the  data we used were sufficiently reliable for our purposes, such as  reviewing the data with officials familiar with generating the data.
To supplement these data sources, we also analyzed loan-level servicing  data we obtained from CoreLogic to examine the volume, characteristics,  and performance of loan modifications made through both federal and  nonfederal programs. The data we obtained provide wide coverage of the  national mortgage market—that is, approximately 65 percent to 70  percent of prime loans and about 50 percent of subprime loans, according  to CoreLogic officials. Due to the proprietary nature of CoreLogic’s  estimates of its market coverage, we could not directly assess the  reliability of these estimates. However, we have used CoreLogic data in  prior reports in which we concluded that the data we used were  sufficiently reliable for our purposes. in the coverage and completeness of the data, our analysis may not be  representative of the mortgage market as a whole. CoreLogic’s prime  loans include conventional loans as well as loans insured or guaranteed  by FHA, VA, and other government entities. Further, prime loans include  near prime or Alt-A loans.
For example, see GAO, Mortgage Reform: Potential Impacts of Provisions in the Dodd- Frank Act on Homebuyers and the Mortgage Market, GAO-11-656 (Washington, D.C.:  July 19, 2011). provides information on certain loan and borrower characteristics at  origination, such as the original loan amount and interest rate as well as  credit score, and a series of monthly observations, which include current  mortgage status (current on payments, 30, 60, or 90 or more days  delinquent, in foreclosure, real estate owned, or has paid off).
We restricted our analysis to first-lien mortgages for the purchase or  refinancing of single-family residential properties (1- to 4-units) in the 50  states and the District of Columbia that were active sometime during the  period from January 2007 through June 2011. This data set contained  about 58.2 prime mortgages and about 7.7 subprime mortgages. We  reviewed documentation on the process CoreLogic used to collect its  data. We discussed this process and the interpretation of different data  fields with CoreLogic representatives. In addition, we conducted  reasonableness checks on data elements to identify any missing,  erroneous, or outlying data. Although the Core Logic data has certain  limitations—for example, certain data fields are not fully reported—we  concluded that the data we used were sufficiently reliable for our  purposes.
To examine the volume, characteristics, and performance of loan  modifications, we took a 15 percent random sample of the CoreLogic data  set, which resulted in 7,608,603 prime mortgages and 608,704 subprime  mortgages. Although this data set did not contain direct information about  the presence of modifications, we developed a set of algorithms to infer if  the loan had been modified. We confirmed the accuracy of our algorithms  by using our methodology to analyze data provided by OCC that included  known modifications (see app. III). We conducted several analyses on  this data set. For example, we calculated the magnitude of payment  reductions as well as the 6-month redefault rates for modified loans.
To identify other key efforts intended to mitigate foreclosures, we  interviewed a wide range of housing market participants and observers.  We identified a number of efforts, such as improvements to servicing  standards. To examine this effort, we reviewed information related to the  consent orders OCC the federal banking regulators sent to 14 servicers  as well as the agreement reached by the federal government and state  attorneys general agreement with the five largest servicers in the United  States.
To examine the current condition of the U.S. housing market, we  analyzed the loan-level data we obtained from CoreLogic. We conducted  our analysis on all active loans in June 2009, 2010, and 2011 that met our  selection criteria. Specifically, we identified loans that were associated  with an increased likelihood of foreclosure and then described the number  and loan and borrower characteristics of these loans. First, we identified  key characteristics associated with an increased likelihood of foreclosure  by reviewing our prior work and other studies, as well as interviewing  housing market participants and observers. Based on these studies and  viewpoints, we identified the following five key characteristics: (1) loans  with two or more missed payments; (2) loans with significant negative  equity (a current LTV ratio of 125 percent or greater); (3) loans with  significant negative equity located in an area with unemployment of 10  percent or greater; (4) loans with a high current interest rate (1.5  percentage points or 150 basis points or higher above the market rate);  and (5) loans with certain origination features, such as a credit score of  619 or below and an LTV of 100 percent or higher at the time of  origination.
Second, we analyzed the CoreLogic loan-level data to determine the  extent to which loans were associated with these five characteristics. We  took steps to ensure that the data we used were sufficiently reliable for  our purposes, such as conducting reasonableness checks on data  elements. In some cases, the CoreLogic data set did not contain  information associated with these characteristics—specifically, negative  equity, unemployment, and high interest rate. In these cases, we linked  additional data to the CoreLogic data to derive this information.
To estimate a borrower’s equity, we linked historical and current  house price information at the zip code level to the CoreLogic data.  Specifically, we calculated for each loan the current house value  based on the date of origination. In areas where a house price did not  exist we used the state-level average house price index for the month  of origination and for June 2009, 2010, and 2011. Due to data  limitations our analysis did not take into account additional liens. As a  result, we may overstate the amount of equity a borrower has in their  home.
To estimate unemployment levels that could affect borrowers we used  employment data at the county level from the Bureau of Labor  statistics (BLS) to analyze local area unemployment rates. We linked  the local area unemployment data with zip code data in CoreLogic to  determine a local area unemployment rate for each loan as of June  2009, 2010, and 2011. If the local area unemployment rate was 10   percent or higher we determined that the loan was in an area with a  high unemployment.
For loans originated during the last 5 years, we determined high  interest rates by comparing the interest rate on individual loans to the  current Freddie Mac’s Primary Mortgage Market Survey monthly  results for adjustable rate mortgage (ARM), 30-year fixed, and 15- year fixed-rate mortgages, depending on the loan’s origination  mortgage product as of June 2009, 2010, and 2011. If the current  interest rate was equal to or greater than the Freddie Mac rate by 150  basis points, we determined that the loan had a high interest rate.
We analyzed loans with delinquency or with two or more of the other four  characteristics associated with an increased likelihood of foreclosure (i.e.,  significant negative equity, significant negative equity and located in an  area with high unemployment, high current interest rate, certain  origination features). We also conducted a state-by-state analysis.
To further examine the current condition of the U.S. housing market, we  identified and analyzed key national housing market indicators, including  measures of loan performance, home equity, unemployment, and home  affordability. To identify these indicators, we reviewed a wide range of  publicly available information and interviewed housing market participants  and stakeholders. To analyze the indicators, we reviewed information in  several reports, including, the National Delinquency Survey data issued  by the Mortgage Bankers Association (MBA), data issued by the National  Bureau of Economic Research, CoreLogic’s Home Price Index, the  Federal Reserve’s statistical releases on the Flow of Funds Accounts of  the United States, IHS Global Insight data on home affordability, and  unemployment data reported by BLS. We did not independently confirm  the accuracy of the information and analysis that we obtained from third  parties. However, we took steps to ensure that the data we used from  these sources were sufficiently reliable for our purposes, such as  reviewing existing information about data quality, interviewing officials  familiar with the data, and corroborating key information.
To examine opportunities to enhance the effectiveness of foreclosure  mitigation efforts, we identified and reviewed the purposes and goals of  federal foreclosure mitigation efforts as well as statutes, requirements,  and guidance associated with these efforts. To describe the costs  associated with federal efforts and specific foreclosure mitigation actions,  we obtained summary data from Treasury, HUD, USDA, VA and the  enterprises. Again, we did not independently confirm the accuracy of the  summary data we obtained. However, we took steps to ensure that the  data we used were sufficiently reliable for our purposes, such as  interviewing officials familiar with the data. We reviewed relevant  principals of federal budgeting resulting from federal credit reform. We  obtained the viewpoints of a wide range of housing market participants  and observers. For example, we met with officials from Treasury, HUD,  FHFA, Fannie Mae, Freddie Mac, VA, and USDA to understand the  extent to which their foreclosure mitigation programs reached struggling  borrowers. We discussed their activities to monitor the performance of  their foreclosure mitigation efforts and the extent to which they had  considered other factors that may affect performance. For instance, we  asked whether they had analyzed the effect of loan and borrower  characteristics on the performance of loss mitigation actions and  considered redefault rates and loss severity when evaluating the costs  and benefits of these actions. Finally, we discussed the utility of, as well  as any obstacles to, taking these steps.
To better understand characteristics that affect redefault rates of modified  loans, we conducted an econometric analysis. Specifically, we analyzed a  sample of loan-level data we obtained from CoreLogic. We took steps to  ensure that the data we used were sufficiently reliable for our purposes,  such as conducting reasonableness checks on data elements. In addition,  we analyzed loan-level data we obtained from Treasury to examine the  performance of HAMP loan modifications. The HAMP data are reported  by servicers at the start of the trial modification period, during the trial  period, during conversion to a permanent modification, and during the  permanent modification phase of the program. The data contain several  loan and borrower characteristics at origination, including the loan-to- value (LTV) and loan amount; as well as some information at time of the  modification, including delinquency status. Since we did not have data on  the performance history of the modified loans, we constructed the loan  history using data from different points in time. The HAMP data have  certain limitations. For instance, certain data fields are not fully reported,  as indicated by the Department of the Treasury. However, we  determined that the data were sufficiently reliable for our purposes. See  appendix V for a detailed summary of the methodology for the analysis of  the CoreLogic and HAMP data, as well as the results from this analysis.
We conducted this performance audit from October 2010 through June  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
Treasury has outlined the  requirements for certain foreclosure  mitigation programs in the MHA  Handbook, which are summarized  here. These guidelines apply to  mortgages that are not owned or  guaranteed by Fannie Mae or  Freddie Mac and that are not insured  or guaranteed by the Federal  Housing Administration (FHA), the  Department of Veterans Affairs (VA),  and the Department of Agriculture  (USDA). Fannie Mae and Freddie  Mac participate in the Home  Affordable Modification Program  (HAMP) but have issued their own  guidance. FHA, VA, and USDA have  issued guidance for companion  programs that are separate from  HAMP.
Treasury’s programs provide relief to  borrowers whose mortgages are held  in lenders’ portfolios or in private  securitization trusts. To qualify,  mortgages must have been  originated on or before January 1,  2009, and be secured by a one-to- four unit residential property. In  general, borrowers must be  delinquent or default must be  reasonably foreseeable (imminent  default).
Home Affordable Modification Program (HAMP) Tier 1: HAMP Tier 1  modifications reduce borrowers’ monthly mortgage payments to affordable levels  and help them avoid foreclosure. To be eligible under HAMP Tier 1, borrowers  must occupy the property and have monthly mortgage payments that exceed 31  percent of their monthly gross income. The HAMP Tier 1 evaluation includes  identifying actions to be taken that will result in a monthly mortgage payment-to- income ratio of 31 percent. These actions must follow a standard sequence until  this ratio is reached: capitalizing past due amounts, reducing the interest rate  down to a minimum of 2 percent, extending the mortgage term by up to 40 years  from the date of modification, and forbearing principal. Servicers have the option  of using an alternative sequence of modification actions under the Principal  Reduction Alternative that includes principal forgiveness as a second step  before reducing the interest rate. Servicers then use a standardized net present  value (NPV) test to compare the financial benefits to the investor of modifying  relative to not modifying the loan.  Borrowers who are approved for HAMP Tier 1  begin with a trial period that lasts at least 3 months. Borrowers who successfully  complete a trial period receive a permanent modification. After 5 years, the  interest rate begins to step up each year until the market rate is reached if the  starting interest rate was below the market rate at the time of the modification.  Treasury pays incentives to investors and servicers for completed modifications  and to borrowers, investors, and servicers for the continued successful  performance of certain modifications. More than 450,000 nonenterprise  permanent modifications were started between when the program began in 2009  and December 2011.
HAMP Tier 2: Effective June 1, 2012, the HAMP Tier 2 program will offer  modifications to certain borrowers who do not qualify for HAMP Tier 1, including  those whose current mortgage payments are below 31 percent of their income  and those who do not occupy the property as their primary residence. HAMP  Tier 2 modifications will capitalize past due amounts, adjust interest rates to the  market rate, extend loan terms to 40 years, and forbear up to 30 percent of  principal on loans with LTV ratios  of more than 115 percent to reach the 115- percent threshold. Borrowers will be offered HAMP Tier 2 modifications only if  these changes reduce monthly payments by at least 10 percent and result in  payments ranging from 25 percent to 42 percent of monthly gross income.
Second-Lien Modification Program (2MP): The Second Lien Modification  Program (2MP) is designed to work in tandem with HAMP modifications to  provide a comprehensive solution to help borrowers afford their mortgage  payments. A participating servicer of a second lien for which the first lien  receives a HAMP Tier 1 or Tier 2 modification must offer to modify the  borrower’s second lien, accept a lump sum payment from Treasury to fully  extinguish the second lien, or accept a lump sum payment from Treasury to  partially extinguish the second lien and modify the remaining portion. Under  2MP, servicers are required to take modification actions in the following order:  capitalize accrued interest and other past due amounts; reduce the interest rate   to as low as 1 percent for 5 years (when the interest rate will reset at the rate on  the HAMP-modified first lien); extend the term to at least match the HAMP- modified first lien; and forbear or forgive principal in at least the same proportion  as the forbearance or forgiveness on the HAMP-modified first-lien, although  servicers may choose to forbear or forgive more than that amount. According to  Treasury, nearly 61,000 second liens had been modified under 2MP, including  nearly 13,000 that involved full extinguishments.
Home Affordable Unemployment Program (UP): This program provides  forbearance on mortgage loans to borrowers whose hardship is related to  unemployment. Borrowers who indicate that their hardship is related to  unemployment when being considered for HAMP must be evaluated for UP and,  if qualified, receive an offer for forbearance. At their discretion, however,  servicers may offer a HAMP trial period instead, although they must document  their reasons. Servicers are not required to offer UP forbearance to borrowers  whose delinquency exceeds 12 months of scheduled monthly mortgage  payments. The minimum duration of UP forbearance is 12 months unless the  borrower finds a job during that time. There is no maximum forbearance period,  and servicers may extend forbearance in increments at their discretion.  Servicers must reduce monthly payments during the forbearance period to no  more than 31 percent of monthly gross income, but may opt to suspend them in  full. When the forbearance period ends, the servicer must evaluate the borrower  for HAMP or other modifications to resolve the delinquency. As of December  2011, more than 18,000 UP forbearance agreements had been started.
Home Affordable Foreclosure Alternatives (HAFA): Borrowers who cannot  afford to keep their homes must be considered for short sales and deeds-in-lieu  of foreclosure (DIL) under the HAFA program. Borrowers may be considered for  HAFA after being considered for HAMP or upon the borrower’s request.  Borrowers who qualify for a HAFA short sale must sign and return a short sale  agreement that lasts for a minimum of 120 days and that lists the minimum  price, allowable transaction costs, and monthly mortgage payments to be made  during the period of the agreement, if applicable. Borrowers may also qualify for  HAFA if they have received an offer on their property and submit a request for a  short sale.  Through HAFA, a borrower may also receive a DIL either as a  condition of the short sale agreement if the property doesn’t sell or separately  without a requirement to market the property. In all HAFA transactions, the title  must be clear, any subordinate lien holders must release their liens, and  investors must agree to the transaction. According to Treasury data, about  26,000 nonenterprise HAFA short sales and DILs had been completed as of  December 2011.
Fannie Mae has outlined the  requirements for foreclosure  mitigation programs in its Single  Family Servicing Guide, which are  summarized here. These guidelines  apply only to mortgages that are  owned or guaranteed by Fannie  Mae.
Fannie Mae recently changed its  foreclosure mitigation workout  hierarchy to require servicers to first  evaluate whether borrowers face a  temporary or permanent hardship.  Temporary hardships may be  addressed with repayment plans and  temporary forbearance. Permanent  or long-term hardships may be  addressed with modifications (which  may include forbearance) under the  Home Affordable Modification  Program (HAMP), Fannie Mae’s  standard loan modifications, short  sales or deeds-in-lieu of foreclosure  (DIL) under the Home Affordable  Foreclosure Alternatives program  (HAFA) or Fannie Mae’s own  program. Fannie Mae also has a  program to lease back a property  that has been conveyed through a  DIL to the former homeowner, called  a deed-for-lease. Previously Fannie  Mae required servicers to evaluate  borrowers for a HAMP modification  before considering them for other  foreclosure mitigation actions.
Repayment Plans and Forbearance: A repayment plan is an agreement  between servicer and borrower that gives the borrower a period of time to  reinstate the mortgage by making regular monthly payments plus an additional  amount to repay the delinquency. Servicers may also offer forbearance to  borrowers, which suspends or reduces payments for up to 6 months.  Forbearance periods longer than 6 months require written agreements with the  borrower and written approval from Fannie Mae. Fannie Mae also has  unemployment forbearance, which is the first action servicers must consider for  unemployed borrowers. Fannie Mae clarified the requirements for this action in  early 2012. Unemployment forbearance initially lasts for 6 months or until the  borrower is reemployed, whichever occurs first. If the borrower completes the  initial unemployment forbearance period and remains unemployed, the servicer  may offer extended unemployment forbearance for up to 6 more months with  Fannie Mae’s approval. For all forbearance programs, once the borrower’s  hardship is resolved, the forbearance period ends and the borrower must repay  the full amount, enter a repayment plan, or receive a loan modification or other  foreclosure mitigation action. Fannie Mae completed about 90,000 repayment  plans and forbearance agreements under these programs between January  2009 and December 2011.
Home Affordable Modification Program (HAMP): Servicers must evaluate  borrowers for HAMP before considering them for other modification options. Like  Treasury’s nonenterprise HAMP program, the Fannie Mae HAMP evaluation  reduces the monthly mortgage payment-to-income ratio to 31 percent by  following a standard sequence of modification actions: capitalizing past due  amounts, reducing the interest rate to a minimum of 2 percent, extending the  mortgage term to up to 40 years, and forbearing principal. Servicers use  Treasury’s net present value (NPV) model to estimate the financial outcome of  modifying or not modifying the loan. Unless the NPV result for not modifying the  loan exceeds the NPV result for modifying the loan by more than $5,000, the  servicer must move forward with the HAMP modification.  Borrowers who are  approved for HAMP begin with a trial period that lasts at least 3 months.  Modifications become permanent after borrowers have successfully completed  the trial period. Fannie Mae pays borrower and servicer incentives for HAMP  modifications but is not eligible for Treasury’s investor incentives under HAMP.  Fannie Mae completed nearly 330,000 HAMP modifications as of December  2011.
Non-HAMP Loan Modifications: Fannie Mae servicers must consider  borrowers who do not qualify for HAMP or have defaulted on HAMP modification  for standard modifications. The terms of Fannie Mae’s standard loan  modification program, which took effect October 1, 2011, require servicers to  capitalize past due amounts, adjust interest rates to a fixed rate (to be adjusted  from time to time based on market conditions), and extend the amortization term  to 480 months. In addition, if the current loan-to-value (LTV) ratio exceeds 115  percent, the servicer must forbear up to 30 percent of the principal balance to  bring the LTV ratio down to 115 percent. These changes must reduce monthly  payments by at least 10 percent, and the borrower’s front-end debt-to-income  ratio must be greater than or equal to 10 percent and less than or equal to 55  percent in order for the modification to proceed. Fannie Mae offers up to $1,600  in incentives for each modification, depending on how early in the delinquency  the modification takes effect.
Prior to October 2011, Fannie Mae delegated authority to its largest servicers,  which represent approximately 90 percent of loans, to offer modifications to  borrowers who met specified eligibility criteria according to a standard set of  waterfall steps. This modification structure was aimed at making monthly  payments more affordable. Fannie Mae paid servicers $800 for each approved  modification. Nearly 390,000 loans were modified through Fannie Mae’s non- HAMP programs between January 2009 and December 2011.
Short Sales and Deeds-in-Lieu of Foreclosure: Borrowers who cannot afford  to keep their homes must be considered for a short sale or DIL, first under HAFA  and then under Fannie Mae’s own program. Borrowers who qualify for a HAFA  short sale must sign and return an agreement that lasts for 120 days and lists  the minimum list price for the short sale, allowable transaction costs, and  monthly mortgage payments for the period of the agreement. A HAFA DIL is  generally available to borrowers who are unable to sell their properties under the  HAFA short sale process. In certain instances—such as a serious illness, death,  military relocation or in other cases when a borrower has no interest or ability to  market the property—the servicer may offer DIL without going through the HAFA  short sale process.  Under Fannie Mae’s program, Fannie Mae has delegated  authority to certain servicers to offer short sales and DILs on its behalf under the  terms of the delegated authority.  However, servicers that do not have Fannie  Mae’s delegated authority are required to obtain Fannie Mae’s approval on a  case-by-case basis. Fannie Mae short sales and DILs can be offered to  borrowers who are ineligible for HAFA. Fannie Mae reported completing more  than 190,000 short sales and DIL transactions since January 2009.
In addition, Fannie Mae has a deed-for-lease program as part of its DIL effort  that has been in place since November 2009. Under this program, the borrower  can receive a lease agreement for up to 12 months. Fannie Mae officials told us  that most borrowers are looking to move out of the home at a time that is  convenient for them rather than looking to stay for an extended period of time.
Freddie Mac has outlined the  requirements for foreclosure  mitigation programs in its Servicer  Guide, which are summarized here.  These guidelines apply only to  mortgages that are owned or  guaranteed by Freddie Mac.
Freddie Mac requires servicers to  evaluate borrowers for foreclosure  mitigation actions in accordance with  a hierarchy, which begins with  reinstatement, repayment plans and  forbearance. If servicers determine  that those options are not  appropriate, they evaluate borrowers  for a modification under the Home  Affordable Modification Program  (HAMP) before considering them for  other foreclosure mitigation actions.  If the borrower does not qualify for  HAMP, the servicer evaluates the  borrower for a Freddie Mac standard  loan modification. If the borrower is  not eligible for a modification, the  servicer evaluates the borrower for a  short sale or deed-in-lieu of  foreclosure (DIL) under the Home  Affordable Foreclosure Alternatives  program (HAFA), and then under  Freddie Mac’s own program.
Repayment Plans and Forbearance: A repayment plan is an agreement  between the servicer and a borrower that gives the borrower a set period to  reinstate the mortgage by making the borrower’s contractual payments plus an  additional amount to repay the delinquency. Forbearance is another temporary  relief option that typically involves reducing or suspending payments for a period  of time, and Freddie Mac has three different types of forbearance. Short-term  forbearance, which does not require Freddie Mac’s approval, is a written  agreement that either suspends payments for up to 3 months or reduces  payments for up to 6 months.  Long-term forbearance, which requires a written  agreement and Freddie Mac’s written approval, is available under certain  circumstances—for example, when the borrower is experiencing a hardship due  to long-term or permanent disability—and reduces or suspends monthly  payments for 4 to 12 months. Unemployment forbearance was added in early  2012. Servicers must consider unemployed borrowers for unemployment  forbearance first. Unemployment forbearance initially lasts for 6 months or until  the borrower gets a job, whichever occurs first. Borrowers who remain  unemployed may be eligible for extended unemployment forbearance, which can  last for up to 6 more months, so long as the borrower’s total delinquency does  not exceed 12 months, with Freddie Mac’s approval. Freddie Mac reported that  servicers had completed nearly 170,000 repayment plans and forbearance  agreements under these programs between January 2009 and December 2011.
Home Affordable Modification Program (HAMP): Servicers must evaluate  borrowers for HAMP before considering them for other modification options. Like  Treasury’s nonenterprise HAMP program, the Freddie Mac HAMP evaluation  includes following a standard sequence of modification actions to produce a  monthly mortgage payment-to-income ratio of 31 percent: capitalizing past due  amounts, reducing the interest rate down to a minimum of 2 percent, extending  the mortgage term by up to 40 years from the date of modification, and, if  applicable, forbearing principal. Servicers use Treasury’s net present value  (NPV) model to estimate the financial outcome of modifying or not modifying the  loan. Unless the NPV result for not modifying the loan exceeds the NPV result  for modifying the loan by more than $5,000, the servicer must move forward with  the HAMP modification. Borrowers who are approved for HAMP begin with a trial  period that lasts at least 3 months, and the modification becomes permanent if  they successfully complete the trial period. Freddie Mac completed more than  150,000 HAMP modifications between January 2009 and December 2011.
Non-HAMP Loan Modifications: Freddie Mac servicers also consider  borrowers who do not qualify for HAMP or have defaulted on a HAMP  modification for standard modifications. The terms of Freddie Mac’s standard  loan modification program, which became available on October 1, 2011, require  servicers to capitalize past due amounts, adjust interest rates to a Freddie Mac- specified fixed rate, and extend the amortization term to 480 months. In addition,  if the current LTV ratio exceeds 115 percent, the servicer must forbear up to 30  percent of the unpaid principal balance to reduce the LTV to 115 percent. The  modification proceeds only if these changes reduce the borrower’s monthly  principal and interest payments by at least 10 percent and the front-end debt-to- income ratio to greater than or equal to 10 percent and less than or equal to 55  percent. Servicers are eligible to receive incentives of up to $1,600 for each  modification, depending on how early in the delinquency the modification takes  effect. Prior to January 2012, Freddie Mac required all servicers to evaluate  borrowers for a non-HAMP modification using a standard waterfall. In some  cases, Freddie Mac delegated authority to some servicers to offer non-HAMP  modifications. Servicers that did not have Freddie Mac’s delegated authority  were required to provide a recommendation to Freddie Mac for a non-HAMP  modification. Freddie Mac would determine the conditions of non-HAMP  modifications and offered incentives of $800 per completed modification. Freddie  Mac modified more than 190,000 loans between January 2009 and December  2011 through their non-HAMP programs.
Short Sales and Deeds-in-Lieu of Foreclosure: Borrowers who cannot afford  or do not want to retain ownership of their homes must be considered for short  sales and deeds-in-lieu of foreclosure (DIL), first under the Home Affordable  Foreclosure Alternatives (HAFA) program and then under Freddie Mac’s own  program. These programs are typically the final options for avoiding foreclosure.  Borrowers may be considered for HAFA only after being considered for home  retention options, such as HAMP and a Freddie Mac standard modification.  Borrowers who qualify for a HAFA short sale must sign and return a short sale  agreement that lasts for 120 days and lists the minimum list price for the short  sale, allowable transaction costs, and monthly mortgage payments to be made  during the period of the agreement. Freddie Mac can extend the agreement if no  acceptable purchase offers have been received, provided that the borrower has  fully complied with the short sale agreement and an acceptable purchase offer is  likely to occur during the extension period. Freddie Mac delegates the approval  of HAFA short sales to servicers. A HAFA DIL is available only to borrowers who  were unable to sell under the HAFA short sale process. With Freddie Mac’s  approval, the servicer prepares a DIL agreement that, among other things, sets  the date when the owner will vacate the property and outlines monthly payment  terms until then. Borrowers who are ineligible for HAFA may be eligible for a  Freddie Mac short sale or DIL. In some cases, Freddie Mac requires that the  servicer obtain approval prior to accepting short sale offers or offering a DIL  agreement. Under both HAFA and Freddie Mac’s short sale and DIL programs, if  the borrower completes the transaction in accordance with Freddie Mac’s  standard requirements, the borrower is released from liability for the remaining  unpaid balance on the mortgage. Freddie Mac reported completing more than  100,000 short sales and DILs since January 2009.
Federal Housing Administration (FHA)
The Federal Housing Administration  (FHA) has outlined the requirements  for foreclosure mitigation programs in  a series of guidance documents  (called mortgagee letters), which are  summarized here. These guidelines  apply only to mortgages that are  insured by FHA.
Prior to engaging in formal  foreclosure mitigation actions, FHA  requires servicers to address  delinquencies through an early  intervention process. This process  involves contacting the borrower and  gathering information on the  borrower’s circumstances and  financial condition. The servicer may  refer the borrower to default  counseling. During this process, the  servicer may come to an informal  forbearance arrangement with the  borrower, which lasts for 3 months or  less, that helps the borrower  reinstate the loan through a  repayment plan.
When a servicer determines the  need for a formal foreclosure  mitigation action, FHA requires  servicers to ensure that the borrower  can afford the new monthly payment.  In addition, servicers must consider  formal foreclosure mitigation actions  in the following order, from the  lowest upfront cost to FHA to the  highest upfront cost: repayment  plans and special forbearance,  standard loan modification, partial  claim, FHA-HAMP, preforeclosure  sale, and deed-in-lieu of foreclosure  (DIL). To qualify for most of these  actions, borrowers must be at least  90 days delinquent but no more than  12 months past due.
Repayment Plans and Special Forbearance: Servicers may provide  temporary relief to borrowers through repayment plans and special forbearance.  Special forbearance combines a suspension or reduction in monthly mortgage  payments with a repayment period and is available to borrowers who are at least  3 mortgage payments delinquent. Two types of special forbearance are  available. Under Type I, the minimum forbearance period is 4 months, unless  the borrower is unemployed, in which case the minimum forbearance period is  12 months under a temporary program change. Servicers must verify the  employment status of unemployed borrowers monthly and certify that payments  are made as scheduled. Type II special forbearance combines a short-term  special forbearance plan with a loan modification or partial claim. The borrower  must make three full monthly payments before the loan modification begins or  the partial claim is executed. FHA provides servicers with incentive payments of  $100 to $200 for Type I special forbearance agreements, depending on  servicers’ performance ratings. FHA does not provide incentives for Type II  agreements because servicers can receive them for the subsequent loan  modifications or partial claims. Servicers reported that about 440,000 repayment  plans were completed between January 2009 and December 2011. During the  same period, FHA paid incentives on about 67,000 Type I special forbearance  plans.
Standard Loan Modifications: Borrowers must have paid at least 12 full  monthly mortgage payments and be at least 3 months delinquent in order to  qualify for a standard loan modification. Servicers capitalize past due amounts,  reduce interest rates to the current market rate, and extend the term by up to 10  years from the original maturity date or 360 months. Borrowers generally must  complete a trial period of 3 months. FHA offers $750 in incentives per standard  modification completed. More than 370,000 standard loan modifications have  been completed since January 2009.
Partial Claims: Servicers may advance funds on behalf of a borrower to  reinstate a loan that is at least 4 months delinquent. The total past due amount  may not exceed 12 months and the mortgage may not be in foreclosure. The  advance (called a partial claim) does not change the borrower’s monthly  payments, so servicers must ensure that borrowers can resume making their  regular payments. Borrowers must complete a trial period of at least 3 months  making their regularly scheduled monthly payments before the partial claim is  executed. FHA reimburses the servicer for the partial claim and executes an  interest-free subordinate lien for the amount, which is payable when the property  is sold or the first mortgage is paid off. FHA provides servicers with incentive  payments of $500 per partial claim. FHA has paid claims on nearly 47,000  partial claims since January 2009.
FHA-HAMP Modifications: Borrowers for whom a standard modification is not  sufficient may be evaluated for a HAMP-style modification under the authority  provided to HUD in 2009. The delinquent loan must have been originated at  least 12 months before, and the borrower must have paid at least four full  monthly payments. FHA-HAMP modifications bring borrowers’ monthly  payments down to 31 percent of income by reducing interest rates to the market  rate, extending the loan term to 30 years, and deferring principal. Rather than  capitalizing past due amounts, however, servicers advance funds to reinstate  the loan. FHA reimburses the servicer for the advance (as with a partial claim)  and executes an interest-free subordinate lien in the amount of the advance plus  any deferred principal. The amount of the subordinate lien cannot exceed 30  percent of the unpaid principal balance prior to the modification. FHA provides  servicers with incentive payments of up to $1,250 per FHA-HAMP modification.  According to data from FHA officials, about 13,000 FHA-HAMP loan  modifications have been completed since the program was implemented.
Preforeclosure Sales and Deeds-in-Lieu of Foreclosure (DIL): Under a  preforeclosure sale agreement (also called a short sale), FHA accepts the  proceeds of the sale as satisfying the mortgage debt, as long as the net  proceeds (sales price minus certain costs) are at least 84 percent of the  appraised value. A DIL is a voluntary transfer of a property from the borrower to  FHA for a release of all obligations under the mortgage. FHA provides servicers  with incentive payments of up to $1,000 for each completed preforeclosure sale  and borrowers with payment of $750 to $1,000. For DILs, servicers can receive  incentive payments of $250 per completed DIL transaction, and borrowers can  receive $2,000. Nearly 60,000 pre-foreclosure sales and DILs have been  completed since the beginning of 2009.
Department of Veterans Affairs (VA)
The Department of Veterans Affairs  (VA) has outlined the requirements  for foreclosure mitigation programs in  a series of guidance documents,  which are summarized here. These  guidelines apply only to mortgages  that are guaranteed by VA.
VA recommends that servicers  consider foreclosure mitigation  actions in the following order:  repayment plans, special  forbearance, loan modifications  (including VA-HAMP), refunded  loans, compromise sales, and  deeds-in-lieu of foreclosure (DIL).
In addition, VA assigns each loan  that is more than 60 days delinquent  to a staff member, who monitors the  servicer’s activity to ensure  appropriate action is taken to assist  the veteran borrower. VA provides  the contact information of the staff  member to the borrower, as well as  options for resolving the delinquency.  If the loan becomes 120 days  delinquent, the VA staff member  performs a review of the adequacy of  servicing, which includes reviewing  the servicer’s case notes, discussing  the case with servicer staff, and  serving as an intermediary between  the servicer and borrower, if  necessary. If VA determines the  servicing has been adequate,  another review will be performed in  90 days.
Repayment Plans: Repayment plans, which last at least 3 months, allow  borrowers to make their normal monthly payments plus a portion of the past due  amount. Servicers must establish that the borrower is financially able to make  these payments and must review the plan monthly to ensure that the borrower is  complying with the plan. VA provides servicers with incentive payments of up to  $200 for each repayment plan that reinstates a loan that was more than 60 days  delinquent. According to data provided by VA officials, more than 25,000  repayment plans have been completed since January 2009.
Special Forbearance: VA recommends that servicers consider special  forbearance for borrowers who would not be able to maintain a repayment plan.  Special forbearance involves a written agreement in which the servicer agrees to  reduce or suspend payments for a month or more. There is no maximum period  for special forbearance plans. At the end of the forbearance period, the borrower  must pay the total delinquency or enter into a repayment plan. VA provides  servicers with incentive payments of up to $200 for each special forbearance  plan that reinstates a loan that was more than 60 days delinquent. However, if  the borrower starts a repayment plan at the end of the forbearance period, the  special forbearance is not eligible for the incentive payment. Instead, the  servicer receives it on the repayment plan if the loan is reinstated.  According to  data from VA officials, about 2,600 special forbearance plans have been  completed since the beginning of 2009.
Standard and VA-HAMP Loan Modifications: Servicers are allowed to modify  loans without VA’s prior approval provided certain regulatory conditions are met,  such as the borrowers must have made at least 12 full monthly mortgage  payments, the loan is not modified more than once in a 3-year period, and no  more than three times over the life of the loan.  If the conditions are not satisfied,  the servicer may seek VA prior approval to modify the loan if they have  determined that the event or circumstance that caused the delinquency has  been or will be resolved and is not expected to reoccur. The traditional loan  modification results in a loan with a fixed interest rate that does not exceed the  current market rate plus 50 basis points. The term of the loan may be extended  to the shorter of 360 months after the due date of the first payment on the  modification or 120 months after the original maturity date. According to VA  officials, servicers are expected to use VA’s underwriting guidance on  affordability to determine whether the borrower can make the monthly payments,  including recommended thresholds for residual income and debt-to-income  ratios, with appropriate consideration of exculpatory or mitigating circumstances.  If servicers determine that a traditional modification is not sufficient, they may  evaluate the borrowers for a HAMP-style modification according to the  guidelines VA issued in 2010. These VA-HAMP modifications involve reducing  the interest rate to as low as 2 percent, extending the term of the loan to 480  months, and deferring principal.
VA provides servicers with incentive payments of up to $700 for each loan  modification that reinstates a loan that was more than 60 days delinquent.  According to data from VA officials, about 30,000 loan modifications have been  completed since the beginning of 2009. VA officials stated that they do not  require servicers to specify whether the modifications they complete are  traditional or VA-HAMP modifications when they report. However, the number of  completed modifications increased markedly after the VA-HAMP guidance was  issued in January 2010 (see figure).
Refunded Loans: VA may elect to purchase a loan and assume the servicing  responsibilities if the servicer determines that modifying the loan is not in the  servicer’s economic interest. VA officials we spoke with said that VA evaluates  refunding options under the terms of HAMP modifications using a VA net  present value (NPV) model. If the NPV result is positive, VA will refund the loan.  Even if the NPV result is negative, VA will evaluate the borrowers’  circumstances and may decide to refund the loan if the circumstances warrant it.  This process is typically the final attempt to keep veterans in their home.  According to data from VA officials, about 250 loans have been refunded since  the beginning of 2009.
Compromise (Short) Sales and Deeds-in-Lieu of Foreclosure (DIL): A  compromise sale, also known as a short sale, is the first option the servicer  should consider after determining that home retention options are not feasible. A  compromise sale is typically for an amount that is less than the borrower’s total  indebtedness on the loan. VA provides servicers with incentive payments of up  to $1,000 for each completed compromise sale on loans that were more than 60  days delinquent. According to data provided by VA officials, almost 13,000  compromise sales have been completed since the beginning of 2009.
A DIL is a voluntary transfer of a property from the borrower to the holder for a  release of all obligations under the mortgage. Servicers are to consider a DIL  only after considering all other loss mitigation options and determining they are  not viable. The servicer must obtain a VA appraisal of the property. After  completing the DIL, the servicer may retain ownership of the property or transfer  it to VA. VA provides servicers with incentive payments of up to $350 per deed- in-lieu of foreclosure transaction that is completed on loans that were more than  60 days delinquent. According to data provided by VA officials, about 2,000 DILs  have been completed since the beginning of 2009.
Department of Agriculture (USDA)
The Department of Agriculture  (USDA) has outlined the  requirements for foreclosure  mitigation programs in a loss  mitigation guide and regulations,  which are summarized here. These  guidelines apply only to mortgages  that are guaranteed by USDA.
Servicers are encouraged to address  delinquencies of one or two missed  payments through an early  intervention process. This process  involves borrower analysis, where  the servicer gathers information on  the borrower’s circumstances,  intentions, and financial condition,  and default counseling, where the  servicer provides the borrower with  information on available resources  for housing counseling and loss  mitigation options. During this  process, the servicer may come to  an informal forbearance  arrangement, which lasts for 3  months or less, that helps the  borrower reinstate the loan.
When moving into formal mitigation  actions (which begin when the  borrower is 90 days or more  delinquent), servicers should  determine first whether the default is  curable or noncurable. For curable  defaults, servicers should consider  special forbearance, loan  modifications, and special loan  servicing. For noncurable defaults,  servicers should consider  preforeclosure sales and deeds-in- lieu of foreclosure.
Special Forbearance: A special forbearance plan can be structured to gradually  increase monthly payments to repay the past due amount over time (at least 4  months) or through a resumption of normal payments for 3 or more months  followed by a loan modification. Servicers may also suspend or reduce  payments for 1 or more months (typically for periods of up to 3 months) to allow  the borrower to recover from the cause of the delinquency, or may allow the  borrower to resume making full monthly payments while delaying the repayment  of the past due amount. The past due amount must not exceed the equivalent of  12 months of principal, interest, taxes, and insurance. There is no maximum  duration for special forbearance plans, but the term must be reasonable and  based upon the borrower’s repayment ability. USDA does not provide servicers  with incentive payments for special forbearance plans. According to USDA,  more than 5,000 special forbearance servicing plans were approved between  January 2009 and December 2011.
Traditional Loan Modifications: Loan modifications can be offered only if  borrowers are 3 or more months delinquent or in imminent danger of default.  A  loan that is in foreclosure must be removed from foreclosure status in order to  be modified. Borrowers must be owner-occupants of the property and be  committed to occupying the property as a primary residence. The servicer must  verify the property’s physical condition through an inspection before approving a  modification. The term of the loan modification should not exceed 360 months  from the date of the original loan, because USDA’s guarantee is only in effect for  30 years from the date of the original loan. Loan modifications may include  reducing interest rates, including to below market levels; capitalizing all or a  portion of past due amounts into the mortgage balance; and reamortizing the  balance due. The modified balance may exceed the original loan balance and  may equal more than 100 percent of the property’s current value. Modified loans  that become delinquent are to be treated as new delinquencies, and servicers  are to go through the full loss mitigation process. USDA does not offer servicers  incentive payments for completing loan modifications. According to USDA,  almost 13,000 loan modification servicing plans were approved between  January 2009 and December 2011.
Special Loan Servicing: Under regulations finalized in September 2010, USDA  authorized servicers to provide additional relief to borrowers when traditional  servicing methods do not provide a means to cure the default.  As with loan  modifications, the borrower must be in default or facing imminent default and  must occupy the property as the primary residence and intend to continue doing  so. Under this authority, called special loan servicing, servicers must reduce the  interest rate to the market rate plus 50 basis points and extend the loan term up  to 30 years. If necessary, the servicer may reduce the interest rate further,  extend the term of the loan to up to 40 years from the date of the modification,  and/or advance funds to satisfy the borrower’s past due amount, including legal  fees and costs related to a canceled foreclosure. In addition, the servicer may  defer principal. The sum of funds advanced cannot exceed 30 percent of the  unpaid principal balance at the time of default and cannot cover past due  amounts of more than 12 months of principal, interest, taxes, and insurance.  USDA will reimburse the servicer for this amount and the borrower will execute a  subordinate lien that is due when the property is sold or the mortgage paid off.  Borrowers who are delinquent at the time of special loan servicing must  complete a 3-month trial period, and borrowers who are in imminent default a 4- month trial period. According to USDA, 143 special loan servicing modification  plans were approved between January 2009 and December 2011.
Preforeclosure Sales and Deeds-in-Lieu of Foreclosure (DIL): A  preforeclosure sale, also known as a short payoff or short sale, is the first option  servicers are to consider after determining that a borrower cannot resolve a  default. A preforeclosure sale is generally for an amount that is less than the  borrower’s total indebtedness on the loan. The preforeclosure sale period is  typically 3 months, and the servicer must review the sale plan every 30 days. If  no closing date is scheduled within 90 days, the servicer may discuss the  likelihood of a sale with the real estate broker and determine whether to extend  the sale period by 30 days (if a sale is likely) or end the sale period. USDA  provides servicers with incentive payments of up to $1,000 for each completed  sale. According to USDA, almost 3,000 preforeclosure sale servicing plans were  approved between January 2009 and December 2011.
A DIL is a voluntary transfer of a property from the borrower to the holder for a  release of all obligations under the mortgage. A DIL is preferable to foreclosure  because it avoids the time and expense of a legal foreclosure action, and the  property is generally in better physical condition because the borrower is  cooperating with the servicer. USDA provides servicers with incentive payments  of up to $250 for each completed DIL transaction. According to USDA, more  than 200 DIL servicing plans were approved between January 2009 and  December 2011.
Refinancing can provide relief to  borrowers who need lower monthly  payments, but borrowers who are  delinquent or who owe more than  their homes are worth are generally  unable to qualify. Here we present  information on federal refinance  programs that specifically target  distressed borrowers.
Home Affordable Refinance Program: The Home Affordable Refinance  Program (HARP) was announced in February 2009 as a way to help borrowers  who were current on their mortgage payments but unable to refinance because  of declining home values. Under HARP, such borrowers can benefit from  reduced interest rates that make their mortgage payments more affordable. Only  mortgages owned by Fannie Mae and Freddie Mac are eligible. Initially, HARP  targeted borrowers with current loan-to-value (LTV) ratios between 80 percent  and 105 percent, although in July 2009 the Federal Housing Finance Agency  (FHFA) revised those requirements to include borrowers with current LTV ratios  of up to 125 percent. To respond to continued weakness in the housing market,  including the large number of borrowers with significant negative equity (current  LTV ratios that are greater than 125 percent), FHFA announced changes to  HARP in October 2011. Among these changes was the removal of the LTV  cap—allowing borrowers with current LTV ratios above 125 percent to  refinance—and reduced delivery fees (fees that the enterprises charge to  servicers and that are typically passed on to the borrower). The standard  mortgage insurance requirements for these refinance loans were relaxed so that  borrowers who did not have mortgage insurance on their existing loan did not  have to purchase it for their refinanced loan, something that would typically be  required for a loan with an LTV ratio of more than 80 percent   FHA Refinance for Homeowners in Negative Equity Positions: Treasury  worked in conjunction with FHA to establish the FHA Refinance for Borrowers in  Negative Equity Positions (FHA Short Refinance), which is in part supported by  TARP funds. For loans refinanced under the FHA Short Refinance program,  Treasury will pay claims on those loans up to a predetermined percentage after  FHA has paid its portion of the claim. This program took effect in September  2010 and provides an opportunity to borrowers who are current on their  mortgage payments and who have loans not insured by FHA that have current  LTV ratios greater than 100 percent to refinance into an FHA-insured mortgage.  In order to qualify, investors must write down at least 10 percent of the  outstanding principal and achieve an LTV ratio of no more than 97.75 percent.  Through December 2011, FHA Short Refinance has had limited success,  reaching 646 borrowers.
Borrowers who receive a refinance under the FHA Short Refinance program and  who have second liens may qualify for relief under the Treasury/FHA Second  Lien Program. Treasury provides incentives to investors and servicers for  partially or fully extinguishing these second liens. While Treasury allocated $2.7  billion in TARP funds to the program, it had not made any incentive payments as  of December 31, 2011, and no second liens had been extinguished.
There are many other efforts that  have been undertaken, including  those by states, localities, and  private organizations to mitigate  foreclosures. Here we highlight three  other efforts: the FDIC loan  modification program, which was  considered in developing the Home  Affordable Modification Program  (HAMP); the Housing Finance  Agency Innovation Fund for Hardest  Hit Housing Markets, which provides  TARP funds to 18 states and the  District of Columbia to develop  innovative solutions to address  housing problems; and the  Emergency Homeowners Loan  Program, which provided funds to  the remaining 32 states and Puerto  Rico to provide temporary assistance  to unemployed borrowers.
FDIC Loan Modifications: On July 11, 2008, FDIC was named conservator of  IndyMac Federal Bank. Soon after, FDIC developed a loan modification program  to modify nonperforming mortgages owned or serviced by the bank into  affordable loans. Under that program, the goal was to reduce monthly payments  to 38 percent of monthly gross income (this amount was subsequently changed  to 31 percent, the same as HAMP) through capitalization, interest rate reduction,  term extension, and, if necessary, principal forbearance—the same waterfall  used by HAMP.  The loan modification program implemented at Indymac  Federal Bank served as a model for loan modification requirements found in  Shared-Loss Agreements. According to FDIC staff, no federal funds have been  expended for these failed bank resolutions.
Housing Finance Agency Innovation Fund for the Hardest Hit Housing  Markets (Hardest Hit Fund): Treasury obligated $7.6 billion to 18 state housing  finance agencies in states that were designated as among the hardest hit by the  housing crisis, plus the District of Columbia. These states were to develop  innovative solutions appropriate for their states. Treasury approved plans for  these states’ programs, which totaled 55 as of December 2011. These programs  target unemployed borrowers with temporary relief as well as offer loan  modification assistance, refinance options, and foreclosure alternatives.
Emergency Homeowners Loan Program: Through the Emergency  Homeowners Loan Program (EHLP), HUD provided short-term loans to  unemployed borrowers to help meet their mortgage obligations in the 32 states  and Puerto Rico that did not receive Hardest Hit Fund dollars. The program was  designed to provide mortgage payment relief (up to $50,000 total) to eligible  homeowners experiencing a drop in income of at least 15 percent to cover past- due mortgage payments as well as a portion of the homeowner’s mortgage  payment for up to 24 months. HUD permitted five states with similar programs  already in place—Connecticut, Delaware, Idaho, Maryland, and Pennsylvania— to direct their allocations to those programs. NeighborWorks America, a federally  chartered nonprofit organization, administers EHLP for the remaining 27 states  and Puerto Rico that did not receive Hardest Hit Fund dollars and did not have  existing programs similar to EHLP. Applications for funds under EHLP were due  in September 2011. HUD reported that, as of September 30, 2011, slightly more  than half of the $1 billion allocated to the program had been obligated. As of  December 2011, more than 5,500 EHLP loans had been closed and nearly  6,000 other loans were in process.
section_title: Appendix III: Description of GAO’s Methodology to Identify Loan Modifications
paragraphs: This appendix describes the algorithms we developed to identify  mortgages that received a modification action and the steps we took to  demonstrate the reliability of our results. By identifying the modification  actions, we were able to examine the timing and characteristics of  modification activity, and to see how certain characteristics affected the  loan performance of a broad set of modified mortgages. We developed  the algorithms because direct information on loan modifications is not  generally available, and is not reported in the proprietary loan-level data  set of prime, Alt-A, and subprime mortgages compiled by CoreLogic, an  aggregator of monthly mortgage data reported by servicers that have  agreed to provide this information. The CoreLogic data provide wide  coverage of the entire mortgage market—approximately 65 percent to 70  percent of prime loans and about 50 percent of subprime loans, according   First, we took several steps to prepare the data so  to CoreLogic officials.that we would have complete and clean loan performance histories.  Second, we developed algorithms to identify month-to-month changes in  loan terms that would indirectly indicate the presence of modifications.  We reviewed statistics on the volume and features of loan modifications  contained in OCC’s mortgage metric reports and shared our approach  and algorithms with a variety of researchers, analysts, and regulators,  making adjustments in response to their comments. Finally, we assessed  the performance of our algorithms by applying them to a large set of  mortgages serviced by entities subject to OCC’s regulation. These  servicers provided information on modifications and loan and borrower  characteristics directly to OCC.
subsections: section_title: Data Source and Preparation
paragraphs: We began with a sample of mortgages in the CoreLogic database that  met certain requirements. Specifically, we restricted our analysis to first- lien mortgages for the purchase or the refinancing of single-family  residential properties (1- to 4-units) located in the 50 states and the  District of Columbia that were active during the period from January 2007  through June 2011. We took a 15-percent sample of this set of loans that  resulted in a set of 7,608,603 prime (and Alt-A) mortgages and 608,704  subprime mortgages. For each mortgage, the CoreLogic database  provided information on selected loan and borrower characteristics at  origination. It also provided a series of monthly observations on, among  other items, the balance, scheduled payment, interest rate, and mortgage  status (current; 30,60, or 90 or more days delinquent; in foreclosure; real  estate owned; or paid in full). This yielded a panel data set with a  sequence of monthly observations for each loan. Because we required  information on month-to-month changes for certain loan characteristics,  such as balance and interest rate, we needed complete and reliable  information on these characteristics for each month that a loan was active  during the period. However, many mortgages, particularly subprime  mortgages, had an incomplete set of monthly observations, often  because a servicer stopped providing information to CoreLogic. In these  cases, we had a sequence of monthly observations early on but not  complete information for our entire period, even though the mortgage was  still active. We also had incomplete data for loans that were transferred  from servicers that did not participate with CoreLogic to servicers that did  and for loans with servicers who joined CoreLogic later in our sample  period, leaving us without information on the earlier mortgage activity. We  excluded loans with these and other data-reporting issues that impaired   For the  our ability to identify loan modifications over our time period.remaining loans (those with complete information), we calculated the  changes in interest rate, balance, and scheduled payment from their  values in the previous month.
section_title: Development of Algorithms
paragraphs: To identify modification actions we developed decision rules or algorithms  for identifying monthly changes in mortgage terms that were likely to  indicate an actual modification action. Some changes to mortgage terms  were expected, but others were not. For instance, in the case of a fully  amortizing, fixed-rate mortgage, the interest rate should not change for  the entire duration of the mortgage. Thus any change to the interest rate  should indicate a modification. But in the case of an adjustable rate  mortgage (ARM) or hybrid mortgage, the interest rate changes in  expected ways according to reset provisions in the mortgage contract.  Thus, a change to the interest rate in a month in which a rate change was  expected and by an amount consistent with identified reset parameters  would likely not indicate a modification. Our decision rules differed  depending on whether a mortgage was a fixed-rate mortgage, ARM, or  hybrid mortgage.
Because we could observe month-to-month changes in interest rates and  loan balance, our algorithms focus on interest rate decreases, balance  increases, and balance decreases that were likely to indicate a  modification. We relied on rules developed by Federal Reserve Bank  researchers to inform our initial screens. Their approach screened out  quite small changes and set upper and lower bounds on balance  changes. In some contexts, they also used information on a loan’s  performance status as part of their decision rules—for instance, by  requiring that observed changes be counted as modifications only if the  mortgage was delinquent before the observed change. We modified  these concepts, initially, accepting as potential modifications even very  small changes in interest rates and balances. We did not impose upper  bounds on balance changes, and we did not require that loans be  delinquent. We made the latter decision because the HAMP program  provides modifications for borrowers who are in imminent risk of default  on their mortgages, even though they may be current in their payments.  Additionally, in the case of prime, subprime and Alt-A hybrid loans, and  subprime ARM loans, we compared the interest rate in the month of a  rate change to the rate that equaled the loan’s specified margin and the  specified index interest rate that was used to determine any adjustments.  If the rate in the month of a rate change was lower than our calculated  rate by more than 100 basis points, we accepted the change as a  modification because the decrease was large relative to what would be  expected.
We placed each identified action into one of five broad categories:  capitalization accompanied by a rate reduction; capitalization only; rate  reduction only; balance decrease accompanied by a rate reduction; and  balance reduction only. For a month-to-month balance decrease, we  could not distinguish between balance forbearance and balance  forgiveness. In addition, because these month-to-month changes were  net changes, we could not identify modifications in which arrears were  added to the balance (capitalization) at the same time as an offsetting  balance reduction. For example, we could not distinguish a (net) balance  decrease modification from a modification in which a capitalization is  more than offset by balance forbearance or forgiveness. Similarly, we  could not distinguish a (net) balance increase modification from a  modification in which a capitalization is less than offset by balance  forbearance or forgiveness.
After examining the resulting volume, timing, and composition of our initial  set of identified actions and incorporating information from OCC mortgage  metric data, we tightened our screens by adjusting the lower bounds,  including upper bounds, and imposing some loan performance conditions  (see table 2). We discussed our general approach with Federal Reserve  Bank researchers, OCC staff, representatives from CoreLogic, and  representatives from Amherst Securities Group, LP. Further, we  discussed our preliminary results with these researchers, OCC staff, and  representatives from CoreLogic.
We did not attempt to identify modifications with only a term extension  characteristic because of data reliability issues concerning information on  a loan’s original term and maturity date and because this type of  modification occurred fairly infrequently. However, for months in which we  did find a rate change or balance change, we solved for the amortization  period associated with other mortgage characteristics at modification, and  estimated whether and by how much the mortgage term had been  extended. Specifically, we placed each action into one of three term  extension categories: with term extension (if the estimated term extension  was between 4 and 200 months); no term extension (if the estimated term  extension was less than 4 months or greater than 200 months); or  unknown term extension (if we were not able to calculate a measure of  term extension).
section_title: Robustness Test
paragraphs: Our algorithms performed well when applied to a database of mortgages  containing information reported by servicers on both modified and  nonmodified loans. We were able to obtain information from OCC’s  database on mortgage characteristics and monthly loan performance for  two samples of 1,000,000 loans that were active for at least some portion   One sample  of the period from January 2009 to December 2010.included known modified loans, the other loans that had not been  modified. We used similar data cleaning steps we developed for the  CoreLogic data to screen out mortgages without complete and reliable  histories and selected only fixed-rate mortgages for our robustness test.  We examined fixed-rate mortgages because they were by far the most  prominent mortgage type in our CoreLogic data sample. Because ARMs  by definition have more month-to-month changes than fixed-rate  mortgages, algorithms for ARMs are likely to be less successful in  identifying true modifications. To the extent that ARMs were  proportionately more troubled and more likely to be candidates for  modification, this difficulty was a limitation Nonetheless, we believe our  overall approach was reasonable and reliable. Furthermore, our  econometric analysis in appendix V is robust to the issue of ARM  modifications.
We were left with 434,635 fixed-rate mortgages with known modifications  and 513,645 fixed-rate mortgages without modifications. When we  applied our algorithms to the set of 434,635 modified mortgages, we  identified 415,367 as having at least one modification action. Because a  mortgage can receive a modification action in more than one month, we  identified a total of 450,131 modification actions over this time period.  Table 3 shows the relationship between OCC’s data and GAO’s at the  loan level, combining the known modified and nonmodified loans.
Of the 434,635 loans for which there was at least one directly reported  modification action, we missed 19,268 (4.4 percent) of them. We believe  that this percentage is an acceptable incidence of false negatives. Of the  loans for which our algorithms did not indicate a modification, about 10  percent of the actions were reported to be term extensions only. We did  not develop algorithms for this type of modification because of data  limitations and evidence that term extensions only were not frequent.  Approximately 40 percent were rate reductions only with very small rate  movements, and approximately 30 percent were capitalization-only  actions. For the set of 513,645 nonmodified loans, our algorithms  identified 2,240 loans with at least one modification action, or 0.4 percent  of these loans. OCC staff expressed concerns about the usefulness of an  algorithmic approach to the identification of modifications. Nonetheless,  we interpret our low rate of false negatives in conjunction with this low  false positive rate to mean that our decision rules were appropriate. That  is, our algorithms found virtually all of the known modifications and very  few modifications in the nonmodified sample.
We were also interested in assessing how the volume of modification  actions captured by our algorithms compared to the volume of directly  reported modification actions over time. In OCC’s monthly mortgage data,  we defined the month of a modification as the month when the database  field for the date of last modification matched the month of the data  record. For example, in the February 2010 data record, the date of last  modification indicated that a modification occurred in February 2010. In  some cases, however, the date of last modification was not reported until  after the fact—for example, a data record for September 2010 might  provide the first indication that a modification had occurred in June 2010.  In these cases, we selected as the month of modification the month  indicated as the month of last modification, even if it was not reported  until later. We totaled modification actions for each month from January  2009 through December 2010 for the directly reported actions and for  those identified by our algorithms. Figure 20 presents the modification  volume during the period and shows that the pattern indicated by the  application of our algorithms is comparable to the pattern of modifications  provided directly by servicers.
section_title: Appendix IV: Loans with Characteristics Associated with Increased Likelihood of Foreclosure
paragraphs: We analyzed CoreLogic data to identify the number and percentage of  prime and subprime loans with characteristics associated with an  increased likelihood of foreclosure in June 2009, 2010, and 2011.  Specifically, we analyzed loans with the following characteristics that we  identified as being associated with an increased likelihood of foreclosure: delinquency of 60 days or more;  current loan-to-value (LTV) ratio of 125 percent or higher;  local area unemployment of 10 percent or higher and current LTV of  125 percent or higher; mortgage interest rate that is 1.5 percentage points or 150 basis  points above market rate; origination credit score of 619 or below; and origination LTV of 100 percent or greater.
We analyzed the volume of prime and subprime loans with each  characteristic as of June 2009, 2010, and 2011. In addition, we evaluated  these characteristics by performance, investor (prime loans only), loan  type (prime loans only), and product type at origination. Finally, we  assessed the extent to which loans had multiple characteristics and the  prevalence of overlap among characteristics. For a detailed description of  our analysis, please see appendix I.
section_title: Appendix V: Description of GAO’s Econometric Analysis of Redefault of Modified Loans
paragraphs: This appendix provides (1) a summary of the characteristics of loans in  the CoreLogic proprietary loan-level servicing database that we used in  our econometric analysis of loans that redefaulted (became 90 days or  more delinquent or in foreclosure) 6 months after receiving loan  modification actions and a comparison of the characteristics of loans in  the CoreLogic data set and Treasury’s Home Affordable Modification  Program (HAMP) data set, and (2) the results of our econometric analysis  of the relationship between redefault rates and modification actions,  controlling for several observable borrower and loan characteristics.
We used the CoreLogic database to analyze loans that had been  modified under a variety of programs, including proprietary programs and  federal programs, such as loans modified through the Department of the  Treasury’s HAMP. In addition, we analyzed information from a Treasury  database that contained information only on loans that were considered  for or received HAMP loan modifications. Although the CoreLogic data set  does not include data from all servicers, because it covers a significant  portion of the mortgage market, we used it to approximate the universe of  loans. The HAMP data set includes loans that had initiated trial  modifications and loans that had converted to permanent modifications. For our analysis of HAMP data, our redefault rate is only for permanent  modifications. For the CoreLogic data, we could not distinguish between  trial and permanent modifications.
Using the above data, we described the borrower and loan characteristics  of modifications from the universe of loans represented in the CoreLogic  database and loans in the HAMP data set. We compared differences  between them, focusing on the differences in borrower and loan  characteristics, and in loan performance. We also used an econometric  analysis to examine the characteristics of borrowers and loans that  redefaulted postmodification. First, we looked at the effectiveness of  different modification actions (e.g. interest rate reductions, term  extensions, loan balance reductions) in reducing redefaults. Second, we  compared the effectiveness of HAMP modifications and the universe of  modifications identified in the CoreLogic data in reducing redefaults.  Third, we examined whether a relationship existed between monthly  payment reductions and redefault rates. Finally, we looked at the effect of  borrower and loan characteristics (such as the delinquency status of the  borrower prior to receiving loan modification and negative home equity)  on redefault rates.
subsections: section_title: Data Used
paragraphs: The CoreLogic database contains loan-level information on mortgage  servicing. According to CoreLogic officials, it covers approximately 65 to  70 percent of the prime loans and about 50 percent of the subprime loans  in the U.S. mortgage market. The database contains detailed information  on the characteristics of purchase and refinance mortgages. We used  these data to represent the universe of loans that received modification  actions between January 2009 and December 2010. We constructed data  for loans that had aged at least 6, 12, or 18 months since modification.  Although a loan could receive multiple modification actions over time, we  recorded each modification action for the same loan as a separate loan.  The data contain static and dynamic monthly data files. The static data  fields are populated as of loan origination and include variables such as  the loan purpose and product type. This is supplemented by monthly  data fields (“transactional” data) that reflect the current loan terms (such  as interest rate) and loan performance. The CoreLogic database has  limitations, including the lack of data on some important variables, such  as the type of modification action and FICO credit scores at the time of  loan modification. Because this data set did not contain direct information  about the presence of modifications, we developed a set of algorithms to  infer if the loan had been modified. In addition, the CoreLogic database  has incomplete information on key variables, such as second-liens and  loan investor or ownership. We explicitly excluded from the analysis  mortgages with certain characteristics, including loans that were paid off  or in real estate owned (REO) status; liens other than first-liens; loans  made for unknown purposes or purposes other than purchase or  refinancing; loans with missing or invalid data on the underlying property  type; loans for multifamily dwellings with five or more units; loans for  mixed-use properties; and loans for commercial units. For computational  tractability, we used a 15-percent random sample of the CoreLogic  database. The data comprise loans modified between the first quarter of  2009 and the fourth quarter of 2010. The sample we used for the analysis  generally contained more than 90,000 loans that had redefaulted—that is,  were 90 days or more delinquent or in foreclosure—within 6 months of  the modification after using an algorithm to identify loans that received  modifications, using several filters, and excluding missing observations.  Because of limitations in the coverage and completeness of the  CoreLogic database, our analysis may not be fully representative of the  mortgage market as whole. Nonetheless, we have determined that the  data were sufficiently reliable for the purposes of our study.
The second database we used contained information from servicers that  participate in HAMP. start of the trial modification period, during the trial period, during  conversion to a permanent modification, and monthly after the conversion  to a permanent modification. Through the fourth quarter of 2010, 15 large  servicers held 85 percent of the loans, and the rest of the loans were  serviced by a few hundred small servicers. Table 19 contains a complete  list of variables from the CoreLogic and HAMP databases.
Servicers of nonenterprise loans and loans not insured by FHA, VA, and USDA  undertake modifications based on the HAMP guidelines while servicers of Fannie Mae  and Freddie Mac loans modify loans using guidelines from the enterprises.
Modified loan becomes 90 or more days past due (dpd) or in  foreclosure within 6 months  Modified loan becomes 90 or more days past due (dpd) or in  foreclosure within 12 months  Modified loan becomes 90 or more days past due (dpd) or in  foreclosure within 18 months  Percentage change in monthly payment of principal & interest  Payment reduction is less than10%  Payment reduction is between 10% and 19%  Payment reduction is between 20% and 29%  Payment reduction is between 30% and 39%  Payment reduction is between 40% and 49%  Payment reduction is between 50% and 59%  Payment reduction is 60% or higher  Change in interest rate (bps)
subsections: section_title: TERM CHANGE (months) Borrower and loan characteristics at modification CURRENT, AT MOD
paragraphs: Definition   FICO greater than or equal to 620 and less than 660 at  modification  FICO greater than or equal to 660 and less than 680 at  modification  FICO greater than or equal to 680 and less than 700 at  modification  FICO greater than or equal to 700 and less than 750 at  modification  FICO greater than or equal to 750 at modification  Current loan-to-value (CLTV) ratio at modification  CLTV is greater than or equal to 10% and less than 80% at  modification  CLTV is greater than or equal to 80% and less than 95% at  modification  CLTV is greater than or equal to 95% and less than 100% at  modification  CLTV is greater than or equal to 100% and less than 115% at  modification  CLTV is greater than or equal to 115% and less than 125% at  modification  CLTV is greater than or equal to 125% and less than 150% at  modification  CLTV greater than or equal to 150% at modification  Housing backend debt-to-income ratio (DTIBE), at modification  DTIBE is greater than or equal to 30% and less than 35% at  modification  DTIBE is greater than or equal to 35% and less than 40% at  modification  DTIBE is greater than or equal to 40% and less than 45% at  modification  DTIBE is greater than or equal to 45% and less than 50% at  modification  DTIBE is greater than or equal to 50% and less than 55% at  modification  DTIBE is greater than or equal to 55% and less than 65% at  modification  DTIBE is greater than or equal to 65% at modification  Percentage change in house prices after modification, zip code  level  Change in unemployment rate after modification, county level  Interest rate at modification (basis points)
section_title: Variable (unit used) MOD REQUIRES PMI Loan modification start MOD STARTED, 2009Q1
section_title: Borrower and loan characteristics at origination FICO CREDIT SCORE, AT ORIGN
paragraphs: Fair Isaac Corporation (FICO) credit score at loan origination  FICO greater than or equal to 350 and less than 550 at loan  origination  FICO greater than or equal to 550 and less than 580 at loan  origination  FICO greater than or equal to 580 and less than 620 at loan  origination  FICO greater than or equal to 620 and less than 660 at loan  origination  FICO greater than or equal to 660 and less than 680 at loan  origination  FICO greater than or equal to 680 and less than 700 at loan  origination  FICO greater than or equal to 700 and less than 750 at loan  origination  FICO greater than or equal to 750 at loan origination  Loan-to-value (LTV) ratio at origination  LTV greater than or equal to 10% and less than 70% at  origination  LTV greater than or equal to 70% and less than 80% at  origination  LTV equal to 80% at origination  LTV greater than 80% and less than 90% at origination  LTV greater than or equal to 90% and less than 100% at  origination  LTV greater than or equal to 100% at origination  Interest rate at origination (basis points)
section_title: Variable (unit used) Other: product characteristics
paragraphs: If loan is owned by government-sponsored enterprises (Fannie  Mae or Freddie Mac)
If loan is owned by non-agency private investors  If loan is owned by lender  Prime loan = 1, subprime loan = 0  Adjustable rate (ARM) = 1, Fixed rate (FRM) = 0  Condominiums, including PUDs (planned unit developments)
Other housing units, including cooperatives  Conventional loans (nongovernment owned or guaranteed loans)
Federal Housing Administration (FHA) loans  Veterans Affairs (VA)
If owner-occupied housing versus a nonowner occupied   Loans for refinance, with cash-out  Loans for refinance, without cash-out  Loans for refinance, reason unknown  Loan originated in 2003 or before  The payment change is the result of modification actions, including, rate reduction, balance reduction  (from principal forgiveness or principal forbearance), capitalization, and term extension.
This modification action includes a rate reduction.
This modification action includes a balance reduction.
This modification action includes principal forgiveness.
This modification action includes principal forbearance.
This modification action includes capitalization.
This modification action includes a term extension.
The data do not include second liens.
Housing price data are from CoreLogic.
Unemployment data are from the Bureau of Labor Statistics.
Includes loans originated on January 1, 2009.
We discuss selected key characteristics of the universe of loans in the  CoreLogic database using the average values of the variables (see table  20). Data for all loans are in column A, and prime and subprime loans are  in columns B and C, respectively. The overall redefault rate 6 months  after modification is 18 percent for all loans: 17 percent for prime loans,  and 19 percent for subprime loans. Prime loans make up 85 percent of  the universe of loans in the data set and subprime loans 15 percent.  Eighty-eight percent of the loans have fixed rates (FRM) at origination,  and the rest have adjustable rates (ARM).
The modification actions we identified were generally used in combination  with other actions, much like the modification actions in the OCC  Mortgage Metrics database. For loan modifications that include interest  rate changes, the average change in interest rate is 299 basis points  (bps), or 2.99 percentage points, and 289 bps and 361 bps for prime and  subprime loans, respectively. In loan modifications, the balances  decrease with principal forgiveness or principal forbearance but increase  with capitalization. For modifications that include balance reductions,  the average reduction is 20 percent (20 percent and 16 percent for prime  and subprime loans, respectively). The capitalized amounts averaged 6  percent of the balances (6 percent and 8 percent for prime and subprime  loans, respectively). The average increase in loan term used in  combination with other modification actions is 96 months (95 months for  prime loans and 101 months for subprime loans). The average reduction  in monthly principal and interest payments as a result of changes in  interest rates, loan balances, and loan term from the modifications is 24  percent of the payments at modification and amounts over $250. The  payment reductions are 24 percent and 25 percent for prime and  subprime loans, respectively. Thus the changes in the modification  actions were generally larger for subprime loans than for prime loans,  implying that the modifications helped subprime borrowers the most.
About 83 percent of the modified loans identified in the CoreLogic data  set were seriously delinquent (at least 90 days past due or in foreclosure),  including 85 percent for prime and 74 percent of subprime loans. Ten  percent of prime loans were in foreclosure, compared with 20 percent of  subprime loans. The CLTV ratios at the time of modification were 108  percent overall (107 percent for prime loans and 112 percent for subprime  loans). These ratios had increased since origination—24 percent for   House prices continued  prime loans and 30 percent for subprime loans. to decline for the 6 months after modifications, falling by about 2 percent,  on average. The overall FICO credit score at the time of origination is  657, but scores for prime and subprime loans differed widely (666 and  609, respectively). The CLTV ratios and FICO scores are consistent with  the relatively low quality of subprime loans. Overall, unemployment  rates declined by less than 1 percent (among prime loans rates  decreased by 0.08 percent compared to an increase of 0.2 percent for  subprime loans).
Many observations are missing data on the loan investor or ownership,  especially for subprime loans. The majority of the prime loans identified  are owned or guaranteed by the enterprises, while the majority of the  subprime loans are private-label securitized (PLS) loans. Overall, portfolio  loans slightly outnumber PLS loans. About 84 percent of the prime loans  are conventional, with FHA accounting for 15 percent and VA and other  government-guaranteed loans for the remaining 1 percent. All subprime  loans are conventional. Almost all the loans (96 percent) are for owner- occupied housing, and a slight majority (55 percent) were for  refinancings. The average unpaid principal balance for prime loans at the  time of origination was $222,617, compared with $197,079 for subprime  loans. About 67 percent and 73 percent of prime loans and subprime  loans, respectively, were originated between 2005 and 2007.  Modifications increased in 2010 compared to 2009, partly because of  HAMP and included a larger share of prime loans as the available pool of  subprime loans dwindled.
section_title: Comparison of CoreLogic and HAMP Data Sets
paragraphs: We compare certain borrower and loan characteristics using comparable  data from the universe of loans as represented by the CoreLogic data and  HAMP loans found in the Treasury data. We restricted the CoreLogic data  to first-lien loans for owner-occupied housing that received modifications  between the fourth quarter of 2009 and the second quarter of 2010, and  that received payment reductions.
The HAMP database has certain limitations. The data were sometimes  missing or questionable, as indicated by the Department of the  Treasury. Also, we constructed the performance history of HAMP loans  using several monthly databases. Since we did not have data for  February 2010 and April 2010, we assumed that the performances was  the same as in the following months, March 2010 and May 2010,  respectively. We do not expect this assumption to affect our results, since  redefault is defined as 3 or more consecutive months of delinquency.We excluded observations if loan performance data were missing for any  of the months. Generally, we believe that the constructed loan  performance data become more reliable as the number of months since  modification increases, as the quality of HAMP data has been improving  over time. As a result, we compare CoreLogic and HAMP loans that are  at least 12 months postmodification or that have redefaulted within 12  months. We believe that the HAMP data we use are sufficiently reliable  for our purposes.
In table 21, the data indicate that the redefault rate is much higher for  CoreLogic than for HAMP loans (26 percent and 16 percent, respectively,  12 months after modification). The HAMP data we use are for participants  with permanent modifications—those who have successfully completed  the trial modification. Most of the CoreLogic loans were far advanced in  their delinquency prior to the modification, with about 89 percent 90 days  or more delinquent or in foreclosure, compared to 61 percent of HAMP  loans. The overall changes resulting from modification actions were  generally largest for HAMP loans, which had an average payment  reduction of 37 percent, compared to 30 percent among CoreLogic loans.  The current LTVs were 109 percent and 140 percent, respectively, in the  CoreLogic and HAMP databases, but there was not much difference  between the loans at the time of origination, when the LTVs were 83  percent and 82 percent, respectively. Thus the decline in equity was 26  percent for the CoreLogic loans and 58 percent for HAMP loans. The  majority of the modified loans were originated between 2005 and 2007.
We discuss below the models we developed and used to estimate the  likelihood of redefault after modifying the typical loan (using the  CoreLogic and HAMP databases), and the estimated results and  robustness checks of the estimates. Unlike the descriptive statistics, this  approach allows us to determine the relationship between the redefault  rate and modification actions, holding other factors constant (including  borrower and loan characteristics). Similarly, this approach also allows us  to determine the relationship between the redefault rate and certain  borrower or loan characteristics holding all the other borrower and loan  characteristic in the model constant.
Following the literature, we grouped into four categories the factors that  generally affect whether a loan modified permanently through government  and proprietary modification programs would redefault: borrower and loan  characteristics at origination, borrower and loan characteristics at  modification, geographic market and time effects, and investor/lender and  servicer effects. We also note that, the redefault rate can be affected by  the type of loan modification action. Typically, the modification lowers the  monthly principal and interest payments by changing the interest rate,  term, or loan balance. We use reduced-form multivariate probabilistic  regression models, an approach used to examine choices and evaluate  various events or outcomes, to help determine these effects.
Accordingly, based on economic reasoning, data availability, and  previous studies on loan performance, we use a relatively flexible  specification to estimate the likelihood that a loan that has been modified  redefaults.equals 100 if a loan that has been permanently modified redefaults within  6 months and 0 if the loan is still active and current. The explanatory  variables that we include in the model to explain loan redefaults are  borrower and loan characteristics and modification actions, conditioned  by the available data. The complete list of variables available for the  analysis is in table 19.
The dependent variable for the redefaults is binary and  We discuss results for redefault in the universe of loans using the  CoreLogic database. The regression estimates are in table 22. We  estimated the models using the ordinary least squares (OLS) regression  technique.  Overall, the models are significant, and most of the variables  are statistically significant at the 5-percent level or better. The effects (the  direction of their impacts) are generally consistent with our expectations.  We discuss below the key findings, based on statistically significant  changes in the likelihood of redefaults, using the estimated marginal  effects of the explanatory variables.
The regression results from estimating redefault in the universe of loans  using the data in table 20 are presented in table 22 (based on the  CoreLogic database) for the combined prime and subprime loans. The table presents regressions of redefault indicators (a modified loan  becoming 90 days or more delinquent within 6 months of the modification)  on modification actions—monthly payment changes, interest rate  changes, balance reduction, capitalization, and term changes. In addition  we include information on the borrower and the loan. The estimates were  generated using the OLS technique. Fixed-effects estimates for loan  origination year and zip codes are not reported, for brevity. The reported  estimates are marginal effects (percentage point differences). The  standard errors are presented in parentheses, and *, **, and *** denote  two-tailed significance at 10 percent, 5 percent, and 1 percent or better,  respectively.
We discuss the results from the redefault model using the CoreLogic data  set, which represents the universe of loans, using the estimates in table  22.  We start with the effects of modification actions on the redefault  rate.
We first discuss the payment change, which is an outcome of the  modification actions (rate change, balance reduction, capitalization, and  term extension). For policy purposes, the payment change is important for  loan modifications because it indicates whether the modification is  affordable to the consumer. But while the payment change is important to  the consumer, the type of modification action is also important to the  lender/investor, because certain actions may not be feasible given the  terms of the mortgage or could result in lower returns. For this reason, we  also discuss the effects of the modification actions, independent of the  resulting payment change. In general, modification actions that make the  loan affordable are expected to lower the redefault rate.
Payment change: Using the coefficient estimate of -0.174 for the  impact of payment change in table 22, we note that the larger the  reduction in monthly principal and interest payments, the less likely  the loans are to redefault. In particular, a 24-percent (the average)  reduction in monthly payments would reduce the likelihood of  redefault by 4 percentage points from the baseline redefault rate of 18  percent to 14 percent.
Rate change: Using the coefficient estimate of -0.008 for the impact  of rate change in table 22, we find that the larger the reduction in the  interest rates of loans that receive interest rate reductions and at least  one other modification action, the lower the redefault rate. A decrease  of 302 bps (the average) would decrease the redefault rate by 2  percentage points from the baseline redefault rate of 16 percent to 14  percent.
Balance reduction: Although the coefficient estimate for the impact  of balance reduction in table 22 indicates, unexpectedly, that  modifications that include balance reductions increase redefaults, the  result is generally not robust. For instance, the estimates are  insignificant when loans with balance reductions of 40 percent or  more are excluded. Furthermore, the sample size used for the  analysis is relatively small for the result to be meaningful.results are inconclusive regarding the impact on the redefault rate of a  modification action that includes a balance reduction, the baseline  redefault rate of these loans is generally low, at 11 percent, compared  to the overall redefault rate of 18 percent, which is the baseline  redefault for the pool of loans used to estimate the payment reduction  equation.
Capitalization: Using the coefficient estimate of 0.947 for the impact  of capitalization in table 22, we see that the larger the proportion of  the amount capitalized, combined with other modification actions, the  higher the redefault rate. A capitalization of 6 percent of the loan  balance (the average) would increase the redefault rate by 6  percentage points from the baseline redefault rate of 19 percent to 25  percent.
Term extension: Using the coefficient estimate of -0.012 for the  impact of term extension in table 22, we note that the redefault rate  falls as the term extension increases. A term extension of 99 months  (the average) would reduce the redefault rate by 1 percentage point  from the baseline redefault rate of 19 percent to 18 percent.
We discuss key results for borrower, loan, and other characteristics  based on results for the payment regression equation in column 1 of table  22. The payment reduction is an amalgamation of several modification  actions, and the results are generally similar to the estimates in the  regression equations for the other modification actions (columns 2  through 5). We present the effects—most of which are expected—on the  redefault rate of borrower and loan characteristics at modification.
Delinquency status at modification: As expected, the results  indicate that the more delinquent the loan at modification, the higher  the redefault rate.
House price depreciation: The redefault rates of loans are higher for  higher CLTVs, as expected. Continued depreciation in house prices  after the loan modification also increases the redefault rate.
Unemployment rate: The redefault rates of loans are higher in areas  where the unemployment rate has increased since the modification,  as expected.
Interest rate at modification: Loans with higher interest rates at the  time of modification are more likely to redefault, as expected.
Time of modification: Loan modifications that started prior to the  fourth quarter of 2009 are more likely to redefault than those modified  in later periods, probably because over time servicers learned which  actions were more effective.
We also present results of the effects of borrower and loan characteristics  at origination on redefault rate:  Credit score at origination: The higher the FICO credit scores at  origination, the less likely loans are to redefault, as expected.
LTV at origination: The redefault rates of loans with higher LTVs at  origination are less likely to redefault, an unexpected result. However,  the effects are generally not statistically significant. These results are  therefore inconclusive.
Interest rate at origination: Loans with higher interest rates at  origination are less likely to redefault, an unexpected result. The  reason for this result is not clear.
We present results of other loan characteristics on the redefault rate:  Investor/lender: As we have already mentioned, a substantial  amount of data on the loan investor or ownership are missing or  unavailable, especially for subprime loans. When we include the  investor variable in the model using the limited available data for  prime loans, we find that the redefault rates of portfolio loans and  private-label securitized loans are lower than Fannie Mae and Freddie  Mac loans. Excluding the Fannie Mae and Freddie Mac loans,  portfolio loans were less likely to redefault compared to private-label  securitized loans.servicers have better information about borrowers in their pools of  portfolio loans than they have about those in the pool of private-label  securitized loans. This finding is also consistent with the notion that  servicers modify loans differently based on investor or ownership  type.
The difference in the redefault rates could be that  Adjustable Rate Mortgages (ARM): Loans with ARMs were more  likely to redefault than those with fixed rates, as expected.
Property type: Loans for condominiums were more likely to redefault  than loans for single-family houses.
Loan type: FHA and VA loans were less likely than conventional  loans to redefault. The reason for this finding is not clear.
Loan purpose: Loans for refinancing, with or without cash-outs, were  less likely to redefault than purchase loans. The reason for this effect  is not clear.
We now compare the effects of the loan modifications in the CoreLogic  data, which represent loans that had been modified under a variety of  proprietary and federal programs, to the effects of loan modifications  made under HAMP. To make the two data sets comparable, we restricted  the CoreLogic data set to owner-occupied housing, since HAMP modified  only this type of housing during the applicable period (fourth quarter of  2009 to second quarter of 2010). The modification also had to reduce the  monthly payment. We also assumed that modification actions resulted in  the same changes to the loan terms. The analysis includes loans that  redefaulted 12 months after they were modified. We used 12 months after  modification instead of 6 months because of HAMP data limitations,  which we mentioned earlier. A summary of the results is presented in  table 23. The full estimates for CoreLogic and HAMP data are in table 24  and 25, respectively. The values represent the incremental effects, which  are the product of the estimated coefficients from regression estimates of  loan redefaults within 12 months of modifications and the average  changes in the modification actions based on the CoreLogic data  representing the universe of loans.
We find that the reduction in redefault rates is similar for loans in both  data sets that are modified to lower monthly payments. For loans from the  CoreLogic data set, a 30 percent payment reduction decreases the  redefault rate by about 9 percentage points. For HAMP-modified loans,  the same reduction results in a 10-percentage-point decrease. The  results are generally similar for rate reduction and capitalization, actions  commonly used for loans in both data sets.
Although we could not separately identify actions that resulted in principal  forgiveness and principal forbearance in the CoreLogic data, our analysis  of HAMP found that the 12-month redefault rate for loans that received  principal forgiveness was 8 percent, and that for loans receiving  forbearance 12 percent. Both rates are lower than the overall redefault  rate for all HAMP loans, which was 15 percent. When controlling for  observable borrower and loan characteristics, however, we found that the  effect of principal forgiveness on the redefault rate was inconclusive,  while larger forbearance lowers the redefault rate.
Table 24 presents regressions of a redefault indicator (a modified loan  becoming 90 days or more delinquent within 12 months of the  modification) on modification actions—monthly payment changes, interest  rate changes, balance reduction, capitalization, and term changes—for  the CoreLogic data. The regression includes information on the borrower  and the loan. We used the OLS technique, and fixed-effects estimates for  loan origination year and zip codes are not reported, for brevity. The  reported estimates are marginal effects (percentage point differences).  The standard errors are presented in parentheses, and *, **, and ***  denote two-tailed significance at 10 percent, 5 percent, and 1 percent or  better, respectively.
Table 25 presents regressions of a redefault indicator (a modified loan  becoming 90 days or more delinquent within 12 months of the  modification) on modification actions—monthly payment changes, interest  rate changes, principal forgiveness, principal forbearance, capitalization,  and term changes—for the HAMP data. The regression includes  information on the borrower and the loan. We used the OLS technique.  Fixed-effects estimates for loan origination year and zip codes are not  reported, for brevity; and fixed effects for the servicers are not reported  for reasons of confidentiality. The reported estimates are marginal effects  (percentage point differences). The standard errors are presented in  parentheses, and *, **, and *** denote two-tailed significance at 10  percent, 5 percent, and 1 percent or better, respectively.
Using the loans from the CoreLogic data, we estimated the impact of  decreases in monthly payments on redefault within 6 months of  modification, limiting the data to payment decreases and within set  ranges. These included payment decreases—0 percent to less than 10  percent (the reference category), 10 percent to less than 20 percent, 20  percent to less than 30 percent, 30 percent to less than 40 percent, 40  percent to less than 50 percent, 50 percent to less than 60 percent, and  more than 60 percent. We also included all the controls used in the  previous estimates (see table 22). An abridged version of the estimates is  presented in table 26 (only for the buckets of payment decreases). The  first bucket is used as the reference group, and the reported estimates  are marginal effects (percentage point differences). The standard errors  are presented in parentheses, and *, **, and *** denote two-tailed  significance at 10 percent, 5 percent, and 1 percent or better,  respectively. The relationship between the payment decreases and  redefault rate is shown in figure 21, based on the estimates in column 1 of  table 27. We also summarize below the results for the separate  modification actions in columns 2 to 5 of table 27.
As shown in figure 21, there is a tradeoff between decreases in monthly  payments as a result of modification actions and the redefault rate. That  is, as the payments decrease, the redefault rate generally decreases, but  only up to a certain point. As an example, irrespective of the modification  action (except for balance reduction), the redefault rate is 12 percent for  loans receiving a 40-percent reduction (the lowest redefault rate), but  rises to 20 percent for loans receiving a reduction of less than 10 percent.  The data also show that the majority of the loans received payment  reductions of less than 30 percent. We obtain similar effects for the  specific modification actions—rate reduction, balance reduction,  capitalization, and term extension. The modification actions generally  result in lower redefault rates as the payment reductions increase, except  for balance reductions (see fig. 21). Some of these actions were much  more commonly used than others—for example, interest rate reductions  and capitalization were used far more frequently than term extensions  and reducing the balance (see fig. 21). Also, the majority of the loans  receive payment reductions of less than 30 percent, except for balance  reductions which generally result in payment reductions exceeding 40  percent.
Several borrower and loan characteristics at modification strongly predict  redefaults, but their impacts differ according to how much payments are  reduced and the type of loan or borrower characteristics. Overall,  borrower and loan characteristics at the time of modification are predictive  of redefault. Large payment reductions generally help borrowers with high  credit risks more than they help other borrowers. High-risk borrowers  generally have high CLTV ratios, high unemployment rates after  modification, and increased delinquency prior to modification. These  borrowers are sensitive to large payment reductions possibly because  they cannot afford their mortgages, but we could not control for  affordability in the model because of a lack of usable data on the debt-to- income (DTI) ratio.
We find that payment reductions are more effective in reducing redefault  rates for borrowers with high CLTV ratios, especially those with ratios  above 125 percent (see table 28 and fig. 22). For instance, the baseline  redefault rate is 18 percent for borrowers with a CLTV of at least 125  percent and 13 percent for those with a CLTV of less than 95 percent.  With a payment reduction of less than 10 percent, the redefault rates are  25 percent and 16 percent for these two groups, respectively, but fall to  16 percent and 12 percent for payment reductions of 30 percent to 39  percent. Among the loans we analyzed, about a third had a CLTV of less  than 95 percent and about a quarter had a CLTV of 125 percent or more.  For all CLTV categories, the majority of the loans received payment  reductions of less than 30 percent.
Payment reductions are more effective in reducing redefault rates for  borrowers in areas where the unemployment rate increased after  modification (see table 29 and fig. 23). For instance, the baseline  redefault rate is 18 percent for borrowers who are located in areas that  experienced higher unemployment rates and 13 percent for those  experiencing lower unemployment rates. With a payment reduction of  between 50 to 59 percent, the redefault rate reduces to about 14 and 12  percent, respectively. Among the loans we analyzed, the proportion of  loans located in areas with increases in or no change in unemployment  rates was slightly lower than those located in areas with decreases in  unemployment rates. For both unemployment categories, the majority of  the loans received payment reductions of less than 30 percent.
Payment reductions are more effective for borrowers who are 90 days or  more past due (see table 30 and fig. 24). For instance, the baseline  redefault rate is 17 percent for borrowers who are 90 days or more  delinquent. But with a payment reduction of at least 40 percent, the  redefault rate reduces to 13 percent. The payment reductions are  generally not very effective for the other borrowers, including those in  foreclosure. Among the loans we analyzed, almost three-quarters were  90 days or more past due. For all loan performance categories, the  majority of the loans received payment reductions of less than 30 percent.
To ensure that the results were reliable, we performed several checks of  robustness for the main results reported for the CoreLogic data set in  column 1 of table 22 for payment reductions. We find that the results of  the checks are generally consistent with what we have reported.
First, we estimated the model for different durations after the  modifications—12 and 18 months—instead of 6 months. The baseline  redefault rate is 35 percent within 12 months of modification, and a 23- percent (the average) reduction in payments decreases the redefault rate  by 8 percentage points to 27 percent. Similarly, within 18 months of  modification, the redefault rate decreases from a baseline of 51 percent to  45 percent for a payment reduction of 18 percent (the average). Second,  as already indicated some loans had multiple modifications. Similar  estimates were obtained when we used only the latest modification action  for loans that received multiple modifications. Third, as in other studies,  the data were limited to loans that entered the CoreLogic database within  3 months of origination. This would help to reduce potential survivorship  bias. Also, we restricted the sample to loans originated since January  2005, including those originated since the housing boom. For both of  these cases, the results were similar to the main results. Fourth, the  significance of the estimates was unchanged when we estimated robust  standard errors. Finally, the results were unchanged when we clustered  the standard errors by zip codes.
See, for example, Agarwal and others (2011a) which uses FICO credit scores and the  documentation status of the loans at origination. Since the data are not available for  documentation status, we used the delinquency status of the borrower and the FICO  credit scores at the time of the modification, both of which are predictive of redefault. way. For instance, low-quality loans would be more likely to redefault than  high-quality loans, because screening on unobservable characteristics is  less important for the latter pool of loans. But if the estimates show that  the conditional redefault rates are similar or low-quality loans were less  likely to redefault, then unobserved characteristics related to loan quality  are likely not the reason for the redefaults. The robustness check  suggests that the results are not likely to be biased by unobserved  borrower characteristics.
We also excluded loans owned or guaranteed by the enterprises and  estimated the models. Loans owned or guaranteed by the enterprises  differ from private-label securitized loans in terms of underwriting  standards, default risk guarantee, servicer incentives, and modification  restrictions. We conducted this analysis for prime loans only due to data  limitations. The results were similar with the Fannie Mae and Freddie Mac  loans excluded. We also provide predicted estimates of the redefault  rates for payment reductions for different modification actions (payment  reduction, rate reduction, balance reduction, capitalization and term  extension) using data on subpopulations of loans—prime, subprime,  enterprise, nonenterprise, FHA, and VA loans in tables 31 to 36 (see also  fig. 25).
We note that since the modification terms are not randomly determined,  but rather may reflect some unobserved borrower and loan  characteristics, the results, as in previous studies, should be considered  as describing the associative relationship between the modification terms  and redefault.
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section_title: Appendix VI: Comments from the Department of Treasury
section_title: Appendix VII: Comments from the Department of Housing and Urban Development
section_title: Appendix VIII: Comments from the Department of Veterans Affairs
section_title: Appendix IX: Comments from the Federal Housing Finance Agency
section_title: Appendix X: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Harry Medina, Assistant  Director; Anne Akin; Serena Agoro-Menyang; Don Brown; Steve Brown;  Tania Calhoun; Emily Chalmers; DuEwa Kamara; John Karikari, Patricia  MacWilliams; John McGrail; Marc Molino; Christine Ramos; Beverly  Ross; Jessica Sandler; Andrew Stavisky; and James Vitarello made key  contributions to this report.