Troubled Asset Relief Program: Treasury Continues to Face Implementation Challenges and Data Weaknesses in Its Making Home Affordable Program
Published: 2011-03-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Two years after the Department of the Treasury (Treasury) first made available up to $50 billion for the Making Home Affordable (MHA) program, foreclosure rates remain at historically high levels. Treasury recently introduced several new programs intended to further help homeowners. This report examines (1) the status of three of these new programs, (2) characteristics of homeowners with first-lien modifications from the Home Affordable Modification Program (HAMP), and (3) the outcomes for borrowers who were denied or fell out of first-lien modifications. To address these questions, GAO analyzed data from Treasury and six large MHA servicers.
section_title: What GAO Found
paragraphs: The implementation of Treasury's programs to reduce or eliminate second-lien mortgages, encourage the use of short sales or deeds-in-lieu, and stimulate the forgiveness of principal has been slow and limited activity has been reported to date. This slow pace is attributed in part to several implementation challenges. For example, servicers told GAO that the start of the second-lien modification program had been slow due to problems with the database Treasury required them to use to identify potentially eligible loans. Additionally, borrowers may not be aware of their potential eligibility for the program. While Treasury recently revised its guidelines to allow servicers to bypass the database for certain loans, servicers could do more to alert HAMP first-lien modification borrowers about the new second-lien program. Implementation of the foreclosure alternatives program has also been slow due to program restrictions, such as the requirement that borrowers be evaluated for a first-lien modification even if they have already identified a potential buyer for a short sale. Although Treasury has recently taken action to address some of these concerns, the potential effects of its changes remain unclear. In addition, Treasury has not fully incorporated into its new programs key lessons from its first-lien modification program. For example, it has not obtained all required documentation to demonstrate that servicers have the capacity to successfully implement the newer programs. As a result, servicers' ability to effectively offer troubled homeowners second-lien modifications, foreclosure alternatives, and principal reductions is unclear. Finally, Treasury has not implemented GAO's June 2010 recommendation that it establish goals and effective performance measures for these programs. Without performance measures and goals, Treasury will not be able to effectively assess the outcomes of these programs. Treasury's data provide important insights into the characteristics of borrowers participating in the HAMP first-lien modification program, but data were sometimes missing or questionable. More homeowners have been denied or canceled from HAMP trial loan modifications than have received permanent modifications. To understand which borrowers HAMP has been able to help, GAO looked at Treasury's data on borrowers in HAMP trial and permanent modifications. These data showed that HAMP borrowers had reduced income and high debt, but the reliability and integrity of some of Treasury's information was questionable.
section_title: What GAO Recommends
paragraphs: GAO recommends that Treasury require servicers to advise borrowers to contact servicers about second-lien modifications and ensure that servicers demonstrate the capacity to successfully implement Treasury's new programs. GAO also recommends that Treasury consider methods to better capture outcomes for borrowers denied or canceled from HAMP first-lien modifications. Treasury acknowledged challenges faced by servicers in implementing the program, but felt that certain criticisms of MHA were unwarranted. However, we continue to believe that further action is needed to better ensure the effectiveness of these programs.

section_title: Letter
paragraphs: Since the Department of the Treasury (Treasury) first announced the  framework for its Making Home Affordable (MHA) program over 2 years  ago, the number of homeowners facing potential foreclosure has remained  at historically high levels. The Emergency Economic Stabilization Act of  2008, which authorized Treasury to establish the $700 billion Troubled  Asset Relief Program (TARP), was intended to, among other things,  preserve homeownership and protect home values. In February 2009,  Treasury announced that up to $50 billion in TARP funds was allocated to  help struggling homeowners avoid potential foreclosure. The key  component under MHA, the Home Affordable Modification Program  (HAMP), offered modifications on first-lien mortgages to reduce  borrowers’ monthly mortgage payments to affordable levels, avoid  foreclosure, and keep their homes. Since HAMP’s inception, concerns  have been raised that the program was not reaching the expected number  of homeowners. In two prior reports, we looked at the implementation of  the HAMP first-lien modification program and noted that Treasury faced  challenges in implementing the program and made several  recommendations intended to address these challenges. In addition, the  Special Inspector General for TARP (SIGTARP) and the Congressional  Oversight Panel have issued several reports containing various  recommendations to Treasury intended to improve the transparency,  accountability, and effectiveness of MHA.
Questions continue to be raised about the extent to which the first-lien  program has effectively reached struggling homeowners and reduced  avoidable foreclosures. For example, more homeowners have been denied  or canceled from HAMP first-lien trial loan modifications than have  received permanent modifications to date, raising questions about which  homeowners HAMP has been able to help and how best to meet the needs  of homeowners struggling to avoid foreclosure. Treasury has begun  implementing several other TARP-funded programs for struggling  homeowners under the MHA program, including the Second-Lien  Modification Program (2MP), the Principal Reduction Alternatives (PRA)  program for borrowers who owe more on their mortgages than the value  of their homes, and the Home Affordable Foreclosure Alternatives (HAFA)  program for those who are not successful in HAMP modifications. All are  funded by the $50 billion originally allocated for MHA, which has since  been reduced to $45.6 billion for all TARP-funded housing programs, and  further reduced to $29.9 billion for MHA programs (with the remainder of  the balance being allocated to the HFA Hardest-Hit Fund and the FHA  Short Refinance option). Because of concerns about the effectiveness of  these newer TARP-funded programs, this report examines the extent to  which these programs have been successful at reaching struggling  homeowners. To understand the extent to which Treasury has been able  to assess who has been reached by HAMP and what additional actions may  be needed to help struggling homeowners, we also examined the  characteristics of homeowners who have been assisted by the HAMP first- lien modification program and the outcomes of borrowers who did not  complete HAMP trial or permanent modifications. We also have ongoing  work looking at the broader federal response to the foreclosure crisis,  which encompasses both TARP and non-TARP funded efforts intended to  mitigate the impact of foreclosures on homeowners.
More specifically, this report examines (1) the status of Treasury’s second- lien modification, principal reduction, and foreclosure alternatives  programs; (2) the characteristics of homeowners who HAMP has been  able to help under the first-lien modification program; and (3) the  outcomes for borrowers who were denied or fell out of HAMP trial or  permanent first-lien modifications.
To address these questions, we obtained information from and spoke with  six large MHA servicers who collectively represented about 74 percent of  the TARP funds allocated to servicers participating in the program. In  addition, we reviewed MHA program documentation that Treasury issued,  including supplemental directives for the second-lien modification,  principal reduction, and foreclosure alternatives programs. In addition, we  spoke with members of a trade association who represented both  residential mortgage loan investors and servicers, and one who represents  private mortgage loan insurers. We also analyzed loan level data from  Treasury’s HAMP database, which included data reported by servicers on  borrowers evaluated for HAMP participation through September 30, 2010,  to analyze the characteristics of borrowers who received HAMP, were  canceled from HAMP trial modifications, or redefaulted from permanent  HAMP modifications. To understand the outcomes of borrowers who were  denied or canceled from HAMP, we requested and obtained data from  each of the six servicers noted above. Finally, we conducted a Web-based  survey of housing counselors through NeighborWorks, which funds a  national network of housing counselors to obtain their perspectives of the  HAMP program. We coordinated our work with other oversight entities  that TARP created—the Congressional Oversight Panel, the Office of the  Special Inspector General for TARP, and the Financial Oversight Stability  Board.
We conducted this performance audit from July 2010 through March 2011  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
paragraphs: Although default rates (loans 90 days or more past due) fell from an all- time high of 5.09 percent at the end of the fourth quarter of 2009 to 3.94  percent at the end of the fourth quarter of 2010 (a nearly 23 percent drop  over the course of a year), the percentage of loans in foreclosure rose to  equal the highest level in recent history at 4.63 percent (fig.1). The  increase in foreclosure inventory during the latter part of 2010 may be due  to issues surrounding foreclosure processing and procedures that resulted  in various foreclosure moratorium initiatives. In addition, the percentage  of loans that newly entered the foreclosure process in the fourth quarter of  2010 remained high at 1.27 percent, compared to 0.42 percent in the first  quarter of 2005.
As we reported in December 2008, Treasury has established an Office of  Homeownership Preservation within the Office of Financial Stability  (OFS), which administers TARP, to address the issues of preserving  homeownership and protecting home values. On February 18, 2009,  Treasury announced the broad outline of the MHA program. The largest  component of MHA was the HAMP first-lien modification program, which  was intended to help eligible homeowners stay in their homes and avoid  potential foreclosure. Treasury intended that up to $75 billion would be  committed to MHA ($50 billion under TARP and $25 billion from Fannie  Mae and Freddie Mac) to prevent avoidable foreclosures for up to 3 to 4  million borrowers who were struggling to pay their mortgages. According  to Treasury officials, up to $50 billion in TARP funds were to be used to  encourage the modification of mortgages that financial institutions owned  and held in their portfolios (whole loans) and mortgages held in private- label securitization trusts. Fannie Mae and Freddie Mac together were  expected to provide up to an additional $25 billion from their own balance  sheets to encourage servicers and borrowers to modify or refinance loans  that those two Government Sponsored Enterprises (GSE) guaranteed.  Only financial institutions that voluntarily signed a Commitment to  Purchase Financial Instrument and Servicer Participation Agreement  (SPA) with respect to their non-GSE loans are eligible to receive TARP  financial incentives under the MHA program.
HAMP first-lien modifications are available to qualified borrowers who  occupied their properties as their primary residence, who had taken out  their loans on or before January 1, 2009, and whose first-lien mortgage  payment was more than 31 percent of their gross monthly income  (calculated using the front-end debt-to-income ratio (DTI)). Only single- family properties (one-four units) with mortgages no greater than $729,750  for a one-unit property were eligible.
The HAMP first-lien modification program has four main features:  1.  Cost sharing. Mortgage holders/investors are required to take the first  loss in reducing the borrower’s monthly payments to no more than 38  percent of the borrower’s income. For non-GSE loans, Treasury then  uses TARP funds to match further reductions on a dollar-for-dollar  basis, down to the target of 31 percent of the borrower’s gross monthly  income. The modified monthly payment is fixed for 5 years or until the  loan is paid off, whichever is earlier, as long as the borrower remains  in good standing with the program. After 5 years, investors no longer  receive payments for cost sharing, and the borrower’s interest rate  may increase by 1 percent a year to a cap that equals the Freddie Mac  rate for 30-year fixed rate loans as of the date that the modification  agreement was prepared. The borrower’s payment would increase to  accommodate the increase in the interest rate, but the interest rate and  monthly payments would then be fixed for the remainder of the loan.  2.  Standardized net present value (NPV) model. The NPV model  compares expected cash flows from a modified loan to the same loan  with no modification, using certain assumptions. If the expected  investor cash flow with a modification is greater than the expected  cash flow without a modification, the loan servicer is required to  modify the loan. According to Treasury, the NPV model increases  mortgage investors’ confidence that modifications under HAMP are in  their best financial interests and helps ensure that borrowers are  treated consistently under the program by providing an externally  derived objective standard for all loan servicers to follow.  3.  Standardized waterfall. Servicers must follow a sequential  modification process to reduce payments to as close to 31 percent of  gross monthly income as possible. Servicers must first capitalize  accrued interest and certain expenses paid to third parties and add this  amount to the loan balance (principal) amount. Next, the interest rate  must be reduced in increments of one-eighth of 1 percent until the 31  percent DTI target is reached, but servicers may not reduce interest  rates below 2 percent. If the interest rate reduction does not result in a  DTI ratio of 31 percent, servicers must then extend the maturity and/or  amortization period of the loan in 1-month increments up to 40 years.  Finally, if the target DTI ratio is still not reached, the servicer must  forbear, or defer, principal until the payment is reduced to the 31  percent target. Servicers may also forgive mortgage principal at any  step of the process to achieve the target monthly payment ratio of 31  percent, provided that the investor allows principal reduction.  4.  Incentive payment structure. Treasury uses TARP funds to provide  both one-time and ongoing incentives (“pay-for-success”) for up to 5  years to non-GSE loan servicers, mortgage investors, and borrowers.  These incentives are designed to increase the likelihood that the  program will produce successful modifications over the long term and  help cover the servicers’ and investors’ costs for making the  modifications.
Borrowers must also demonstrate their ability to pay the modified amount  by successfully completing a trial period of at least 90 days before a loan is  permanently modified and any government payments are made under  HAMP. Treasury has entered into agreements with Fannie Mae and  Freddie Mac to act as its financial agents for MHA. With respect to Freddie  Mac, these responsibilities are carried out by a separate division of that  entity. Fannie Mae serves as the MHA program administrator and is  responsible for developing and administering program operations  including registering servicers and executing participation agreements  with and collecting data from them, as well as providing ongoing servicer  training and support. Within Freddie Mac, the MHA-Compliance (MHA-C)  team is the MHA compliance agent and is responsible for assessing  servicers’ compliance with non-GSE program guidelines, including  conducting on-site and remote servicer loan file reviews and audits.
Initially, only servicers who signed a SPA prior to December 31, 2009, were  eligible to participate in MHA. Subsequently, the Secretary of the Treasury  exercised the authority granted under the Emergency Economic  Stabilization Act of 2008 to extend TARP’s obligation authority to October  3, 2010, which allowed servicers to continue to sign SPAs to participate in  MHA until that time. As of December 31, 2010, there were a total of 143  active servicers. Through January 2011, $29.9 billion in TARP funds had  been committed to these servicers for modification of non-GSE loans.  Based on the MHA Servicer Performance Report through January 2011,  nearly 1.8 million HAMP trial modifications had been offered to borrowers  of GSE and non-GSE loans as of the end of January 2011, and nearly 1.5  million of these had begun HAMP trial modifications. Of the trial  modifications begun, approximately 145,000 were in active trial  modifications, roughly 539,000 were in active permanent modifications,  roughly 740,000 trial modifications had been canceled, and roughly 68,000  permanent modifications had been canceled. Recently, the number of new  trial and permanent modifications started each month has declined (fig. 2).  As of December 31, 2010, $1 billion in TARP funds had been disbursed for  TARP-funded housing programs, of which $840 million was disbursed for  HAMP-related activity.
section_title: Implementation of Treasury’s Newer Housing Programs Has Been Slow and Capacity of Servicers to Carry Out These Programs Remains Unclear, Raising Uncertainty About the Potential Impact of These Programs
paragraphs: Treasury has recently implemented programs to reduce or eliminate  payments on second-lien mortgages, provide incentives for the use of  short sales or deeds-in-lieu as alternatives to foreclosure, and provide  incentives for the forgiveness of principal for borrowers whose homes are  worth significantly less than their mortgage balances. However, as of  December 2010, reported activity under these three programs had been  limited.    2MP was announced in March 2009, and had disbursed $2.9 million out of  nearly $133 million allocated to the program by the end of December 2010.  In part, the limited activity appears to be the result of problems that  servicers have experienced using the database that Treasury required to  identify second-lien mortgages eligible for modification. Treasury has  taken some steps to address these challenges, but could take further  action to ensure that borrowers are aware of their potential eligibility for  the program.
HAFA was announced in March 2009 and had disbursed $9.5 million out of  $4.1 billion allocated to the program by the end of December 2010.  Restrictive program requirements—for example, that borrowers be  evaluated for a HAMP first-lien modification before being evaluated for  HAFA, appear to have limited program activity to date. Treasury has taken  steps to revise program guidelines, but it remains to be seen the extent to  which these actions will result in increased program activity.
PRA was announced in March 2010 and Treasury had not reported activity  as of December 2010 for this $2 billion program. Mortgage investors and  others have cited concerns that the voluntary nature of the program and  transparency issues, including concerns about the extent of reporting on  PRA activity, may limit the extent to which servicers implement PRA.  Treasury has not yet implemented our June 2010 recommendation that it  report activity under PRA, including the extent to which servicers  determined that principal reduction was beneficial to investors but did not  offer it, to ensure transparency in the implementation of this program  feature across servicers.
Further, Treasury has not incorporated key lessons learned from  implementation challenges it faced with the first-lien program. Similar to  the first-lien modification program, Treasury has not established effective  performance measures for these three programs, including goals for the  number of borrowers it expects to help. As a result, determining the  progress and success of these programs in preserving homeownership and  protecting home values will be difficult.
subsections: section_title: Challenges in Matching First- and Second-Lien Mortgage Data and Potential Lack of Awareness of the Program Have Slowed Implementation of the Second-Lien Modification Program
paragraphs: Under 2MP, Treasury provides incentives for second-lien holders to  modify or extinguish a second-lien mortgage when a HAMP modification  has been initiated on the first-lien mortgage for the same property.  Treasury requires servicers who agree to participate in the 2MP program  to offer to modify the borrower’s second lien according to a defined  protocol when the borrower’s first lien is modified under HAMP. That  protocol provides for a lump-sum payment from Treasury in exchange for  full extinguishment of the second lien or a reduced lump-sum payment for  a partial extinguishment and modification of the borrower’s remaining  second lien. The modification steps for 2MP are similar to those for HAMP  first-lien modifications, with the interest rate generally reduced to 1  percent and the loan term generally extended to match the term of the  HAMP-modified first lien. In addition, if the HAMP modification on the  first lien included principal forgiveness, the 2MP modification must forgive  principal in the same proportion. Servicers were required to sign specific  agreements to participate in 2MP. As of November 2010, 17 servicers were  participating in the program, covering nearly two-thirds of the second-lien  mortgage market.
According to Treasury, 2MP is needed to create a comprehensive solution  for borrowers struggling to make their mortgage payments, but Treasury  officials we interviewed told us that the pace of 2MP modifications had  been slow. Of the six servicers we contacted, five had signed 2MP  participation agreements and represented the majority of potential second  liens covered by servicers participating in the program. Only one of these  five servicers had begun 2MP modifications as of the date we collected  information from these servicers—over 18 months after the program was  first announced by Treasury. This servicer reported that it had started  1,334 second-lien modifications. As of January 2011, Treasury had not yet  begun reporting activity under 2MP. According to servicers and Treasury  officials, the primary reason for the slow implementation of 2MP has been  challenges in obtaining accurate matches of first and second liens from the  data vendor required by Treasury. Treasury’s 2MP guidelines specify that  in order for a second lien to be modified under 2MP, the corresponding  first lien must first have been modified under the HAMP first-lien  modification program. Fannie Mae, as the MHA program administrator,  has contracted with a mortgage loan data vendor—Lender Processing  Services (LPS)—to develop a database that would inform second-lien  servicers when the corresponding first lien had been modified under  HAMP. LPS was also the data vendor used by Fannie Mae to process the  loan level data reported by servicers for the HAMP first-lien program.  Under 2MP, participating servicers agree to provide LPS with information  regarding all eligible second liens they serviced. LPS, in turn, provides  participating 2MP servicers with data on second liens that have had the  borrowers’ corresponding first-lien mortgages modified under the HAMP  program. However, the five participating 2MP servicers we spoke with all  expressed concerns about the completeness or accuracy of LPS’ data. In  particular, they noted that differences in the spelling of addresses—for  example, in abbreviations or spacing—could prevent LPS from finding  matches between first and second liens. Additionally, another servicer  reported that first-lien data could be incorrectly reported in LPS—for  example, in one case, a borrower was incorrectly reported as not in good  standing and, subsequently, was reported as canceled from HAMP. This  mistake prevented the borrower’s first and second liens from being  matched, even though the borrower was in good standing and eligible for  2MP. Treasury has also acknowledged that an inability to identify first- and  second-lien matches poses a potential risk to the successful  implementation of 2MP.
Initial 2MP guidelines stated that servicers could not offer a second-lien  modification without a confirmation of a match from LPS, even if they  serviced both first and second liens on the same property and, thus, would  know if the first lien had been modified under HAMP. In November 2010  Treasury provided updated program guidance that revised the match  requirement if servicers serviced both the first and second lien on a  property. According to these updated guidelines, servicers can offer a 2MP  modification when they identify a first- and second-lien match within their  own portfolio or if they have evidence of the existence of a corresponding  first lien, even if the LPS database has not identified it. While this change  may enable more 2MP modifications, Treasury did not release this  guidance until after participating servicers had already begun  implementing 2MP, more than a year after the program’s guidelines were  first announced in August 2009.
If they do not service both liens, second-lien servicers must rely on LPS for  matching data or obtain sufficient documentation of the HAMP first-lien  modification to identify the match. If the matching data provided by LPS is  not accurate, it is possible that eligible borrowers will not receive second- lien modifications. Treasury noted that there are no standard data  definitions in the servicing industry, making it difficult to match these data  across servicers. To address some of the concerns about inaccurate and  incomplete matches, Treasury officials told us they worked with LPS to  change the matching protocols. Now LPS provides 2MP servicers with a  list of confirmed address matches and a separate list of probable matches  based only on loan number and zip code. Treasury told us that it would  issue additional guidance for handling probable matches, but added that  servicers would be responsible for confirming probable matches with LPS.
Treasury does not require first-lien servicers to check credit reports to  determine if borrowers whose first liens they modified also had second  liens, and if so, the identity of the second-lien servicer. One servicer noted  that credit reports did not always have complete and reliable information.  In addition, Treasury does not require first-lien servicers to inform  borrowers about their potential eligibility for the second-lien program.  Therefore, borrowers may be unaware that their second lien could be  modified and unlikely to inquire with their second-lien servicers about a  second-lien modification. Any gaps in the awareness of 2MP could  contribute to delays in modifying eligible second-lien mortgages or missed  opportunities altogether. Additionally, any delays or omissions increase  the likelihood that the borrower with an eligible second lien may not be  able to maintain the required monthly reduced payments on the modified  first- and unmodified second-lien mortgages and ultimately redefault on  their HAMP first-lien modification.
section_title: Treasury Has Taken Some Recent Steps to Address Requirements That May Have Been Affecting Participation in the Foreclosure Alternatives Program
paragraphs: Under HAFA, Treasury 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 are eligible for relocation assistance of $3,000 and  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 subordinate lien holders. Servicers  who participate in the HAMP first-lien modification program are required  to evaluate certain borrowers for HAFA—those whom they cannot  approve for HAMP because, for example, they do not pass the NPV test or  have investors that prohibit modifications; those who do not accept a  HAMP trial modification; and those who default on a HAMP modification.
All six of the large MHA servicers we spoke with identified extensive  program requirements as reasons for the slow implementation of the  program, including the requirement in the initial guidance that borrowers  first be evaluated for a HAMP first-lien modification. Restrictive short-sale  requirements, and a requirement that mortgage insurers waive certain  rights may have also contributed to the limited activity under HAFA. As a  result, they said they did not expect HAFA to increase their overall  number of short sales and deeds-in-lieu. Some of the program  requirements identified by servicers as a reason for the slow  implementation of the program were recently addressed by Treasury’s  December 28, 2010, revisions to its HAFA guidelines.
Borrowers had to first be evaluated for HAMP. According to Treasury’s  initial guidelines, borrowers were to be evaluated for a HAMP first-lien  modification before being considered for HAFA, even borrowers who  specifically requested a short sale or deed-in-lieu rather than a  modification. As such, borrowers interested in HAFA had to submit all  income and other documentation required for a HAMP first-lien  modification. According to servicers we interviewed, this requirement was  more stringent than most proprietary short-sale requirements, and  borrowers may have had difficulty providing all of the documentation  required. For example, one servicer told us that it evaluated borrowers for  proprietary short sales on the basis of the value of the property and the  borrower’s hardship and that income documentation was not required.  Additionally, a HAMP evaluation may add extra time to the short-sale  process. In cases where a borrower had already identified a potential  buyer before executing a short-sale agreement with the servicer, the  additional time required for a HAMP first-lien evaluation may have  dissuaded the buyer from purchasing the property.
In response to this concern, Treasury released updated HAFA guidance on  December 28, 2010, to no longer require servicers to document and verify a  borrower’s financial information to be eligible for HAFA. The updated  guidance requires servicers to notify borrowers who request a short sale  before they have been evaluated for HAMP about the availability of HAMP,  but no longer requires the servicer to complete a HAMP evaluation before  considering the borrower for HAFA, especially in circumstances where the  borrower already has a purchaser for the property. As a result, borrowers  who specifically request a short sale or deed-in-lieu can be considered for  HAFA at the start of the HAMP evaluation process, rather than having to  wait until the completion of the HAMP evaluation process.
Restrictive short-sale requirements. According to servicers we spoke  with, some HAFA short-sale requirements, such as occupancy  requirements, may have been too restrictive. Specifically, one servicer  cited as too restrictive the requirement in the initial guidelines that a  property not be vacant for more than 90 days prior to the date of the short- sale agreement, and that if it is vacant, it is because the borrower  relocated at least 100 miles away to accept new employment. To address  this concern, Treasury issued updated guidance in December 2010 which  extended the allowed vacancy period from 90 days to 12 months and  eliminated the requirement that the borrower moved to accept  employment, but added a requirement that the borrower had not  purchased other residential property within the prior 12 months. Owner- occupancy restrictions may also limit the number of HAFA short sales and  deeds-in-lieu. One servicer noted that many of the short sales it completed  outside of HAFA were for nonowner-occupied properties, which may  include second homes or commercial properties. However, HAFA offers  alternatives to foreclosure only for eligible loans under HAMP, which is  intended for a property serving as a borrower’s principal residence.
Waiving of rights by mortgage insurers to collect additional sums.
According to Treasury guidelines, “a mortgage loan does not qualify for  HAFA unless the mortgage insurer waives any right to collect additional  sums (cash contribution or a promissory note) from the borrower.” Some  servicers noted that this requirement had prevented some HAFA short  sales from being completed due to difficulties in obtaining approval for  HAFA short sales from mortgage insurers. Lenders frequently require  mortgage insurance for loans that exceed 80 percent of the appraised  value of the property at the time of origination. Under a short-sale  scenario, the mortgage insurance company could be responsible for  paying the mortgage holder or investor for all or part of the losses incurred  under the short sale depending upon the coverage agreement and  proceeds from the sale.
Mortgage insurance representatives we spoke with indicated that while  they supported HAFA participation, they felt that mortgage insurers  should not have to waive their rights to collect additional sums if  borrowers had some ability to pay them. These representatives told us that  they had not seen many requests for approvals of HAFA foreclosure  alternatives, so they did not believe this requirement was a key  impediment for HAFA. However, they agreed that because servicers did  not know whether mortgage insurers would agree to waive their rights, the  requirement could make it more difficult to solicit borrowers for HAFA.  To minimize the impact of this requirement, one mortgage insurance  representative noted that his company commits to responding to servicers  within 48 hours with a decision about whether the mortgage insurance  company agrees to forego a contribution from the borrower.
We plan to continue to monitor the progress of the HAFA program,  including the impact of Treasury’s December 2010 revisions to its HAFA  guidelines as well as the other program requirements identified by  servicers as contributing to the slow implementation of the program, as  part of our ongoing oversight of the performance of TARP.
section_title: Large MHA Servicers Generally Have Agreed to Offer Principal Reductions, but Mortgage Investors Had Concerns about Program Design and Transparency
paragraphs: PRA provides financial incentives to investors who agree to forgive  principal for borrowers whose homes are worth significantly less than the  remaining amounts owed under their first-lien mortgage loans. Treasury’s  PRA guidelines require servicers to consider principal forgiveness for any  HAMP-eligible borrowers with MLTV greater than 115 percent, using both  the standard waterfall and an alternative. While servicers must consider  borrowers for principal forgiveness, they are not required to offer it, even  if the NPV value to modify the loan is higher when principal is forgiven. If  they choose to offer forgiveness, servicers must reduce the balance  borrowers owe on their mortgages in increments over 3 years, but only if  the borrowers remain current on their payments. Servicers must establish  written policies to Treasury detailing when principal forgiveness will be  offered. According to Treasury, a survey of the 20 largest servicers  indicates that 13 servicers are planning to offer principal reduction to  some extent.
Of the six servicers we spoke with, three said that they planned to offer  principal reduction under the program in all cases in which the NPV was  higher with PRA, unless investor restrictions prevented it. As of October  2010, one of these three servicers had begun HAMP trial modifications  with PRA, another had begun implementation of PRA but had not yet  made trial modification offers with PRA, and the third servicer had not yet  completed implementation of the program. The three remaining servicers  we spoke with said they would limit the conditions under which they  would offer principal forgiveness under the program. One servicer offered  PRA only for adjustable-rate mortgage loans, subprime loans, and 2-year  hybrid loans, and the other had developed a “second look” process for  reviewing loans that had a higher NPV result with principal forgiveness.  This servicer reevaluated these loans using its internal estimates of default  rates and did not forgive principal unless its own estimates indicated a  higher NPV with forgiveness. As a result, only 15 to 25 percent of those  who otherwise would have received principal forgiveness will receive it  after this “second look” process, according to this servicer. The third  servicer said it would not offer PRA for loans that had mortgage insurance,  noting that mortgage insurers typically took the first loss on a loan and the  PRA would alter that equation with the investor absorbing the full amount  of loss associated with the principal reduction.
Four of the six servicers we contacted told us that investor restrictions  against principal forgiveness would not limit their ability to offer principal  reduction. However, one servicer noted that about half the loans it  serviced had investor restrictions against principal forgiveness. Another  servicer noted that a material number of its servicing agreements with  investors prohibited principal forgiveness.
Mortgage investors we spoke with expressed concern about PRA’s design  and transparency. In particular, they expressed concern that because the  HAMP NPV model did not use an LTV that reflected both the first and  second liens (combined LTV), the model might not reflect an accurate NPV  result. That is, the NPV model might understate the likelihood of redefault  if it did not use the combined LTV. As a result, investors face the prospect  of forgiving principal without knowing the true redefault risk. Further,  although the purpose of PRA is to address negative equity, not taking the  combined LTV into account would underestimate the population of  underwater borrowers since it would not account for any associated  second liens. In addition, under PRA, servicers must forgive principal on  the second lien in the same proportion as the principal forgiven on the first  lien. However, mortgage investors expressed concern about limited  transparency into whether servicers were forgiving principal on the  second lien. Additionally, SIGTARP recommended in July 2010 that  Treasury reevaluate the voluntary nature of the program and consider  changes to ensure the consistent treatment of similarly situated  borrowers. According to Treasury, servicers began reporting PRA activity  in January 2011 for trial and permanent modifications through December  31, but it is still unclear what level of program detail Treasury will publicly  report. We recommended in June 2010 that Treasury report activity under  PRA, including the extent to which servicers determined that principal  reduction was beneficial to mortgage investors but did not offer it, to  ensure transparency in the implementation of this program. Treasury  officials told us they would report PRA activity at the servicer level once  the data were available. We plan to continue to monitor Treasury’s  reporting of PRA and other TARP-funded housing programs.
section_title: Treasury Could Do More to Incorporate Lessons Learned from the First- Lien Modification Program in Implementing Newer Programs
paragraphs: In our June 2010 report, we pointed out that it was important that Treasury  incorporate lessons learned from the challenges experienced with the  HAMP first-lien modification program into the design and implementation  of the newer MHA-funded programs. In particular, we noted that it would  be important for Treasury to expeditiously develop and implement these  new programs (including 2MP, HAFA, and PRA) while also developing  sufficient program planning and implementation capacity, including  providing program policies and guidance, hiring needed staff, and ensuring  that servicers are able to meet program requirements. Treasury officials  said they solicited input from servicers and investors when designing 2MP,  PRA, and HAFA, and have begun to perform readiness reviews for these  servicers. However, servicers have cited challenges with changing  guidance under these programs. We also noted that Treasury needed to  implement appropriate risk assessments and meaningful performance  measures in accordance with standards for effective program  management. However, Treasury has not completed program-specific risk  assessments, nor has it developed performance measures to hold itself and  servicers accountable for these TARP-funded housing programs or  finalized specific actions it could take in the event servicers fail to meet  program requirements.
Program planning and implementation capacity. Treasury has provided  servicers with some guidance on the new programs, but some servicers  said that ongoing changes to the guidelines have presented challenges. In  June 2010, we noted that effective program planning included having  complete policies, guidelines, and procedures in place prior to program  implementation. Treasury published initial guidance for 2MP, HAFA, and  PRA prior to the dates these programs were effective, and some servicers  indicated that implementation of these newer programs was smoother  than it was with the first-lien modification program (see fig. 3). However,  other servicers indicated that initial program guidance was unclear and  that additional guidance was issued late in the implementation process.  For example, while Treasury first announced the 2MP program in March  2009, it did not publish specific 2MP guidelines until August 2009 and then  issued revisions to the guidelines in March 2010, the first month of official  implementation, with revisions in June 2010 and again in November 2010.  According to the servicers we contacted, ongoing program revisions  presented challenges such as needing to retrain staff and, in some cases,  delayed program implementation. Treasury officials noted that issuing  additional guidance improves the program and is often necessary as  circumstances change. Servicers also reported that while initial guidance  for PRA was issued before the effective date of the program, Treasury did  not issue guidance specific to the NPV 4.0 model until October 1, 2010, the  date PRA became effective. As a result, servicers told us that there was  insufficient time to update internal servicing systems in time to implement  PRA as of its effective date.
Treasury has also not completed a needed workforce assessment to  determine whether it has enough staff to successfully implement the new  program. In July 2009, we recommended that Treasury place a high  priority on fully staffing vacancies in its Homeownership Preservation  Office (HPO), the office within Treasury responsible for MHA governance,  and fill all necessary positions. According to Treasury officials, each  director within HPO conducts ongoing informal assessments of staffing  needs, and Treasury has recently added two positions in marketing and  communications, as well as two additional staff to address policies  regarding the borrower complaint process. In addition, two additional staff  positions to support the borrower complaint resolution process have  recently been approved by the staffing board. HPO has also named a  Deputy Chief. In addition, Treasury officials told us that Fannie Mae and  Freddie Mac, Treasury’s financial agents for MHA, had doubled the  number of staff devoted to these functions as the complexity of MHA has  increased. However, as of December 2010, Treasury had not conducted a  formal workforce assessment of HPO, despite the addition of the new  MHA programs, 2MP, HAFA, and PRA. As we noted in July 2009, given the  importance of HPO’s role in monitoring the financial agents, servicers, and  other entities involved in the $45.6 billion TARP-funded housing programs,  having enough staff with appropriate skills is essential to governing the  program effectively.
Servicers have not demonstrated full capacity to effectively carry out these  programs. Treasury has previously stated that the implementation of the  HAMP first-lien program was hindered by the lack of capacity of servicers  to implement all of the requirements of the program. According to  Treasury, Fannie Mae has conducted program-specific readiness reviews  for the top 20 large servicers for HAFA and PRA, including all 17 servicers  participating in 2MP. These reviews assess servicers’ operational  readiness, including developing key controls to support new programs,  technology readiness, training readiness, as well as staffing resources and  program processes and documentation. According to Treasury officials, 5  servicers have completed readiness reviews for 2MP, and 5 additional  servicers were scheduled to be surveyed in January 2011; 19 servicers have  completed these reviews for HAFA; and 18 servicers have completed these  reviews for PRA. According to Treasury’s summary of these reviews, a  large majority of servicers completing these readiness reviews did not  provide all documentation required to demonstrate that the key tasks  needed to support these programs were in place at the time of the review.  Of those that had complete reviews, 4 had provided all required  documents for HAFA and 3 had provided all required documents for PRA.  None of the servicers provided all required documents for 2MP. Treasury  notes that it relies on Fannie Mae to monitor program readiness and that  MHA-C reviews all programs as part of its on-site reviews. Nonetheless, it  is unclear what actions Treasury has taken to ensure that the servicers  who did not submit the required documentation have the capacity to  effectively implement the programs, making less certain the ability of  these servicers to fully participate in offering troubled homeowners  second-lien modifications, principal reduction, and foreclosure  alternatives.
Meaningful performance measures and remedies. As we also reported in  June 2010, Treasury must establish specific and relevant performance  measures that will enable it to evaluate the program’s success against  stated goals in order to hold itself and servicers accountable for these  TARP-funded programs. While Treasury has established program  estimates of the expected funding levels for 2MP, HAFA, and PRA  programs, it has not fully developed specific and quantifiable servicer- based performance measures or benchmarks to determine the success of  2MP, HAFA, and PRA, including goals for the number of homeowners  these programs are expected to help. Treasury officials told us that they  were using the amounts of TARP funds allocated to MHA servicers to  determine estimated participation rates, but this estimate is adjusted on a  quarterly basis and according to Treasury, is not the best measure for  holding servicers accountable. Treasury officials stated that when data  became available they would assess certain aspects of program  performance—for example, they noted that Treasury planned to assess the  redefault rates of modifications that received PRA or 2MP, compared with  those that did not. However, Treasury has not set benchmarks, or goals,  for these performance measures, as we recommended in June 2010. In  addition, Treasury has not stated how it will use these assessments to hold  servicers accountable for their performance or what remedial actions it  will take in cases where individual servicers are not performing as  expected in these programs. We continue to believe that Treasury should  take steps to establish benchmarks that can be used to hold servicers  accountable for their performance.
Appropriate risk assessment. We previously reported that agencies must  identify the risks that could impede the success of new programs and  determine appropriate methods of mitigating these risks. In particular, we  highlighted the need for Treasury to develop appropriate controls to  mitigate those risks before the programs’ implementation dates. Although  Treasury has not systematically assessed risks at the program level,  Treasury officials told us they had identified several risks associated with  2MP, HAFA, and PRA and specified ways to mitigate these risks, and  added they were planning to begin new risk assessments in January 2011  that would be completed by June 2011. According to Treasury officials,  this new round of risk assessments will include 2MP, HAFA, and PRA, but  the programs will not be evaluated individually.
In addition, Treasury has not yet fully addressed all program-specific risks.  As we have seen, Treasury has acknowledged the risk that the matching  database for 2MP may not identify all first liens modified under HAMP.  While Treasury began addressing this issue in updated guidance released  in November 2010, it cannot yet determine whether all borrowers eligible  for 2MP are being identified and considered for second-lien modifications.  Treasury has also acknowledged several potential risks with all types of  short-sale transactions, including HAFA transactions. According to  Treasury officials, these risks include those arising from sales to allied  parties, side agreements, and rapid resales. For example, Treasury officials  noted a short-sale purchaser could be inappropriately related to the  servicer, allowing the short sale to be inappropriately engineered to  generate extra compensation for one or both parties. Treasury states that  HAFA includes requirements to mitigate these risks, such as requiring  arms-length transactions. According to Treasury officials, MHA-C, the  group within Freddie Mac that acts as Treasury’s financial agent for MHA  compliance activity, is also in the process of developing compliance  procedures to address these risks. Further, Treasury has identified several  potential risks with PRA, including servicer noncompliance with PRA  requirements, moral hazard (the risk that borrowers would default on their  mortgages to receive principal reduction when they otherwise would not  have), and low program participation. According to Treasury officials,  these risks will be mitigated through regular compliance reviews, servicer  reporting of NPV results both with and without PRA, and other program  requirements. For example, to guard against moral hazard, Treasury  requires that borrowers be experiencing hardship and that servicers  forgive the principal over 3 years only if the borrower remains current on  the modified payments. However, low program participation may continue  to be a risk for PRA, despite the initial participation plans of several of the  large servicers. While Treasury officials told us they plan to monitor the  reasonableness of the extent of principal forgiveness on a servicer-specific  basis, we continue to believe that due to the voluntary nature of the  program, Treasury will need to ensure full and accurate servicer-specific  reporting of program activity for future assessments of the extent to which  servicers are offering PRA when the NPV is higher with principal  forgiveness, as we recommended in June 2010. We plan to continue to  monitor and report on Treasury’s risk assessment and control activities for  MHA programs as part of our ongoing oversight of Treasury’s use of TARP  funds to preserve homeownership and protect property values.
section_title: Treasury Has Some Data on the Characteristics of Borrowers in HAMP’s First-Lien Program, but Data Were Sometimes Missing or Questionable
paragraphs: Our analysis of Treasury’s HAMP data through September 30, 2010,  indicated that borrowers who entered into trial modifications or received  permanent modifications continued to have elevated levels of debt, as  evidenced by the median back-end DTI for these two groups (55 and 57  percent, respectively). Borrowers who received a trial modification  based on stated (unverified) income—a practice that Treasury no lo nger  permits—were the most likely to have their trial modifications canceled,  and borrowers who were the most delinquent on their mortgage payments  at the time of applying for a loan modification were the most likely to  redefault on their modifications. While the data Treasury collected from  the servicers provided these and other insights into the characteristics of  borrowers helped under the program, some data were missing and some  information was inaccurate, preventing certain types of analyses of HAMP  borrowers. For example, race and ethnicity information was not available  for a significant portion of borrowers. In addition, Treasury’s data on  borrowers’ LTV ratios at the time of modification ranged from 0 to 999,  with 1 percent of non-GSE borrowers in active permanent modifications  reporting ratios over 400 percent, implying that some borrowers who  received HAMP modifications did not have a mortgage, and others had  loan amounts more than 4 times the value of their homes. Treasury said  that it and Fannie Mae were continuing to refine and strengthen data  quality checks and that the data would improve over time.
subsections: section_title: Certain Factors Increase the Likelihood of Trial Modification Cancellation and Early Data Indicate that Borrowers Who Redefaulted from Permanent Modifications Were Further Into Delinquency
paragraphs: According to Treasury’s HAMP data, 88,903 non-GSE borrowers were in  active HAMP trial modifications and 205,449 borrowers were in permanent  modifications as of the end of September 2010. These borrowers generally  cited a reduction in income as their primary reason for hardship when  applying for HAMP modifications.
Over half of borrowers cited a “curtailment of income,” such as a change  to a lower-paying job, as the primary reason they were experiencing  financial hardship (56 percent and 53 percent of those in active trial and  permanent modifications, respectively). However, only 5 percent of  borrowers in each of these groups cited unemployment as their primary  reason for hardship.
Borrowers in trial and permanent modifications through September 2010  also had high levels of debt prior to modification—median front-end DTI  ratios of 45 and 46 percent, and back-end DTI ratios of 72 and 76 percent,  respectively. Even after modification, these borrowers continued to have  high debt levels (median back-end DTI ratios of 55 and 57 percent for  those in trial and permanent modifications, respectively). Treasury has  defined a high back-end DTI to be 55 percent, and has required borrowers  with total postmodification debt at this level to obtain counseling.
In addition, borrowers in trial and permanent modifications tended to be  “underwater,” with median mark-to-market LTV ratios of 123 percent and  128 percent, respectively.
Borrowers who were unsuccessful in HAMP modifications, either because  they were canceled from a trial modification or because they redefaulted  from permanent modifications, shared several of these characteristics,  including having high levels of debt and being “underwater” on their  mortgages. However, some characteristics appeared to increase the  likelihood that a borrower would be canceled from a trial modification.  Holding other potential factors constant, the following factors increased  the likelihood that a borrower would be canceled from a trial  modification:    Use of Stated Income. Borrowers who received a trial modification based  on stated income were 52 percent more likely to be canceled from trial  modifications than those who started a trial modification based on  documented income. In some cases, borrowers who received trial  modifications based on stated income were not able to or failed to provide  proof of their income or other information for conversion to permanent  modification. In other cases, borrowers may have submitted the required  documentation but the servicer lost the documents. Over one-third of the  396 housing counselors who responded to our survey identified servicers  losing documentation as the most common challenge that borrowers have  faced in providing the required documentation for a permanent  modification. In December 2010, the Congressional Oversight Panel also  reported that Treasury has failed to hold loan servicers accountable when  they have repeatedly lost borrowers’ paperwork.
Length of Trial Period. Borrowers who were in trial modification periods  for fewer than 4 months were about 58 percent more likely to have their  trial modifications canceled than borrowers in longer trial periods. This  finding may indicate that borrowers who default on their trial  modifications will do so earlier in the process rather than later.
Delinquency Level at Time of Modification. Borrowers who were 60 or 90  days or more delinquent at the time of their trial modifications were 6 and  9 percent more likely to have trial modifications canceled, respectively,  compared with borrowers who were not yet delinquent at the time of their  trial modifications. Treasury has acknowledged the importance of  reaching borrowers before they are seriously delinquent by requiring  servicers to evaluate borrowers still current on their mortgages for  imminent default, but as we noted in June 2010, this group of borrowers  may be defined differently by different servicers. In addition, most  borrowers who received HAMP were delinquent on their mortgages at the  time of modification—as of September 30, 2010, 83 percent of those who  had begun trial or permanent modifications were at least 60 days  delinquent on their mortgages.
According to our analysis, there were also several factors that lowered the  likelihood of trial cancellations, although the effect was generally smaller  than the factors that increased the likelihood of being canceled.
High MLTV Ratio. Borrowers who had high MLTV ratios (above 120  percent) were less likely to be canceled from a trial modification  compared to those with MLTV ratios at or below 80 percent. That is, loans  with a MLTV between 120 and 140 percent were 7 percent less likely to be  canceled, while loans with an MLTV of more than 140 percent were 8  percent less likely to be canceled.
Amount of Principal or Payment Reduction: While only about 2 percent  of borrowers had received principal forgiveness as of September 30, 2010,  borrowers who received principal forgiveness of at least 1 percent of their  total loan balance were less likely to be canceled from trial modifications,  compared with those who did not receive principal forgiveness. In  addition, larger monthly payment reductions lowered the likelihood that a  trial modification would be canceled. For example, our analysis showed  that borrowers who received a principal and interest payment reduction of  least 10 percent were less likely to be canceled from their trial  modifications than borrowers who received a payment reduction of less  than 10 percent or who had an increase in payments.
Figure 4 illustrates the extent to which certain factors increase or  decrease likelihood of borrowers being canceled from HAMP trial  modification. See appendix II for further details on our analysis of factors  affecting the likelihood of trial modification cancellation.
In addition, our initial observations of over 15,000 non-GSE borrowers  who had redefaulted from permanent HAMP modifications through   September 2010 indicated that these borrowers differed from those in  active permanent modifications in several respects. Specifically, non-GSE  borrowers who redefaulted on their HAMP permanent modifications  tended to have the following characteristics    higher levels of delinquency at the time of trial modification evaluation  (median delinquency of 8 months compared to 5 months for those still in  active permanent modifications);  lower credit scores, although borrowers current on their HAMP-modified  payments also had low median credit scores (525 and 552, respectively);  lower median percentage of payment reduction compared with those who  were still current in their permanent modifications (24 percent compared  with 33 percent for those who were still current in their permanent  modifications); and  lower levels of debt before modification than borrowers who did not  redefault (median front-end DTI ratio of 41 percent prior to modification  compared to 46 percent front-end DTI ratio for those still current in their  permanent modifications)—these borrowers likely did not receive as  much of a payment reduction from the modification due to lower levels of  debt to begin with.
These results were largely consistent with information that the Federal  Deposit Insurance Corporation (FDIC) released on the performance of its  IndyMac loan modifications. For example, FDIC found that borrowers’  delinquency status prior to loan modification correlated directly with  redefault rates after modification, with a 1-year redefault rate of roughly 25  percent for borrowers who were 2 months delinquent at the time of  modification compared to a nearly 50 percent redefault rate for those who  were more than 6 months delinquent at the time of modification. FDIC  also reported that the redefault rates for its IndyMac modifications  declined markedly with larger reductions in monthly payments.
section_title: Some Key Information on HAMP Borrowers and Applicants Was Missing or Inaccurate in Treasury’s Database
paragraphs: Treasury’s data on HAMP provide important information and insights on  characteristics of borrowers who are in trial and permanent modification,  who have been canceled from trial modifications, and who have  redefaulted from permanent modifications. However, Treasury’s database  contained information that was inaccurate or inconsistent, and Treasury  does not collect information on all borrowers who are denied HAMP  modifications. For example, Treasury’s data on borrowers’ LTV ratios at  the time of modification ranged from 0 to 999, with 1 percent of non-GSE  borrowers in active permanent modifications reporting ratios over 400  percent, implying that some borrowers who received HAMP modifications  did not have a mortgage, and others had loan amounts more than 4 times  the value of their homes. Some data elements also included internal  inconsistencies. For example, a borrower’s back-end DTI (the ratio of total  monthly debt-to-gross monthly income) includes the front-end DTI (the  ratio of monthly housing debt-to-gross monthly income) and, therefore,  should always at least be equal to the front-end DTI. However, according  to Treasury’s database, 29 percent of those in trial modifications and 40  percent of those who had trial modifications canceled had back-end DTIs  that were less than their front-end DTIs. The quality of these data  improved for those who received permanent modifications, with only 3  percent of these borrowers showing back-end DTIs that were less than the  front-end DTIs.
Treasury acknowledged that its HAMP database contained some  inconsistencies, despite edit checks conducted by Fannie Mae as the  HAMP administrator. According to Treasury, the inconsistencies continue  because of servicers’ data-entry errors, data formatting mistakes such as  entering percentages as decimals rather than whole numbers, and data  mapping problems. Treasury said it was continuing to work with Fannie  Mae to refine and strengthen data quality checks and that the data has and  will continue to improve over time. For example, Treasury noted that  since September 2010, it has worked to improve the quality of borrower  and loan attributes such as back-end DTI and modification terms. Treasury  officials said that the error rate on these data elements has dropped from  16 percent and 12 percent for trial and permanent modifications,  respectively, to 2 percent and 10 percent.
Treasury’s HAMP database also was missing a significant amount of  information on borrowers’ race and ethnicity, resulting in an inability to  date to assess whether HAMP is being fairly implemented across servicers.  For example, as of September 30, 2010, race and ethnicity information was  not available for 65 percent of non-GSE borrowers in active trial  modifications. A significant portion of borrowers declined to report this  information—that is, for 45 percent of non-GSE borrowers in active trial  modifications the category was marked as “not provided by borrower.”  However, for another 20 percent, some data are simply missing, with no  category marked. Some of this information may be missing because  servicers were not required to report borrowers’ race and ethnicity until  after December 1, 2009. As a result, Treasury lacks complete information  needed to be able to determine whether the first-lien modification  program has been implemented fairly across all borrowers.
In addition, Treasury acknowledged data-mapping problems with race and  ethnicity data that resulted in some data being included in the system of  record, but inadvertently excluded from the database. Combined, these  factors resulted in a large proportion of borrowers without race and  ethnicity information, as of September 30, 2010. According to Treasury  officials, Fannie Mae was making improvements to the data mapping,  which should allow Treasury to better evaluate whether HAMP is being  implemented fairly across all borrowers. Treasury officials told us they  anticipated that the more complete data would be ready to use in early  2011. On January 31, 2011, Treasury announced the availability of loan- level HAMP data to the public for the first time. The data files were as of  November 30, 2010, and included information on borrowers’ race and  ethnicity. According to Treasury, these data indicated that roughly 31  percent of borrowers who started trial modifications after December 1,  2009, did not report race and ethnicity data. Treasury also reported  approximately 6 percent of data as not applicable or not reported by the  servicer. In addition, roughly 57 percent of those who were denied or did  not accept trial modifications did not report or were missing this  information.
Finally, Treasury’s HAMP database did not contain information on all  borrowers who were denied HAMP, as some borrowers were denied  before income information was collected for a net present value test.  Treasury currently requires servicers to report identifying information,  such as borrowers’ names and Social Security numbers, as well as the  reason for denial for all borrowers denied modification, but other data  elements—including income information, level of delinquency, LTV, and  GSE or non-GSE status—is not required to be collected by servicers if  borrowers are denied because they do not meet basic eligibility  requirements such as the property being owner-occupied. According to  data we received from Treasury, through September 30, 2010, some  information was lacking on 85 percent of borrowers who were denied  HAMP trial modifications, including monthly gross income amounts and  the number of months in delinquency. Treasury noted that these data are  incomplete because they are unobtainable by the servicers and not a good  use of servicer resources to obtain. While we recognize that servicers may  be unable to collect information from borrowers who were previously  denied trial modifications, going forward it will be important for Treasury  to collect sufficient information from servicers to assess program gaps.  According to Treasury, it has requested servicers to report on borrowers  who were denied HAMP when low volumes of these data were received.
section_title: Most Borrowers Denied or Canceled from Trial Modifications Appear to Have Avoided Foreclosure To Date, but Weaknesses in Treasury’s Data Collection Limit its Ability to Understand the Outcomes of These Borrowers
paragraphs: Because there have been more HAMP trial modification cancellations than  conversions to permanent modifications, we evaluated Treasury’s  reporting of the disposition paths, or outcomes, of borrowers who were  denied or canceled from HAMP trial modifications and obtained additional  information from six large MHA servicers to understand the extent to  which these borrowers have been able to avoid foreclosure to date. While  it appears that the majority of these borrowers had been able to avoid  foreclosure as of the time of our data collection and Treasury’s survey, if  borrowers are being evaluated for a loss mitigation option such as a  proprietary modification and the servicer has also started foreclosure  proceedings, Treasury’s data reporting template will result in a loan being  reported only as a proprietary modification or the other applicable loss  mitigation category, understating the number of borrowers who have had  foreclosure proceedings started. In addition, Treasury’s reporting of  outcomes for these borrowers does not differentiate between borrowers  who received proprietary modifications and those who were still being  evaluated for these modifications, some of whom will not ultimately  receive them. For example, for six large servicers, Treasury reported that  43 percent of borrowers who had their trial modification canceled  received proprietary modifications. However, the reported 43 percent  includes both borrowers who had received proprietary modifications and  those who were being evaluated for proprietary modifications. Data we  collected from the same servicers indicate that only 18 percent of  borrowers with canceled trial modifications received permanent  proprietary modifications, while another 23 percent had pending but not  yet approved permanent modifications. Without a complete picture of the  outcomes of those borrowers who were denied or canceled from HAMP,  Treasury cannot accurately evaluate the outcomes for these borrowers  and determine whether further action may be needed to assist this group  of borrowers.
subsections: section_title: Treasury’s Reporting Does Not Fully Reflect the Current Disposition Actions for Borrowers Denied or Canceled from HAMP
paragraphs: According to HAMP guidelines, servicers must consider all potentially  HAMP-eligible borrowers for other loss mitigation options, such as  proprietary modifications, payment plans, and short sales, prior to a  foreclosure sale. To report the current outcomes of borrowers who  applied for but did not receive a HAMP trial modification or had a HAMP  trial modification canceled, Treasury surveys the eight largest HAMP  servicers each month and publishes these data in the monthly servicer  performance reports. However, Treasury’s requirements for reporting  these data produce results that do not fully reflect all outcomes for  borrowers who were denied or canceled from HAMP and overstate the  proportion of some outcomes. First, in order to prevent double counting of  transactions, the survey does not allow servicers to place a borrower in  more than one outcome category. Additionally, servicers must follow the  order in which Treasury lists the outcomes on the survey. However, this  does not allow for the accurate reporting of borrowers being considered  for multiple potential outcomes. For example, a servicer could be  evaluating a borrower who had been denied a HAMP modification for a  proprietary modification at the same time that the servicer started  foreclosure proceedings. But the Treasury survey would capture only the  proprietary modification, because that category is the first in the list of  possible outcomes. Because servicers are allowed to evaluate borrowers  for loss mitigation options while simultaneously starting foreclosure,  Treasury’s requirement that borrowers be included in only one category,  starting with proprietary modifications, likely overstates the proportion of  borrowers with proprietary modifications while also understating the  number of borrowers who have started foreclosure.
Furthermore, a comparison of Treasury’s data to data we received from  six large MHA servicers on the outcomes of borrowers denied a HAMP  trial modification showed that Treasury’s requirement that servicers place  borrowers according to a specific order of outcomes may result in an  understatement of the number of borrowers becoming current. For  example, according to the data we received, almost 40 percent of  borrowers who were denied a HAMP trial modification became current  without any additional assistance from the servicer as of August 31, 2010.  In comparison, Treasury reported only 24 percent of borrowers became  current after applying for but not receiving a HAMP trial modification  through these same servicers. While differences may exist between the  populations of these data, a servicer we spoke with noted one reason that  the percentage of current borrowers in the Treasury survey was lower  than the percentage reported in our data was Treasury’s requirement that  servicers report outcomes in a certain order, with “borrower current”  being in last place. As a result, borrowers are reviewed for all other  outcomes before being reflected in this category. Placing borrowers only  in one category according to a specific order may not reflect all of the  outcomes experienced by these borrowers and may understate outcomes  further down the list, such as starting foreclosure or becoming current.
Second, while Treasury’s survey includes an “action pending” category, all  six of the servicers we spoke with told us that Treasury had instructed  them to include borrowers who were being evaluated for an outcome in  their respective outcome categories, such as proprietary modification,  rather than the “action pending” category. Treasury recently instructed  servicers to use the action pending category only if a borrower had  recently been denied a HAMP trial modification, had a HAMP trial  modification canceled, or fallen out of another disposition path such as a  proprietary modification, and the servicer has not yet determined the next  step for the borrower. Because the proprietary modification category  includes borrowers who are still being evaluated for modifications as well  as those who have received them, the number of borrowers who actually  received a proprietary modification cannot be determined from Treasury’s  data. For example, for the outcomes of borrowers who had a canceled  HAMP trial modification, we asked six large MHA servicers to separate  borrowers who were being evaluated for permanent proprietary  modifications from those who had actually received them. For these same  six servicers, while Treasury reported that 43 percent of borrowers who  canceled from a HAMP trial modification through August 2010 were in the  process of obtaining a proprietary modification, the data we received  indicated that 18 percent of these borrowers had received permanent  proprietary modifications, and 23 percent were in the process for being  approved for one. By including borrowers who received permanent  proprietary modifications alongside borrowers who were still in the  process for getting one, Treasury may not fully understand the extent to  which servicers are providing permanent assistance to borrowers being  denied or canceled from HAMP trial modifications.
While Treasury has taken steps to collect data on the outcomes of  borrowers who do not receive a HAMP trial or permanent modification— data that could be used to assess the extent to which these borrowers are  receiving other loss mitigation programs—the way in which Treasury has  asked servicers to report these data overstates the proportion of certain  outcomes and understates others, such as starting foreclosure  proceedings. In addition, Treasury’s reporting does not differentiate  between those who have received a proprietary modification and those  who are being evaluated for one. If the information presented in the  monthly servicer performance reports does not fully reflect the outcomes  of these borrowers, Treasury and the public will not have a complete  picture of their outcomes. Further, Treasury cannot determine the extent  to which servicers provided alternative loss mitigation programs to  borrowers denied or canceled from HAMP or evaluate the need for further  action to assist this group of borrowers.
section_title: Outcomes of Borrowers Vary by Whether Borrowers were Denied, Canceled, or Redefaulted, and by Servicer
paragraphs: We requested data from six servicers on the outcomes of borrowers who  (1) were denied a HAMP trial modification, (2) had a canceled HAMP trial  modification, or (3) redefaulted from a HAMP permanent modification.  According to the data we received, of the about 1.9 million GSE and non- GSE borrowers who were evaluated for a HAMP modification by these  servicers as of August 31, 2010, 38 percent (713,038) had been denied a  HAMP trial modification; 27 percent (505,606) had seen their HAMP trial  modifications canceled; and 1 percent (20,561) had redefaulted from a  HAMP permanent modification. We requested that the servicers report all  of the outcomes borrowers had received and they separate those who  were being evaluated for an outcome from those who had received them.  According to the data we received, borrowers experienced different  outcomes, depending on whether they were denied a HAMP trial  modification, received but were canceled from a trial modification, or  redefaulted from a permanent modification.
According to these servicers’ data through August 31, 2010, borrowers  who were denied HAMP trial modifications were more likely to become  current on their mortgages without any additional help from the servicer  (39 percent) than to have any other outcome (see fig. 5). According to  one servicer, borrowers who were denied a HAMP trial modification were  often current when they applied for a HAMP modification and, once  denied, were likely to remain current. In addition, 9 percent of these  borrowers paid off their loans. Twenty-eight percent of borrowers who  had been denied trial modifications received or were in the process for  receiving a permanent proprietary modification or a payment plan.  Servicers initiated foreclosure proceedings on 17 percent at some point  after being denied, while only 3 percent of borrowers completed  foreclosure. Several servicers explained that loss mitigation efforts can  often work in tandem, so a borrower could be referred for foreclosure and  evaluated for another outcome at the same time, and borrowers who were  referred for foreclosure may not necessarily complete it.
Of those borrowers who were canceled from a HAMP trial modification,  servicers often initiated actions that could result in the borrower retaining  the home. Specifically, 41 percent of these borrowers received or were in  the process for receiving a permanent proprietary modification, and 16  percent received or were in the process for receiving a payment plan (see  fig. 6). However, servicers started foreclosure proceedings on 27 percent  of borrowers at some point after the HAMP trial modification being  canceled, but, similar to borrowers who were denied a HAMP trial  modification during this time period, a small percentage completed  foreclosure (4 percent). Compared with borrowers who were denied,  borrowers who had a HAMP trial modification canceled were less likely to  become current on their mortgages (15 percent) or to pay off their loan   (4 percent).
There were wide ranges in the outcomes among servicers we contacted  for borrowers who were canceled from HAMP trial modifications (see  table 1). For example, of those borrowers who had a canceled HAMP trial  modification, one servicer reported that 26 percent had obtained a  proprietary modification through August 31, 2010, compared with 14  percent for another servicer. In addition, for borrowers who had a  canceled HAMP trial modification, one servicer reported foreclosure  completion rates of almost 7 percent, while another servicer reported  foreclosure completion rates of roughly 1 percent. Servicers reported a  wide range of outcomes, which depend on factors such as the composition  of loan portfolios and proprietary loss mitigation programs, including  modifications, payment plans, and short sales. These programs can differ  in design and may have, among other things, different eligibility  requirements for borrowers.
Finally, of the borrowers who redefaulted from a HAMP permanent  modification, almost half were reflected in categories other than  proprietary modification, payment plan, becoming current, foreclosure  alternative, foreclosure, or loan payoff (see fig. 7). Twenty-eight percent of  borrowers who redefaulted from permanent modifications were referred  for foreclosure at some point after redefaulting, but, like borrowers denied  or canceled from a HAMP trial modification, the percentage of borrowers  who completed foreclosure remained low relative to other outcomes (less  than 1 percent). Unlike borrowers who were denied or canceled,  borrowers who redefaulted were less likely to receive or be in the process  for receiving a permanent proprietary modification or payment plan after  redefaulting, with 27 percent of borrowers receiving or in the process for  receiving one of the outcomes. In addition, less than 1 percent of  borrowers who redefaulted became current as of August 31, 2010.
section_title: Proprietary Modifications Offer Additional Flexibility and More Borrowers Have Received Them than HAMP Permanent Modifications
paragraphs: As noted above, servicers have reported that many borrowers who were  denied, canceled, or redefaulted from HAMP have received or were being  evaluated for proprietary modifications. According to HOPE NOW,  servicers completed over 1.2 million proprietary modifications from  January 2010 through December 2010, compared with roughly 513,000  permanent HAMP modifications (see fig. 8).
In designing the HAMP program, Treasury stated that it had to balance the  needs of taxpayers, investors, and borrowers and develop a program that  would ensure consistent and equitable treatment of borrowers by multiple  servicers. In contrast, servicers told us they had greater flexibility with  respect to the types of borrowers and conditions under which they could  offer proprietary modifications. First, several servicers told us their  proprietary modification programs had fewer documentation  requirements. According to HAMP guidelines, borrowers must submit all  required documentation in order to be evaluated for and offered a HAMP  modification, including a Request for Modification and Affidavit, a tax  form, documentation to support income, and a Dodd-Frank Certification  form. While Treasury has taken steps to streamline documentation  requirements in the past, both Treasury and servicers acknowledge that  borrowers’ failure to submit required documentation was one of the  primary reasons for being denied or canceled from a HAMP trial  modification. However, a servicer can offer a proprietary modification  even if the borrower lacked all of the required documentation. For  example, one servicer told us that if a borrower who was required to  submit 10 documents for a proprietary modification submitted only 6, the  servicer could still offer a modification if the 6 documents provided  sufficient information.
Second, several servicers told us they were able to offer more proprietary  modifications than HAMP modifications or help borrowers whom HAMP  cannot, because their proprietary modifications had fewer eligibility  requirements, such as restrictions on occupancy type. Treasury  announced early on that the HAMP program was not designed to help all  borrowers, such as those with investment properties and second homes.  For a borrower to be eligible for a modification under HAMP, the property  must be owner occupied, and according to Treasury’s HAMP data, through  September 2010, servicers have denied roughly 63,000 HAMP applicants (7  percent) who they said failed to meet this requirement. But all six  servicers who provided us with information offered proprietary  modification programs without this restriction, allowing them to reach  borrowers who were ineligible for HAMP. One servicer we spoke with  noted that it had a large portfolio of investment properties that do not  meet the eligibility requirements for a HAMP modification.
In addition, while HAMP guidelines require borrowers to have a front-end  DTI above 31 percent, all of the servicers we spoke with indicated their  proprietary modification programs also served borrowers who had front- end DTIs below 31 percent. The servicers explained that even with low  DTIs many of these borrowers were still unable to make their mortgage  payments because they had high levels of back-end debt, such as credit  card balances and car loans. We previously reported that HAMP requires  borrowers with high total household debt levels (postmodification DTI  ratios greater than 55 percent) to agree to obtain counseling, but it does  not require documentation that they actually received this counseling.  We continue to believe that it is important that Treasury determine  whether borrowers are receiving this counseling and whether the  counseling requirement is having its intended effect of limiting redefa ults,  as we recommended. When asked about the differences between effe ctive  proprietary modifications and HAMP modifications, roughly 63 percent of  housing counselors who responded to this question on our Web-based  survey ranked the ability of proprietary modifications to reach borrowers  with DTIs less than 31 percent as one of the main differences. According  to Treasury’s HAMP data, through September 2010, roughly 215,000  borrowers (24 percent) who were denied HAMP were denied because they  had a front-end DTI of less than 31 percent. Almost all of the servicers we  received information from indicated that the eligibility requirements for  their proprietary modification programs allowed mortgage balances that  exceeded HAMP limits. portfolio comprised super-jumbo loans, many of which fell outside the  HAMP mortgage balance limits. Roughly 106,000 borrowers (12 percent)  who were denied HAMP trial modifications through September 2010 were  denied because of ineligible mortgages. Fifty-two percent of housing  counselors also identified higher mortgage balance limits as another key  difference between proprietary modifications and HAMP modifications.
For a one-unit property, the unpaid principal balance limit to be eligible for the HAMP  program is $729,750; for a two-unit, $934,200; for a three-unit, $1,129,250; for a four-unit,  $1,403,400. allowing servicers to bring a borrower’s payment down to a more  affordable level for some borrowers. In addition, for a servicer to be  required to offer a borrower a HAMP modification, HAMP requires the  borrower to pass the NPV test with a front-end DTI ratio of 31 percent.  However, some borrowers may fail the test at this level but would be able  to pass with a higher DTI ratio—for example, at 38 percent. These  borrowers may not be able to receive a HAMP modification, even though a  DTI ratio of 38 percent may have been more affordable than their current  mortgage payment. Some borrowers who are denied a HAMP modification  due to a negative NPV result but have a positive NPV result with a higher  front-end DTI may be offered a proprietary modification. For example, one  servicer plans to use variable front-end DTI thresholds to bring borrowers’  DTI ratios into more affordable ranges. The servicer will calculate  borrowers with front-end DTI ratios greater than 31 percent based on 31  percent, 35 percent, and 38 percent thresholds, and borrowers with front- end DTI ratios less than 31 percent could be brought down to a DTI as low  as 24 percent if they pass the NPV test at this level. The servicer estimates  that of 3,370 borrowers who were denied a HAMP trial modification  because their front-end DTI was already below 31 percent or as a result of  a negative NPV, 2,415 would pass the NPV test using the flexible front-end  DTI ratio thresholds and could receive a proprietary modification.
In addition, having the flexibility to bring borrowers’ front-end DTI ratios  to below 31 percent allows servicers to account for borrowers’ back-end  DTI ratios when offering proprietary modifications. Several of the  servicers we spoke with had proprietary modification programs that  considered borrowers’ overall affordability, or ability to pay, when  modifying a mortgage, and the servicers calculated affordability  differently. For example, one servicer addressed overall affordability by  using a net spendable income calculation to determine a borrower’s  monthly mortgage payment. According to the servicer, its net spendable  income calculation factors in all of the borrower’s income and deducts all  expenses, including credit cards and utility bills. This proprietary  modification program was designed to leave the borrower with  approximately 10 percent of net spendable income, with a minimum of  $250 and a maximum of $1,000. Another servicer reported using family size  to determine affordability. The servicer indicated that it calculated  borrowers’ monthly payments based on the nature of the borrowers’  hardship, their current financial situation, and their change in  circumstances, as well as a postmodification monthly net disposable  income of $600 and an additional $100 per dependent. By incorporating  family size, this proprietary modification program may be able to help  some borrowers who may otherwise not qualify for HAMP.
Because servicers had a variety of proprietary modification programs that  calculated affordability in a number of ways, and because their loan  portfolios differed, the changes in mortgage terms as a result of  proprietary modifications varied across servicers. According to data we  received from six servicers, roughly 655,000 borrowers had permanent  proprietary modifications as of August 31, 2010. These borrowers had their  interest rate reduced by an average of 2.35 to 3.87 percentage points,  depending on the servicer. In addition, the amount of term extension  varied by each servicer. Specifically, servicers extended mortgage terms  by an average of 87 to 178 months for borrowers who had permanent  proprietary modifications. Lastly, servicers forbore varying amounts of  principal, ranging from an average of $33,971 to $116,488, or 16 percent to  60 percent of the unpaid principal balance prior to modification.
section_title: The Sustainability of Both HAMP and Proprietary Modifications Remain Unclear
paragraphs: While the number of proprietary modifications has outpaced the number  of HAMP modifications, the sustainability of both types of modifications is  still unclear. HAMP redefault rates have been relatively low to date, but it  is likely too soon to draw conclusions about HAMP redefaults. While data  on the redefault rates of HAMP and proprietary modifications are limited,  the Office of the Comptroller of the Currency (OCC) and Office of Thrift  Supervision (OTS) reported that 11 percent of HAMP modifications and 22  percent of proprietary modifications that started in the fourth quarter of  2009 were 60 or more days delinquent after 6 months. In addition, one  servicer reported the redefault rates for its proprietary modifications were  26 percent at 6 months and roughly 40 percent at 12 months after the loan  was modified, while another servicer reported redefault rates of 32  percent at 6 months and 51 percent at 12 months.
Proprietary modifications may not reduce monthly mortgage payments as  much as HAMP modifications, potentially affecting the ability of  borrowers to maintain their modified payments. According to OCC and  OTS, during the third quarter of 2010, proprietary modifications reduced  monthly mortgage payments by an average of $332 per month, while  HAMP modifications reduced them by an average of $585 per month.  According to our analysis of Treasury’s HAMP data, borrowers who had a  GSE or non-GSE HAMP permanent modification as of September 30, 2010,  had their payments reduced by an average of $632, or 33 percent of the  average payment before modification. According to the data we received  from six servicers, for GSE and non-GSE loans, borrowers with a  permanent proprietary modification as of August 31, 2010, had their  monthly mortgage payments reduced from an average of $100 to $691 per  month, or 7 to 30 percent of the average monthly payment before  modification. In response to our survey, housing counselors provided  several examples of borrowers who had received proprietary  modifications that did not substantially reduce monthly mortgage  payments and that, in some cases, increased payments.
As we have seen, the extent to which modifications reduce monthly  mortgage payments may correlate with the ability of borrowers to  maintain modified payments. Specifically, OCC and OTS reported that  modifications made in 2010 that reduced monthly mortgage payments by  20 percent or more resulted in a redefault rate of 12 percent 6 months after  modification compared with 28 percent for modifications that reduced  payments by 10 percent or less. However, servicers have told us their  proprietary modification programs can serve borrowers with front-end  DTIs below 31 percent—borrowers who would be ineligible for a HAMP  modification. As a result, the average percentage monthly reduction for  these borrowers may not be as high as it would be for those with a HAMP  modification, because their premodification front-end DTI ratios were  lower than those of borrowers who received a HAMP modification. Going  forward, it will be important for Treasury to monitor redefault rates and  understand how they differ across servicers and modification terms. We  will also be looking at the redefault rates of HAMP and non-HAMP  modifications, as well as the effectiveness of other foreclosure mitigation  efforts, as part of our ongoing work looking at the broader federal  response to the foreclosure crisis.
section_title: Conclusions
paragraphs: HAMP and the newer MHA programs were part of an unprecedented  response to a particularly difficult time for our nation’s mortgage markets.  However, 2 years after Treasury first announced that it would use $50  billion in TARP funds for various programs intended to preserve  homeownership and protect home values, foreclosure rates remain at  historically high levels. While Treasury originally estimated that 3 to 4  million people would be helped by these programs, only 550,000  borrowers had received permanent HAMP first-lien modifications as of  November 30, 2010, and the number of borrowers starting trial  modifications has been rapidly declining since October 2009. Moreover,  Treasury has experienced challenges in implementing its other TARP- funded housing initiatives. In particular, the 2MP program, which Treasury  has stated is needed to create a comprehensive solution for borrowers  struggling to make their mortgage payments, has had a slow start.  According to six large MHA servicers, they have faced difficulties— matching errors and omissions—in using the database required for  identifying second liens eligible for modification under the program. As a  result, servicers told us that relatively few second liens had been modified  as of August 2010, a year after program guidelines were first issued.  Treasury has taken some steps to address the issues that have slowed  down implementation of the program, but more could be done to inform  potentially eligible borrowers about 2MP. Specifically, borrowers whose  second liens may be eligible for modification under 2MP may not be aware  of the program or of any errors in the matching process, as servicers are  not required to inform borrowers receiving HAMP first-lien modifications  that they could also be eligible for 2MP. Consequently, missed matches of  first and second liens could go undetected, and some borrowers who were  eligible for but not helped by the program are less able to keep up the  payments on their first-lien HAMP modifications.
HAFA and PRA, two other key components of Treasury’s TARP-funded  homeownership preservation effort, have also had slow starts. In fact,  servicers we spoke with did not expect HAFA to increase the overall  number of short sales performed, primarily due to extensive program  requirements that lengthen the time frames associated with a short sale  under the program. While Treasury has recently revised its HAFA program  requirements to allow servicers to bypass the HAMP first-lien program  eligibility review for borrowers interested solely in participating in HAFA  and relaxed other HAFA program requirements, it remains unclear the  extent to which these changes will result in greater program participation.  Additionally, because of the voluntary nature of the PRA program and  concerns over the lack of program transparency, including the level of  public reporting that will be available at the servicer level, it remains  unclear how many borrowers will receive principal reductions under PRA.  Treasury has stated that it will report on PRA activity when data are  available, and we continue to believe that it will be important that this  reporting includes the extent to which servicers determined that principal  reduction was beneficial to investors but did not offer it, as we  recommended in June 2010. If HAFA and PRA do not result in increased  program participation, Treasury’s efforts to combat the negative effects  associated with avoidable foreclosures will be compromised, potentially  limiting the ability of Treasury efforts to preserve homeownership and  protect home values.
Further, Treasury could do more to apply lessons learned from its  experience in implementing early HAMP programs to its more recent  initiatives. We reported in June 2010 that the implementation of other  TARP-funded homeownership preservation programs could benefit from  lessons learned in the initial stages of HAMP implementation. Specifically,  we noted that it would be important for Treasury to expeditiously develop  and implement new programs while also developing sufficient program  planning and implementation capacity, meaningful performance measures  and remedies, and appropriate risk assessments in accordance with  standards for effective program management. Already, 2MP, HAFA, and  PRA have undergone several revisions, and servicers cited changing  guidelines and short implementation periods as significant challenges in  fully implementing the programs. In July 2009, we recommended that  Treasury place a high priority on fully staffing vacancies in the  Homeownership Preservation Office (HPO) and evaluating staffing levels  and competencies. As of January 2011, Treasury has filled key positions in  HPO, but has not conducted a formal assessment of its staffing levels  despite the implementation of the newer programs. We continue to believe  that it is essential that Treasury ensure that it has enough staff with the  appropriate skills to govern TARP-funded housing programs effectively.  While Treasury has conducted reviews of the readiness of servicers  participating in 2MP, HAFA, and PRA to successfully implement the  programs, a large majority of servicers did not provide all documentation  required to demonstrate that the key tasks needed to support these  programs were in place. It is imperative that Treasury take swift action to  ensure that servicers have the ability to implement these programs since,  as we have seen with the slow progress of the HAMP first-lien  modification program, the success of these TARP-funded initiatives will be  largely driven by the capacity and willingness of servicers to implement  these programs in an expeditious and effective manner. In addition,  Treasury has not developed program-specific performance measures  against which to measure these programs’ success and has not specified  the remedies it will take if servicers are not meeting performance  standards. Without specific program measures and remedies, Treasury will  not be able to effectively assess the outcomes of these programs and hold  servicers accountable for performance goals. We continue to believe that  it is important for Treasury to develop such performance measures and  clear goals for them, as we have recommended.
Treasury requires servicers to submit data on borrowers who have been  evaluated for HAMP, and these data provide important information and  insights on the characteristics of borrowers who are in trial and permanent  HAMP modifications, who have been canceled from trial modifications, and  who have redefaulted from permanent modifications. However, Treasury’s  HAMP database also contains inaccurate or missing information on certain  key variables, including LTV ratios and borrowers’ race and ethnicity.  Treasury has stated that it is working to improve the quality of its data, and  it will be important that the agency do so expeditiously. Complete and  accurate information is important for Treasury to fully understand the  characteristics of borrowers who HAMP has been unable to help or  determine program compliance. Moreover, this information is important to  identify what additional steps or adjustments that could be made to existing  TARP-funded programs to better achieve the mandated goals of preserving  homeownership and protecting property values.
Finally, while Treasury has begun publicly reporting the outcomes for  borrowers who have been denied or canceled from HAMP trial  modifications, its reporting practices make it difficult to determine the  extent to which these borrowers are helped by non-HAMP (proprietary)  loan modifications. For example, data we collected from six large MHA  servicers showed that only 18 percent of borrowers canceled from a  HAMP trial modification had received a proprietary modification and an  additional 23 percent had a proprietary modification pending. However,  Treasury reported that 43 percent of these borrowers were in the process  of receiving a proprietary modification with those same six servicers.  Furthermore, Treasury’s system for reporting outcomes requires servicers  to place borrowers in only one category even when borrowers are being  evaluated for several possible outcomes, with proprietary modifications  reported first. As a result, the proportion of borrowers with proprietary  modifications is likely overstated relative to other possible outcomes, such  as foreclosure starts. Without accurate reporting of borrower outcomes,  Treasury cannot know the actual extent to which borrowers who are  denied, canceled, or redefaulted from HAMP are helped by other programs  or evaluate the need for further action to assist this group of homeowners.
section_title: Recommendations for Executive Action
paragraphs: As part of its efforts to continue improving the transparency and  accountability of MHA, we recommend that the Secretary of the Treasury  take actions to  require servicers to advise borrowers to notify their second-lien servicers  once a first lien has been modified under HAMP to reduce the risk that  borrowers with modified first liens are not captured in the LPS matching  database and, therefore, are not offered second-lien modifications;    ensure that servicers demonstrate they have the operational capacity and  infrastructure in place to successfully implement the requirements of the  2MP, HAFA, and PRA programs; and    consider methods for better capturing outcomes for borrowers who are  denied, canceled, or redefaulted from HAMP, including more accurately  reflecting what actions are completed or pending and allowing for the  reporting of multiple concurrent outcomes, in order to determine whether  borrowers are receiving effective assistance outside of HAMP and whether  additional actions may be needed to assist them.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Treasury for its review and comment,  and we received written comments from the Acting Assistant Secretary for  Financial Stability that are reprinted in appendix III. We also received  technical comments from Treasury that we incorporated into the report as  appropriate. In its written comments, Treasury stated that it appreciated  our efforts in assessing the housing programs initiated under its TARP  program and acknowledged the draft report’s description of the  operational capacity and infrastructure challenges faced by servicers in  implementing Treasury’s housing programs. In addition, Treasury noted  that our research in proprietary modifications made by servicers outside  of MHA was useful. However, Treasury stated that it believed that the draft  report raised certain criticisms regarding the design and implementation  of MHA that were unwarranted.
First, Treasury stated that the draft report criticized Treasury for the  number of changes made to its housing programs following their  implementation, and its alleged failure to incorporate the lessons it  learned from the first-lien HAMP program into the roll out and design of  other MHA programs, such as HAFA. Treasury stated that the report  should acknowledge the circumstances under which the programs were  first implemented. In response, we added some additional language  recognizing that HAMP and the newer MHA programs were part of an  unprecedented response to a particularly difficult time for our nation’s  mortgage markets. However, servicers we spoke with noted that ongoing  changes to guidelines have presented challenges such as needing to  update internal servicing systems and retrain staff which, in some cases,  delayed program implementation. In addition, as noted in the draft report,  Treasury has repeated some of the practices that were the focus of  previous recommendations we had made for the first-lien program in its  implementation of its newer MHA programs. For example, in our July 2009  report, we found that Treasury had not developed a means of  systematically assessing servicers’ capacity to meet program requirements  during program admission, and we recommended further action in this  area to increase the likelihood of success of the program. In our review of  the newer MHA programs, we also found that Treasury had not fully  ensured that servicers had the capacity to successfully implement these  programs. We continue to believe that such action is needed to better  ensure the likelihood of success of these newer MHA programs.
Second, Treasury raised concerns about the draft report’s comparison of  HAMP modifications to proprietary modifications. Treasury noted that it  did not believe that it was constructive to assess HAMP’s performance  based on the goals of proprietary programs that are not government  supported. We have added some additional language to the report to  provide additional context to the report’s discussion of proprietary  modifications. The purpose of this report was not to assess the  performance of HAMP modifications based on the goals of proprietary  modifications. Instead, the draft report provided a description of  proprietary modifications and some of the ways that they differ from  HAMP modifications. It does not suggest that the objective of HAMP  modifications and proprietary modifications are or should be the same,  particularly given Treasury’s responsibility to safeguard taxpayer dollars  under HAMP. As noted by Treasury in its comment letter, there is little  available information about these proprietary modifications, and the more  that is known about their terms and outcomes, the easier is will be for  policymakers and regulators to craft appropriate changes to MHA and  other housing programs aimed at preventing avoidable foreclosures.
Third, Treasury noted that the draft report criticized the completeness and  quality of the data collected by Treasury related to HAMP modifications,  and that it disagreed with the conclusion that missing or inaccurate  information limits Treasury’s ability to identify program gaps. Treasury  noted that it relies on data provided by the borrowers to the servicers and  it has improved significantly over the past 6 months, especially as the  program moved to verified income. Treasury stated that the data on  permanent modifications is robust, allowing Treasury to determine gaps in  programs and how to make improvements. In the draft report, we  acknowledged that Treasury is working with Fannie Mae to improve the  data and, particularly with borrower race and ethnicity information, the  data has improved over time. However, it is equally important that  Treasury obtain complete and accurate information on those who are  denied or canceled from a HAMP trial modification. Without such  information, Treasury cannot determine if servicers are implementing the  program fairly or whether additional actions may be necessary to address  the needs of borrowers who are denied or canceled from HAMP trial  modification. Going forward, it will be important for Treasury to continue  to improve the quality of its HAMP data as this information is important to  identify what additional steps or adjustments could be made to existing  TARP-funded housing programs to better achieve the mandated goals of  preserving homeownership and protecting property values.
We are sending copies of this report to interested congressional  committees and members of the Congressional Oversight Panel, Financial  Stability Oversight Board, Special Inspector General for TARP, Treasury,  the federal banking regulators, and others. This report is also available at  no charge on the GAO Web site at http://www.gao.gov.
If you or your staffs 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. GAO staff who made major contributions to this report are  listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To examine the status of the Department of Treasury’s (Treasury) second- lien modification, principal reduction, and foreclosure alternatives  programs and the design and implementation challenges Treasury and  servicers have faced with these programs to date, we spoke with and  obtained information from six large Making Homes Affordable (MHA)  servicers, including the four largest servicers participating in the Second- Lien Modification Program (2MP) at the start of our review. These six  servicers were: American Home Mortgage Servicing, Inc.; Bank of  America; CitiMortgage; JP Morgan Chase Bank; OneWest Bank; and Wells  Fargo Bank. We determined these as six large MHA servicers based on the  amount of Troubled Asset Relief Program (TARP) funds they were  allocated for loan modification programs. These six servicers collectively  represented 72 percent of the TARP funds allocated to participating  servicers. For each of these six servicers, we reviewed their 2MP, Home  Affordable Foreclosure Alternatives (HAFA), and the Principal Reduction  Alternatives (PRA) guidance, policies, procedures, process flows, training  materials, and risk assessments, as applicable; and interviewed  management staff. We also reviewed 2MP, HAFA, and PRA documentation  issued by Treasury, including the supplemental directives related to 2MP,  HAFA, and PRA, readiness assessments of servicers, and reporting process  flows. We also spoke with officials at Treasury to understand the  challenges faced in implementing these programs and the steps taken by  Treasury to assess the capacity needs and risks of these programs, as well  as steps taken to measure the programs’ success. We spoke with trade  associations representing investors, mortgage insurers, servicers, and an  organization representing homeowners and community advocates. Finally,  we reviewed the Standards for Internal Control in the Federal  Government to determine the key elements needed to ensure program  stability and adequate program management.
To examine the characteristics of homeowners who the Home Affordable  Modification Program (HAMP) has been able to help, we obtained and  analyzed Treasury’s HAMP data in its system of record, Investor  Reporting/2 (IR/2), through September 30, 2010. We reviewed Treasury  guidelines on reporting requirements for HAMP, including the information  servicers are required to report for borrowers who were denied trial  modifications, and spoke with Treasury and Fannie Mae officials to  understand potential inconsistencies and gaps in the data. We determined  that the data was sufficiently reliable for our purposes. We also used the  data to perform an econometric analysis of factors that contribute to  borrowers’ likelihood of seeing their trial modifications canceled (see  appendix II for more details). We received and incorporated feedback on  our model from Treasury and others. To obtain housing counselors’ views  of borrowers’ experiences with HAMP, we conducted a Web-based survey  of housing counselors who received funding from NeighborWorks  America, a national nonprofit organization created by Congress to provide  foreclosure prevention and other community revitalization assistance to  the more than 230 community-based organizations in its network. We  received complete responses from 396 counselors. This report does not  contain all the results from the survey. The survey and a more complete  tabulation of the results will be part of an upcoming report.
Finally, to examine the outcomes for borrowers who were denied or fell  out of HAMP trial or permanent modifications, we reviewed HAMP  program documentation on policies for evaluating these borrowers for  other loss mitigation programs. We reviewed the outcomes of borrowers  who applied for but did not receive a HAMP trial modification or who had  a canceled HAMP trial modification as reported by Treasury in the  monthly MHA servicer performance reports. We obtained documentation  from Treasury and interviewed servicers to understand how Treasury  collects data on the outcomes of these borrowers. In addition, we obtained  data from the six large MHA servicers noted earlier in this appendix.  Specifically, we obtained and analyzed data on the outcomes of all  borrowers who were denied a HAMP trial modification, had a canceled  HAMP trial modification, or redefaulted on a HAMP permanent  modification; the number of proprietary modifications completed; and the  characteristics of the terms of these proprietary modifications. The  servicers provided the data between when they began participating in the  HAMP program and August 31, 2010, or the date in which they submitted  their August 2010 reporting to Treasury (e.g., September 6, 2010).  According to the data we received, the number of trial modifications  offered by these six servicers represented 72 percent of the total number  of trial modifications offered by all servicers as reported by Treasury  through September 2, 2010. We determined that these data were reliable  for the purposes of our report. To understand why servicers may offer  more proprietary modifications than HAMP modifications, we reviewed  data on the number of completed proprietary modifications published by  HOPE NOW, an alliance between counselors, mortgage companies,  investors, and other mortgage market participants. In addition, we  reviewed documentation on the terms and eligibility requirements of the  proprietary modification programs offered by the six servicers  participating in our review. In addition, we interviewed these servicers  about the features of their proprietary modification programs. Also,  through our Web-based survey of housing counselors, we received  responses on the differences between effective proprietary modifications  and HAMP modifications, as well as examples of effective and ineffective  proprietary modifications. Finally, to understand the sustainability of  HAMP and proprietary modifications, we reviewed data published by the  Office of the Comptroller of the Currency and the Office of Thrift  Supervision on the redefault rates and monthly payment reduction of  HAMP modifications, as well as data we collected from servicers on the  redefault rates, terms, and monthly payment reductions of their GSE and  non-GSE proprietary modifications.
We conducted this performance audit from July 2010 through March 2011  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.
section_title: Appendix II: Description of GAO’s Econometric Analysis of HAMP Trial Loans Modifications Cancellations
subsections: section_title: Data and Model Specification
paragraphs: To describe the characteristics of the borrowers and mortgages that have  been canceled from the trial modification, we used an econometric analysis  rather than present descriptive statistics since it allowed us to control for  the impacts of potential confounding factors, including differences across  servicers as well as default-risk differences among the borrowers that are  not observable (unobserved borrower heterogeneity). Servicers who  participate in the Home Affordable Modification Program (HAMP) are  required to provide periodic loan level data to Fannie Mae in its capacity as  the administrator for the HAMP program. Specifically, servicers are required  to report data at the start of the trial modification period and during the  modification trial period, for loan set up of the approved modification, and  monthly after the modification is set up on Fannie Mae’s system. The data  used in our econometric analysis are for HAMP loans as of September 30,  2010. The data have one record per loan, with information on the loan  status—whether the loan is denied for trial modification, has entered the  trial plan, and its outcome (i.e., converted to the permanent modification, or  still active in the trial plan, or has fallen out). We excluded loans that  entered the trial plan from July 2010 through September 2010 (which is the  end of the current data set) because not enough time had likely elapsed for  loans in this pool to have defaulted or been canceled.
Through September 30, 2010, several servicers have signed up for HAMP.  Seventeen of them, we categorized as “large” based on the Treasury reported  data on “estimated eligible loans 60 days or more delinquent,” have over 90  percent of the loans—the remainder of the servicers were grouped into the  “other” category. For the universe of 1,361,832 loans that had entered the  trial period plan as of September 30, 2010, the average cancellation rate was  ta  50 percent. The sample we used for the regression analysis, based on da availability, consists of 727,095 loans (53 percent of the universe), with an  average cancellation rate of 50 percent. The sample data exclude servicers  whose share of loans or fallout rates for the sample differed a lot from that of  the universe; there are 13 “large” and “other” servicers.
Following the literature, we used a reduced-form probability model to help  determine the effects of the characteristics of the borrower and mortgage  on HAMP trial loan cancellations. Accordingly, based on economic  reasoning, data availability, the HAMP guidelines, and previous studies on  loan performance, we use probabilistic models to estimate the likelihood  that a loan modified under the trial period plan does not convert to a  permanent modification. The dependent variable for the cancellations is  binary, which equals 1 if a loan that entered the trial-period plan did not  convert to permanent modification and 0 otherwise. The explanatory  variables that we include in the model are conditioned by the available  data (see table 3 for the list of the variables).
We estimated cancellation rates using binomial logistic probability (logit)  models, an approach commonly used in economics to examine choices  and evaluate various events or outcomes. The models included fixed  effects for the servicers, which allowed us to account for both the  observed and unobserved characteristics of the servicers. We also  included state-level fixed effects to control for factors that vary across the  states but are the same within a state, such as the type of foreclosure laws  and other state policies on mortgages.
section_title: Econometric Results
paragraphs: The basic regression results from using the probability model, described  above and the data in table 3, are presented in table 4. Most of the  variables were statistically significant at the 5 percent level or better, and  typically consistent with our expectations as to the direction of their  impacts. We discuss below the key findings, based on statistically (and  economically) significant changes in the likelihood of cancellation, using  the estimated marginal effects of the explanatory variables.
Stated income. Loans that entered the trial plan using stated income  documentation were 52 percent more likely to be canceled, compared to  verified income. This effect was consistent with expectations since these  borrowers are likely not to able to provide verified documentation when  requested.
Trial length. Trial periods that last for 4 months or less were about 58  percent more likely to be canceled compared to those that stay in the trial  plan for a longer term. A longer stay in the trial plan implies the borrower’s  payments are current and, therefore, less likely to be canceled. This result  is generally consistent with the hazard models of mortgage performance  that indicate that loans that are likely to default do so much earlier than  later.
Delinquency status. Borrowers who were 60 days or 90 days or more past  due on their mortgages before the trial-period plan, compared to  borrowers who were current, were 6 and 9 percent more likely to have  their loans canceled, respectively; thus, the longer the delinquency status  the more likely the cancellation. This effect is consistent with  expectations.
Payment Reduction. The reduction in payment generally results from  interest rate reduction and extension of the loan term. Loans that receive  reductions in payments (of principal and interest) of more than 10 percent,  compared to reductions that are less than 10 percent or less (which  include no reductions and increases in payments), were 5 percent less  likely to be canceled. This result is expected since the payment reductions  increase the affordability of the mortgage, a key objective of HAMP.
MLTV ratios. Loans with an LTV between 120 and 140 percent were 7  percent less likely to be canceled, while loans with an LTV of more than  140 percent were 8 percent less likely to be canceled, compared to those  with MLTV 80 percent or less. This effect is contrary to expectation. The  reason for this outcome is while borrowers with high MLTV were more  likely to have their trial modifications canceled due to not making their  payments, they were disproportionately less likely to have their trial  modifications canceled because of insufficient documentation, compared  to those with MLTV at or below 80 percent.
Principal reductions. Loans that received principal reductions in the form  of principal forgiveness of between 1 and 50 percent of their total loan  balance were 6 percent less likely to be canceled compared with those  that did not receive principal forgiveness. We note that only about 2  percent of the loans have received principal forgiveness.
Servicer effects. We estimated the changes in the likelihood of cancellation  for the servicers using the marginal effects in table 4. To examine the  extent to which there is variation in the likelihood of cancellation across  servicers, we defined three distinct borrower profiles and calculated the  likelihood of cancellation for each of these borrower profiles for each  servicer. The “typical” borrower profile used mean values for the borrower  population; the “current” borrower profile used mean values for all  characteristics except that the borrower was assumed to be current (less  than 30 days delinquent); and the “delinquent” profile used mean values  for all characteristics except that the borrower was assumed to be  delinquent by 90 days or more. Because delinquency status predicts higher  likelihood of cancellations for borrowers who are seriously delinquent (90  days or more delinquent) compared to being current (less than 30 days  delinquent), the likelihood of cancellation increases with increased  delinquency for each servicer.
The results presented in fig. 9 show significant variation across the  servicers for cancellations of trial modifications. In particular, for the large  servicers, the likelihood of cancellation increased for about one-half of  them (ranging from 1 to 24 percent) but decreased for the other half  (ranging from -2 to -39 percent) for the “typical” borrower. Although the  major reasons for the cancellations vary across the servicers, they were  primarily due to incomplete documentation, trial plan default, and  ineligible mortgage.
State-level effects. For the state-level effects we estimated the change in  the likelihood of trial cancellations across the states using the marginal  effects in table 4, similar to the analysis of the servicer effects. The results  presented in fig.10 show that the changes in the likelihoods of  cancellations are higher in most of the states, including high mortgage  foreclosure states such as Arizona, California, Florida, Michigan, and  Nevada—which have over 40 percent of the trial loans.
Several checks were conducted to ensure that our results are reliable— including the sample used, model specification, and estimation  techniques. In all cases, our key results were generally unchanged.  Specifically, we excluded the servicer effects and state-level effects, and  included the start time of the trial to account for the housing and  economic conditions at the time of the modification. We also estimated  robust standard errors to ensure that the tests of significance are reliable.  Furthermore, although we could not use the fixed-effects technique to  control for unobserved heterogeneity across the borrowers because we do  not have repeat observations on the borrowers, we attempted to  incorporate unobserved heterogeneity among the borrowers using mixed  multinomial logit estimation. This is intended to help capture the  differential in risk preferences and idiosyncratic differences among the  borrowers that are not captured by the explanatory variables in the  models we estimated. However, we could not estimate the mass point  locations with any precision. Finally, we noted that since loans enter and  exit HAMP over time, these results may not necessary pertain in the  future.
section_title: Appendix III: Comments from the Department of the Treasury
subsections: section_title: GAO Comments
paragraphs: 1.  We acknowledge that Treasury’s HAMP program is part of an  unprecedented response to a particularly difficult time in our nation’s  mortgage markets. As noted in the report, we also acknowledge that  Treasury took steps to consult with servicers on the design and  implementation of 2MP, HAFA, and PRA. However, Treasury has  repeated some of the practices that were the focus of previous  recommendations we had made for the first-lien program in its  implementation of its newer MHA programs. For example, in July 2009,  we recommended that Treasury develop a means of systematically  assessing servicers’ capacity to meet program requirements during  program admission. While Treasury has begun assessing servicers’  capacity to implement 2MP, HAFA, and PRA, it has not ensured that  servicers have sufficiently demonstrated they have the capacity to  successfully and expeditiously implement these programs. In addition,  we recommended in June 2010 that Treasury finalize and implement  benchmarks for performance measures under the first-lien  modification program, as well as develop such measures for the newly  announced programs. Treasury has not developed these benchmarks,  either for the first-lien or the subsequent programs, making it difficult  to hold servicers accountable for performance and assess the extent to  which they have been successful. The pages referenced in this  comment are now pages 20 to 24.  2.  Treasury indicated that the draft report criticized it for a lack of a  database that includes second liens matched to HAMP-modified first  liens. The draft report does not criticize Treasury for the lack of a  database. Rather, the report notes that Treasury worked with LPS to  develop a database and has taken steps to improve the quality of the  data. We also note that servicers reported difficulties with the  matching of first and second liens, including concerns about the  accuracy and completeness of the data, which contributed to the slow  initial implementation of 2MP. As a result of these challenges,  servicers had been modified relatively few second liens a year after  program guidelines were issued. The pages referenced in this comment  are now pages 13 and 24.  3.  Treasury noted that the draft report suggested that extensive program  requirements and unclear guidance were obstacles to the program’s  success. The section of the draft report that discussed concerns about  extensive program requirements was associated with the  implementation challenges with the HAFA program only. The draft  report noted that Treasury itself has acknowledged these obstacles  and has since revised many of the HAFA program requirements that  were identified as contributing to the slow implementation of the  program. With regard to Treasury’s comments about program  guidance, we clarified the language in the report to focus on the  programs’ changing guidance. Servicers told us that ongoing program  revisions presented challenges such as needing to retrain staff and in  some cases delayed program implementation. The pages referenced in  this comment are now pages 15 and 48.  4.  Treasury noted that the draft report faulted Treasury for failing to set  numerical goals, especially with regard to the new programs. Treasury  stated the programs were launched under challenging and  unprecedented circumstances, making it extremely difficult to predict  how many homeowners will respond to servicer solicitations, provide  requisition documentation, or accept the modification when offered.  As we, the Congressional Oversight Panel, and SIGTARP have  previously noted, establishing key performance metrics and reporting  on individual servicers’ performance with respect to those metrics are  critical to transparency and accountability. As such, we continue to  believe that it is important that Treasury implement our June 2010  recommendation that it develop measures and benchmarks for its  newer MHA program. Without pre-established performance measures  and goals, Treasury will not be able to effectively assess the outcomes  of its MHA programs or hold servicers accountable for their  performance. The pages referenced in this comment are now pages 12,  23, and 49.  5.  Treasury stated that the draft report left the impression that Treasury  chose not to collect data on proprietary modifications. In fact, the  report notes that Treasury does collect data on the post-HAMP  disposition paths. We believe the information that Treasury collects  through its eight largest HAMP servicers provides important and useful  information to policymakers on the disposition of borrowers denied or  canceled from HAMP trial and permanent modifications. However, as  noted in the draft report, we believe the way in which the information  is collected makes it difficult to understand the outcomes of these  borrowers. Without accurate reporting of borrower outcomes,  Treasury cannot know the actual extent to which borrowers who are  denied, canceled, or redefaulted from HAMP are helped by other  programs or evaluate the need for further action to assist this group of  homeowners. The pages referenced in this comment are now pages 41  to 45.  6.  Treasury commented that the draft report suggested a criticism of  HAMP modifications because it notes that proprietary modifications  are more flexible and easier to secure than a HAMP modification.  Treasury notes that it manages a national, publicly financed program  and must balance the interest of taxpayers, investors, and borrowers in  designing and implementing the program. We agree. Our observation is  not intended to suggest that HAMP adopt the flexibility of proprietary  modifications. We are simply describing what is known about  proprietary modifications. Moreover, the report notes that the long- term sustainability of both types of modifications is unclear,  particularly for proprietary modifications because these modifications  may not reduce the monthly payments of borrowers as much as HAMP  modifications have. The pages referenced in this comment are now  pages 41 to 45.  7.  Treasury stated that it believed that the overall conclusion reached in  the draft report that the gaps in data limit Treasury’s ability to identify  program gaps is inaccurate and misleading. Treasury noted that some  of the examples of missing or inaccurate data are outliers. It also noted  that the data on permanent modifications is robust and that data  provided by servicers has improved significantly over the past 6  months. We have added text in the report to acknowledge that  Treasury’s data, particularly on the race and ethnicity of borrowers,  has improved over time, and that the reporting in the most recent  public file represents an improvement over the data we received as of  September 30, 2010. We also note that Treasury has worked with  Fannie Mae to make improvements to the data. While we acknowledge  that progress has been made in the quality and accuracy of the data  reported by servicers, we believe that it is critical that Treasury  continue to work toward improving the data so that it and  policymakers can understand the characteristics of both borrowers  who have been helped by HAMP as well as those who could not be  helped by HAMP. This information will be essential to identifying what  additional steps or adjustments could be made to existing TARP- funded programs or other government programs to prevent avoidable  foreclosures to better achieve the goals of preserving homeownership  and protecting property values. The pages referenced in this comment  are now pages 25 to 40.  8.  Treasury stated that it instructed servicers to report borrowers in a  single disposition path to avoid double counting of borrowers and,  thereby, provide a clear view of the current path the population is  following through the progression of potential loss mitigation  outcomes. However, the current method of data collection can distort  the current disposition status of borrowers because borrowers are  often “dual-tracked” (e.g., being evaluated for a proprietary  modification while also starting the foreclosure process). Reflecting  the full range of possible outcomes these borrowers face would  improve Treasury’s understanding of the extent to which borrowers  are helped by other programs and assist any evaluation of the need for  further action to assist this group of homeowners.  9.  Treasury stated that it disagreed with the draft report’s conclusion that  its programs had not been fully implemented. We revised the language  in the report to more clearly state that the implementation of  Treasury’s MHA programs had gotten off to a slow start and reiterated  that actions needed to be taken by Treasury to better ensure the  success of its programs. The page referenced in this comment is now  page 47.
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Lynda Downing, Harry Medina,  John Karikari (Lead Assistant Directors); Tania Calhoun; Emily Chalmers;  William Chatlos; Grace Cho; Rachel DeMarcus; Marc Molino; Mary Osorno;  Jared Sippel; Winnie Tsen; Jim Vitarello; and Heneng Yu made important  contributions to this report.