Troubled Asset Relief Program: Home Affordable Modification Program Continues to Face Implementation Challenges
Published: 2010-03-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Mortgage loan defaults and foreclosures are key factors behind the current economic downturn. In response, Congress passed and the President signed the Emergency Economic Stabilization Act of 2008, which authorized the Department of the Treasury to establish the Troubled Asset Relief Program (TARP). Under TARP, Treasury created the Home Affordable Modification Program (HAMP) as its cornerstone effort to meet the act's goal of protecting home values and preserving homeownership. This statement focuses on (1) HAMP's program activities to date, (2) status of GAO's July 2009 recommendations to strengthen HAMP's transparency and accountability, (3) preliminary findings from GAO's current work evaluating servicers' implementation of HAMP, and (4) additional challenges HAMP faces going forward. GAO obtained information from 10 HAMP servicers of various sizes that accounted for 71 percent of the TARP funds allocated to participating servicers. GAO reviewed their policies and procedures, interviewed management and quality assurance staff, and observed a sample of phone calls between borrowers and servicers. GAO is also reviewing samples of loan files for borrowers offered and denied HAMP trial modifications. Finally, GAO spoke with officials at Treasury and its financial agents--Fannie Mae and Freddie Mac--and is analyzing program information and data from these sources.
section_title: What GAO Found
paragraphs: When Treasury announced the program in March 2009, it estimated that HAMP could help 3 to 4 million borrowers. Through February 2010, including both the portion funded by TARP and the portion funded by Fannie Mae and Freddie Mac: (1) about 1.1 million borrowers had begun trial modifications; of which (2) about 800,000 were in active trial modifications, and (3) fewer than 200,000 permanent modifications had been made. As of early March 2010, the TARP-funded portion of the program had 113 participating servicers, and about $36.9 billion of the $50 billion in TARP funds for HAMP had been allocated to these servicers. A typical TARP-funded modification could result in a monthly mortgage payment reduction of about $520. Treasury has taken some steps, but has not fully addressed concerns that GAO raised in its July 2009 report on HAMP's transparency and accountability. For example, Treasury has yet to finalize some key components of its internal controls over the first-lien program, including establishing metrics and benchmarks for servicers' performance. In addition, Treasury has not finalized remedial actions, or penalties, for servicers not in compliance with HAMP guidelines. According to Treasury, these remedies will be completed in April 2010. Lastly, GAO reported that Treasury's projection that 3 to 4 million borrowers could be helped by HAMP was based on several uncertain assumptions and might be overly optimistic, and GAO recommended that Treasury update this estimate, but the Department has not yet done so. Preliminary results of GAO's ongoing work show inconsistencies in some aspects of program implementation. Although one of HAMP's goals was to ensure that mortgage modifications were standardized, Treasury has not issued specific guidelines for all program areas, allowing inconsistencies in how servicers treat borrowers. For example, the 10 servicers GAO contacted had 7 different sets of criteria for determining whether borrowers who were not yet 60 days delinquent qualified for HAMP. Also, some servicers were not systematically tracking all HAMP complaints and, in some cases, tracked only resolutions to certain types of complaints, such as written complaints addressed to the company president. GAO also found that servicers faced challenges implementing HAMP because of the number of changes to the program, some of which have required servicers to readjust their business practices, update their systems, and retrain staff. HAMP is likely to face additional challenges going forward, including successfully converting trial modifications, addressing the needs of borrowers who have substantial negative equity, limiting redefaults for those who receive modifications, and achieving program stability. While GAO's study is not yet completed, GAO shared preliminary findings with Treasury to allow it to address these issues in a timely manner.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work on the Home Affordable  Modification Program (HAMP), which the Department of the Treasury has  implemented under the Troubled Asset Relief Program (TARP). Dramatic  increases in home mortgage defaults and foreclosures have been at the  root of the current economic crisis. In response to the turmoil in the  financial markets, the Emergency Economic Stabilization Act of 2008 (the  act) authorized Treasury to establish TARP and to purchase and insure up  to $700 billion in troubled assets from financial institutions through  TARP. Treasury’s initial focus in implementing TARP was to stabilize the  financial markets and increase lending to businesses and consumers, but  the authorities granted to Treasury under the act were also to be used to  preserve homeownership, protect home values, and maximize assistance  for homeowners with respect to foreclosure mitigation efforts. On  February 18, 2009, Treasury announced the framework for HAMP, a  program that would use up to $50 billion of TARP funds to help at-risk  homeowners avoid potential foreclosure, primarily by reducing their  monthly mortgage payments.
My statement today is based on our July 23, 2009, report on HAMP and our  current work evaluating Treasury’s ongoing implementation of the  program. Specifically, this statement focuses on (1) HAMP program  activities to date, (2) the status of the recommendations we made in our  July 2009 report to strengthen the transparency and accountability of  HAMP, (3) preliminary findings from our current work evaluating  servicers’ implementation of HAMP, and (4) additional challenges HAMP  faces going forward. Our current work evaluates servicers’ practices in  informing borrowers about HAMP, the extent to which servicers have  been consistently evaluating borrowers for HAMP participation, and the  processes that have been put into place for borrowers to file HAMP  complaints. To examine these questions, we spoke with and obtained  information from 10 HAMP servicers of various sizes that collectively  represented 71 percent of the TARP funds allocated to participating  servicers and visited 6 of them. We reviewed their policies and procedures,  interviewed management and quality assurance staff, and observed a  sample of phone calls between borrowers and their servicers. We are also  reviewing samples of loan files from each servicer for borrowers who  were offered and denied HAMP trial modifications. Finally, we spoke with  officials at Treasury and its financial agents—Fannie Mae and Freddie  Mac—to understand how they were ensuring compliance with HAMP  guidelines and their processes for resolving HAMP complaints. We are  coordinating our work with other oversight entities that TARP created— the Congressional Oversight Panel (COP) and the Office of the Special  Inspector General for TARP (SIGTARP).
The work on which this testimony is based was performed 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 finding and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
subsections: section_title: Background
paragraphs: National default and foreclosure rates rose sharply from 2005 through 2009  to the highest level in 29 years (fig. 1). Default rates climbed from 1.09  percent to 5.09 percent, and foreclosure start rates—representing the  percentage of loans that entered the foreclosure process each quarter— grew almost threefold, from 0.42 percent to 1.2 percent. Put another way,  over half a million mortgages entered the foreclosure process in the fourth  quarter of 2009, compared with about 174,000 in the fourth quarter of 2005.  Finally, foreclosure inventory rates rose over 350 percent over the 4-year  period, increasing from 0.99 percent to 4.58 percent, with most of that  growth occurring after the second quarter of 2007. As a result, over 2  million loans were in the foreclosure inventory as of the end of 2009.  Foreclosure starts declined in the last quarter of 2009, but the number of  defaults continued to climb.
Foreclosure is a legal process that a mortgage lender initiates against a  homeowner who has missed a certain number of payments. The  foreclosure process has several possible outcomes but generally means  that the homeowner loses the property, typically because it is sold to  repay the outstanding debt or repossessed by the lender. The foreclosure  process is usually governed by state law and varies widely by state.  Foreclosure processes generally fall into one of two categories—judicial  foreclosures, which proceed through courts, and nonjudicial foreclosures,  which do not involve court proceedings. The legal fees, foregone interest,  property taxes, repayment of former homeowners’ delinquent obligations,  and selling expenses can make foreclosure extremely costly to lenders.  Options to avoid foreclosure include forbearance plans, short sales, deeds  in lieu of foreclosure, and loan modifications. With forbearance plans and  loan modifications, the borrower retains ownership of the property. With  short sales and deeds in lieu of foreclosure, the borrower does not.
In March 2009, Treasury issued the first HAMP guidelines for modifying  first lien mortgages in an effort to help homeowners avoid foreclosure.  The goal of the first-lien mortgage modification program is to reduce the  monthly payments of struggling homeowners to more affordable levels— specifically 31 percent of household income. According to Treasury,  HAMP was intended to offer reduced monthly payments to up to 3 to 4  million homeowners. Under the first-lien modification program, Treasury  shares the cost of reducing the borrower’s monthly mortgage payments  with mortgage holders/investors and provides various financial incentives  to servicers, borrowers, and mortgage holders/investors for loans modified  under the program for 5 years. To be eligible for a first-lien loan  modification:  the property must be owner occupied and the borrower’s primary  residence; the property must be a single-family property (1 to 4 units) with a  maximum unpaid principal balance on the unmodified first-lien mortgage  that is equal to or less than $729,750 for a 1-unit property; the loan must have been originated on or before January 1, 2009; and the monthly first-lien mortgage payment must be more than 31 percent of  the homeowner’s gross monthly income.
Borrowers have until December 31, 2012, to be accepted into the first-lien  modification program. HAMP also includes other subprograms that, for  example, offer incentives to modify or pay off second-lien loans of  borrowers whose first mortgages were modified under HAMP and to  pursue foreclosure alternatives when a HAMP modification cannot be  offered.
The HAMP first-lien modification program has four main features:  1.  Cost sharing – Mortgage holders/investors will be required to take the  first loss in reducing the borrower’s monthly payments to no more  than 38 percent of the borrower’s income. Treasury will then use 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, the payment may increase by  1 percent a year to a cap of the Freddie Mac rate for 30-year fixed rate  loans as of the date that the modification agreement is prepared.  2.  Standardized net present value (NPV) test – The NPV test  compares expected cash flows from a modified loan to the same loan  with no modification. If the expected 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  test increases mortgage holder/investor confidence and helps ensure  that borrowers are treated consistently under the program by  providing a transparent and externally derived objective standard for  all loan servicers to follow.  3.  Standardized waterfall – Servicers must follow a sequential  modification process to reduce payments to 31 percent of gross  monthly income. Servicers must first capitalize accrued interest and  expenses paid to third parties. Next, interest rates must be reduced to  the higher of 2 percent or a level that achieves the 31 percent debt-to- income target. If the debt-to-income ratio is still over 31 percent,  servicers must then extend the amortization period of the loan up to 40  years. Finally, if the debt-to-income ratio is still over 31 percent, the  servicer must forbear—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. 4.  Incentive payment structure – Treasury will use HAMP funds to  provide both one-time and ongoing (“pay-for-success”) incentives to  loan servicers, mortgage holders/investors, and borrowers to increase  the likelihood that the program will produce successful modifications  over the long term and help cover the servicers’ and investors’ costs of  modifying a loan.
Prior to HAMP, many servicers offered their own loan modification  programs, but the vast majority of these loan modifications increased or  did not change the borrower’s monthly mortgage payment. Rather, the  focus of these programs was on bringing delinquent loans current by  adding past due interest, advances for taxes or insurance, and other fees to  the loan balance. Some of these loan modifications changed the interest  rate or remaining term of the loan but typically focused on reducing  payments to 38 rather than 31 percent of the borrower’s gross monthly  income. For example, FDIC’s IndyMac Federal Bank loan modification  program, on which HAMP is partially based, initially reduced payments to  38 percent of the borrower’s gross monthly income before subsequently  revising the payment target to 31 percent. Many servicers continue to offer  non-HAMP loan modifications for borrowers who do not qualify for  HAMP. Appendix I provides examples of non-HAMP loan modification  programs and an overview of other federal foreclosure prevention  programs.
section_title: The HAMP Loan Modification Program Has Made Limited Progress to Date
paragraphs: Treasury first announced HAMP in February 2009 and issued the first  implementation guidelines in March 2009. Since then, Treasury has issued  11 supplemental directives for the HAMP program, 8 of them for the first- lien modification program (fig. 2). The early supplemental directives  tended to focus on basic implementation issues, but the later directives  resulted in significant changes to the program—for example, requiring  servicers to send written denial notices to borrowers, streamlining the  process used by servicers for evaluating borrowers, and requiring that  servicers verify borrowers’ income before initiating trial modifications.
As of March 9, 2010, 113 servicers had signed HAMP Servicer Participation  Agreements to modify loans not owned or guaranteed by the government  sponsored enterprises (GSE) Fannie Mae and Freddie Mac. Roughly $36.9  billion in TARP funds have been allocated to these servicers for  modification of non-GSE loans. These servicers include national financial  institutions such as Bank of America, Wells Fargo, and JP Morgan Chase  and national servicing organizations such as GMAC Mortgage and Ocwen.  Fannie Mae and Freddie Mac required all servicers of loans that they  owned or guaranteed to participate in the GSE HAMP program.
Treasury reported that through February 2010 servicers had offered nearly  1.4 million HAMP trial modifications to borrowers of GSE and non-GSE  loans, and roughly 1.1 million of these had begun HAMP trial  modifications. Of the trial modifications begun, about 0.8 million were in  active trial modifications, fewer than 0.2 million were in active permanent  modifications, and the remaining had been canceled. As shown in figure 3,  the number of trial modifications started generally increased until October  2009 but then decreased. In part, the decrease in new trial modifications  may be the result of a shift in focus on the part of Treasury and the  servicers from starting new modifications to making existing trial  modifications permanent. In July 2009, Treasury announced a goal of  500,000 trial modifications started by November 1, 2009. In November,  however, Treasury announced a campaign to increase the number of  conversions to permanent modifications. Although the first trial  modifications started nearly a year ago, servicers are completing  permanent modifications at a rate slower than Treasury expected, with 32  percent of loans that have been in trial for 3 months or more approved for  conversion. Servicers we spoke with cited several challenges in making  trial modifications permanent, including obtaining all the required  documentation and borrowers who missed trial period payments.
To date, Treasury has reported limited information on the number of  borrowers who have been denied trial modifications under HAMP. The 10  HAMP servicers that we spoke with reported a wide range of denial rates.  The reasons for denying trial modifications varied by servicer—for  example, one servicer reported high proportions of investors prohibiting  HAMP modifications and another servicer reported insufficient or  excessive borrower income as the most common reasons for denial.
Additionally, Treasury has provided limited data on the performance of  HAMP modifications, both trial and permanent. According to program  administrators, servicers are not required to report trial period payments  on a monthly basis, and these payments may not be reported until the trial  modification becomes official. Thus, it is difficult to determine the number  of borrowers in trial modifications who may be delinquent in their trial  payments. Limited information is available on the performance of  permanent modifications because few trials have become permanent.  According to Treasury, through the end of February 2010, 1,473 of the  170,207 permanent modifications made had defaulted, and 26 had paid off  their loans.
HAMP payments are contingent upon trial modifications becoming  permanent, and given the small number of permanent modifications to  date, Treasury has made relatively few incentive payments to investors,  servicers, and borrowers. According to Treasury, through the end of  February 2010, a total of $58 million had been disbursed to servicers and  investors. Roughly 78 percent of these payments went to servicers and 22  percent to investors. As of March 1, 2010, no incentive payments had been  made on borrowers’ behalf because no borrowers had reached the first  anniversary of their trial modification, as the program requires before  making the incentive payment.
Overall, non-GSE borrowers participating in HAMP had their mortgage  interest rates on their loans reduced by approximately 5.5 percentage  points (from 7.5 percent to 2.0 percent on average) and for nearly half of  these borrowers had seen their loan terms extended to 40 years (an  increase of 13 years beyond the original remaining term of the loan). To  show the payments that Treasury might make for a typical modification,  we developed an example of first-lien cost-sharing and incentive payments  based on median loan and borrower characteristics of non-GSE borrowers  entering trial modifications through February 17, 2010. For a borrower  with a loan of about $222,000 who is paying 44 percent of his gross  monthly income toward monthly housing payments, a HAMP modification  would reduce the monthly housing payment by $520, from $1,760 to  $1,240. Excluding the Home Price Decline Protection (HPDP) incentive,  over 5 years Treasury would pay an investor $9,900 for the difference in  mortgage payments and other incentives. A servicer would receive $4,500,  and a borrower $5,000. In total, the borrower would receive $36,200 in the  form of reduced payments and incentives. Appendix II elaborates on this  example.
section_title: Further Actions Needed by Treasury to Improve HAMP’s Transparency and Accountability
paragraphs: In our July 2009 report on HAMP, we noted that Treasury’s projection that  3 to 4 million borrowers could be offered loan modifications was based on  several uncertain assumptions and might be overly optimistic. Specifically,  we reported that some of the key assumptions and calculations regarding  the number of borrowers whose loans would be successfully modified  under HAMP using TARP funds were necessarily based on limited analyses  and data. According to Treasury, projections for the number of non-GSE  borrowers who will participate in HAMP are updated quarterly through the  revised allocation of TARP funds for HAMP servicers. Nonetheless,  according to Treasury’s Web site, Treasury continues to expect that HAMP  will offer reduced monthly payments to up to 3 to 4 million borrowers.
We also reported that while HAMP is the cornerstone effort under TARP to  meet the act’s goals of preserving homeownership and protecting home  values, a number of HAMP programs remained largely undefined. Since  that time, additional details of the HPDP incentives, second-lien  modification program, and foreclosure alternatives program have been  announced, but the number of homeowners who can be helped under  these programs remains unclear. In July, we noted that Treasury had not  estimated the number of additional modifications that would be made as a  result of HPDP incentive payments, even though the potential exists for  the incentive payments to use up to $10 billion in TARP funds. To date,  Treasury has not prepared any such estimate. In addition, while Treasury  has attempted to improve the targeting of these incentive payments by  incorporating the size of the unpaid principal balance and the loan-to- value ratio in the payment calculations, HPDP incentives continue to be  available for loans that would have passed the NPV test without them.  Similarly, although the second-lien and foreclosure alternatives programs  were included in the March 2009 program guidelines, no funds have yet  been disbursed under either of these programs to date. According to  Treasury, as of March 1—over a year after the first announcement of  HAMP—details of the second-lien program had not yet been finalized, and  only two servicers had signed an agreement to participate in the program.
Finally, we reported in July that Treasury had not finalized a  comprehensive system of internal control for HAMP. We noted that  important parts of a comprehensive system of internal control include,  among other things, implementing a system for determining compliance,  having sufficient numbers of staffing with the right skills, and establishing  and reviewing performance measures and indicators. According to  Treasury, it was working with its financial agents to implement such a  system and we continue to assess Treasury’s efforts in this area. While the  Chief of the Homeownership Preservation Office (HPO)—the office within  Treasury that is responsible for administering HAMP—consulted with staff  and reduced staffing levels from 36 to 29 full-time positions, Treasury has  not yet formally assessed whether HPO has staff with the skills needed to  govern the program effectively. In addition, Treasury has not yet finalized  remedies, or penalites, for servicers who are not in compliance with  HAMP guidelines. According to Treasury, these remedies will be complete  in April 2010 and a HAMP compliance committee has been established to  review issues related to servicers’ compliance with program guidelines  and to enforce appropriate remedies. Furthermore, while Treasury has put  in place some performance metrics for HAMP, it has not developed  benchmarks, or goals, to measure these metrics against, limiting its ability  to determine the success of the program. We continue to assess Treasury’s  efforts to establish a comprehensive system of internal control as part of  our ongoing oversight of the implementation of TARP and our annual audit  of TARP’s financial statements. Appendix III provides more detail on the  recommendations we made in July and Treasury’s responses to them.
section_title: Servicers Reported Facing Challenges in Implementing HAMP, and Program Implementation Was Sometimes Inconsistent
paragraphs: The servicers we interviewed told us that a major challenge they faced in  implementing the HAMP first-lien modification program was the number  of changes to the program. Each major program change often required  servicers to adjust their business practices, update their systems, and  retrain their servicing staff. An example of a significant program change  that servicers brought to our attention was Treasury’s recent requirement  that borrowers fully document their income before they can be evaluated  for a trial modification. According to servicers we contacted, Treasury told  servicers in July 2009 that it was a “best practice” to use stated income  information to evaluate borrowers for trial modifications in order to offer  modifications more quickly. As a result, some servicers that had been  requiring fully documented income before offering a trial modification  switched to using stated income, a change that involved altering business  processes, including updating company policies and retraining employees.
However, as Treasury became concerned about the number of trial  modifications that were not converting to permanent modifications due to  difficulty obtaining income documentation from borrowers after the trial  period began, Treasury subsequently reversed the policy. In January 2010,  Treasury announced that effective June 1, 2010, servicers would be  required to evaluate borrowers for trial modifications based on fully  documented income. Servicers that switched to or had been using stated  income will again have to alter their processes and policies to meet the  new standards.
Servicers also told us that the instability of Treasury’s NPV model  presented another implementation challenge. Although the NPV test is a  key element in evaluating borrowers for HAMP, servicers told us that they  experienced problems accessing and using the NPV model on Treasury’s  Web portal. According to Treasury, servicers were allowed to use their  own NPV models until September 1, but some servicers told us that the  lack of a Treasury model made it difficult for them to begin offering trial  modifications. One servicer told us that in the first few months of the  program, it was otherwise ready to start making trial modifications but it  was unable to effectively use Treasury’s Web-based NPV model. As a  result, it had to keep borrower applications on hold for several months.
In addition, although one of HAMP’s goals is to create clear, consistent,  and uniform guidance for loan modifications across the industry, we found  inconsistencies and wide variations among the HAMP servicers that we  contacted with respect to communication with borrowers about HAMP,  the criteria used to evaluate borrowers for imminent default, and the  tracking of HAMP complaints.
Communications with borrowers – Although Treasury guidelines state  that servicers must provide borrowers with information designed to help  them understand the modification process and must respond to HAMP  inquiries in a timely and appropriate manner, the HAMP servicers we  contacted differed widely in the timeliness and content of their initial  communications with borrowers about HAMP. For example, while some  servicers contacted borrowers about HAMP as soon as payment was 30  days delinquent, other servicers did not inform borrowers about HAMP  until payments were at least 60 days delinquent. Treasury has not  developed standards to evaluate servicers’ performance in communicating  with borrowers or penalties for servicers that do not meet Treasury’s  requirements.
We reviewed the Web sites of the 20 HAMP servicers with the largest  program allocations and found that 3 did not provide any information  about HAMP and that 3 others had posted inaccurate information about  the program. The inaccuracies included statements implying that the  program had not yet started and that only loans owned by Fannie Mae or  Freddie Mac were eligible for HAMP. After we notified Treasury of these  issues, two of the servicers updated their Web sites to include accurate  program information. However, one continued to contain inaccurate  information, and three continued to have minimal information about the  program, but, according to Treasury, the level of information cannot be  mandated.
Criteria for imminent default – According to HAMP guidelines,  borrowers in danger of imminently defaulting on their mortgages may be  eligible for HAMP modifications. Although Treasury’s goal is to create  uniform guidance for loan modifications across the industry, Treasury has  not provided specific guidance on how to evaluate non-GSE borrowers for  imminent default, leading to inconsistent practices among servicers.  Among the 10 servicers we contacted, there were 7 different sets of  criteria for determining imminent default. While some servicers do not  impose any requirements beyond the basic HAMP eligibility criteria, others  do. For example, four servicers aligned their imminent default criteria for  their non-GSE portfolios with the imminent default criteria that the GSEs  required for their loans prior to March 1, 2010. These criteria required  borrowers to have cash reserves equal to less than 3 months’ worth of  monthly housing payments and a ratio of disposable net income to  monthly housing payments (debt coverage ratio) of less than 1.20. One  servicer had begun using the new GSE criteria for its non-GSE loans,  which impose a maximum cash reserves limit of $25,000 and have no debt  coverage ratio requirement, for its non-GSE loans. In addition, four  servicers implemented additional criteria for imminent default: including a sliding scale for the borrower’s front-end debt-to-income  ratio (e.g., borrowers in the highest income category had to have a  front-end debt-to-income ratio of at least 40 percent);   an increase in expenses or decrease in income that is more than a  certain percentage of income;    a ratio of the remaining loan balance to the current house value that is  above a certain percentage; and   a “hardship” situation lasting more than 12 months.
As a result of the differences in criteria used to assess imminent default,  borrowers with the same financial situation and loan terms could be  approved for a HAMP loan modification by one servicer and denied by  another.
Tracking of HAMP complaints – While Treasury has directed HAMP  servicers to have procedures and systems in place to respond to HAMP  inquiries and complaints and to ensure fair and timely resolutions, some  servicers are not systematically tracking HAMP complaints or their  resolutions. For example, according to Treasury a compliance review  conducted by Freddie Mac in fall 2009 cited a servicer for not tracking,  monitoring, or reporting HAMP-specific complaints. In the absence of an  effective tracking system, the compliance agent could not determine  whether the complaints had been resolved. Similarly, several of the  servicers we interviewed indicated that they tracked resolutions only to  certain types of complaints. For example, several servicers told us that  they tracked only written HAMP complaints and that they handled these  written complaints differently depending on the addressee. In one case,  letters that were addressed to the president of the company were directed  to an “escalation team” that tracked the resolution of the complaint, and  required weekly updates to the borrower until the complaint was resolved.  In comparison, complaint letters that were not addressed to a company  executive were routed through a business unit without specific response  time requirements.
We have shared our preliminary observations about inconsistencies in  servicers’ implementation of HAMP with Treasury so that these  inconsistencies can be addressed in a timely manner. As we continue our  work evaluating servicers’ implementation of the program, we plan to  develop specific recommendations for Treasury as they are needed and  appropriate to ensure that HAMP borrowers are treated consistently.
section_title: HAMP Faces Additional Challenges Going Forward
paragraphs: While HAMP has offered some relief to over a million borrowers struggling  to make their mortgage payments, the program may face several additional  challenges going forward. These include problems converting trial to  permanent modifications, the growing issue of negative equity, redefaults  among borrowers with modifications, and program stability and  management.
Conversions – Treasury has taken some steps to address the challenge of  converting trial modifications to permanent modifications, but  conversions may continue to be an issue. During December 2009 and  January 2010, Treasury held a HAMP Conversion Campaign to help  borrowers who were in HAMP trial modifications convert to permanent  modifications. This effort included a temporary review period lasting  through January 31, which did not allow canceling trial modifications for  any reason other than failure to meet HAMP property requirements and a  requirement that the eight largest servicers submit conversion action  plans. Since the announcement of the Conversion Campaign, the number  of new conversions each month has increased from roughly 26,000 in  November to roughly 35,000 in December and nearly 50,000 in January.  However, as noted above, relatively few trial modifications have been  made permanent.
Negative Equity – As we reported in July 2009, HAMP may not address  the growing number of foreclosures among borrowers with negative equity  in their homes (so-called “underwater” borrowers). While HAMP’s  overriding policy objective is to make mortgages more affordable for  struggling homeowners, factors other than affordability may influence a  borrower’s decision to default, including the degree to which the borrower  is underwater. As we reported in July, many states with high foreclosure  rates also have high proportions of mortgages with negative equity. To  help address this issue, in February 2010 Treasury announced the Housing  Finance Agency Innovation Fund for the Hardest-Hit Housing Markets  program, which will allocate $1.5 billion in HAMP funds to five states that  have suffered an average home price drop of at least 20 percent from the  state’s price peak, based on a seasonally adjusted home price index.  However, the details of this program and the extent to which it will be able  to address defaults and foreclosures among this group of borrowers still  remain to be seen.
Redefaults – Some borrowers who receive a permanent HAMP  modification are likely to redefault on their modified mortgages. Because  few permanent modifications have been made to date, the redefault rate  for HAMP remains to be seen, but HAMP alone may not address the needs  of all borrowers. In particular, while HAMP lowers borrowers’ monthly  first-lien payments to 31 percent of their gross monthly income, some  borrowers may have high amounts of other debt, such as monthly  payments on second mortgages or cars. These borrowers may have  difficulty making even modified payments. In our July report, we noted  that while Treasury requires borrowers with high levels of total debt to  agree to obtained counseling, Treasury was not tracking whether  borrowers obtain this counseling. We therefore recommended that  Treasury consider methods of monitoring whether or not borrowers were  obtaining the required counseling. Treasury officials told us that they  considered methods of monitoring compliance but concluded that the  processes would be too burdensome. As a result, it remains difficult to  determine whether this program feature is likely to meet its purpose of  reducing redefaults among high debt-burdened borrowers. We continue to  believe that Treasury should seek cost-efficient methods to assess the  extent to which the counseling requirement is reducing redefaults.  Furthermore, the second-lien program, which could help reduce  borrowers’ total debt, has yet to be fully specified and, to date, only two  servicers have signed up for this program.
Program Stability and Management – HAMP continues to undergo  significant program changes, including the recently announced shift to  upfront income verification and the implementation of the second-lien  modification program, the foreclosure alternatives program, and the  Hardest-Hit Housing Markets program. Treasury will be challenged to  successfully implement these programs while also continuing to put in  place the controls and resources needed to continue the first-lien  modification program.
Given the magnitude of the investment of public funds in HAMP and the  fact that the program represents direct outlays of taxpayer dollars rather  than investments that may yield a return (as in other TARP programs), it is  imperative that Treasury continue to improve HAMP’s transparency and  accountability. As we have noted, HAMP is Treasury’s cornerstone effort  under TARP to meet the act’s purposes of preserving homeownership and  protecting home values. As the number of delinquent loans and  foreclosures continues to climb and home values continue to fall in many  areas of the country, Treasury will need to ensure that borrowers receive  consistent access to and treatment from servicers. Treasury also needs to  make sure that it has the information, controls, and resources to  successfully implement a still-developing program. We will continue to  evaluate the implementation of HAMP as part of our ongoing oversight of  the activities and performance of TARP.
Mr. Chairman and Members of the Committee, I appreciate this  opportunity to discuss this critically important program and would be  happy to answer any questions that you may have. Thank you.
section_title: Contact
paragraphs: For further information on this testimony, please contact Richard J.  Hillman at (202) 512-8678 or hillmanr@gao.gov, Thomas J. McCool at (202)  512-2642 or mccoolt@gao.gov, or Mathew J. Scirè 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  statement. GAO staff who made major contributions to this statement are  listed in appendix IV.
section_title: Appendix I: Examples of Other Foreclosure Prevention Programs
paragraphs: Borrowers with loans owned or guaranteed by Fannie Mae or  Freddie Mac can refinance into a fixed rate loan at the current  market rate  Eligible borrowers are current on their loans, the owner occupant of  a one- to four-unit property, and have a loan-to-value ratio (LTV) of  less than 125 percent  Between February 2009 and February 2010, over 190,000  borrowers were refinanced through HARP  Borrowers can refinance into an affordable loan insured by FHA  Eligible borrowers are those who, among other factors, have a  monthly mortgage debt-to-income ratio above 31 percent  Servicers provided incentive payments; lenders required to write  down the existing mortgage amount depending on the borrower’s  monthly mortgage debt-to-income ratio and total household debt.
Borrowers must agree to share the equity created at the beginning  of their new Hope for Homeowners mortgage  Between October 2008 and January 2010, 96 loans were refinanced  under Hope for Homeowners  Eligible borrowers can get monthly mortgage payments reduced to  31 percent of gross monthly income.
Programs vary, but include modification programs aimed at reducing  monthly payments.
For example, one bank has a program to modify pay option  adjustable rate mortgages. Another bank modifies loans to decrease  monthly payments to between 31 and 40 percent of the borrower’s  monthly gross income.
section_title: Appendix II: Example of Treasury Payments for a Typical Modification over 5 Years
paragraphs: Term (month)
Interet rate (fixed)
House value of $246,667.
House value decreases 20%.
Reduction in payment of 0%.
subsections: section_title: Firt five year after loan modification
paragraphs: Payment for Monthly Reduction (from % to 1%)
Pay for Performance Success ($1,000/yr for 5 yrs)
Pay for Success ($1,000/yr for  yrs)
Home Price Decline Protection (HPDP)
section_title: Borrower benefit
paragraphs: Pay for Performance Success ($1,000/yr for 5 yrs)
Invetore eligile to receive HPDP incentive pyment depending on where the property  i locted. For thi exmple, if the tril modifiction were rted in Septemer 2009, invetore eligile for HPDP incentive tht rnge from $0 to $16,200. If the trirted dring Octoer,  Novemer, nd Decemer 2009, the mont cold rnge from $0 to $10,800. If the trirted  dring the firt 3 month of 2010, the incentive pyment cold asch as $5,880.
section_title: Appendix III: Treasury’s Actions in Response to GAO’s July 2009 HAMP Recommendations
subsections: section_title: Consider methods of monitoring whether borrowers with total household debt of more than 55 percent of their income who have been told that they must obtain HUD- approved housing counseling do so, and assessing how this counseling affects the performance of modified loans to see if the requirement is having its intended effect of limiting redefaults.
paragraphs: According to Treasury, it considered options for monitoring what  proportion of borrowers is obtaining counseling, but determined that it  would be too burdensome to implement.
Treasury does not plan to assess the effectiveness of counseling in  limiting redefaults because it believes that the benefits of counseling  on the performance of loan modifications is well documented and the  assessment of the benefits to HAMP borrowers is not needed.
Reevaluate the basis and design of the HPDP program to  ensure that HAMP funds are being used efficiently to  maximize the number of borrowers who are helped under  HAMP and to maximize overall benefits of utilizing  taxpayer dollars.
On July 31, 2009, Treasury announced detailed guidance on HPDP  that included changes to the program’s design that, according to  Treasury, improve the targeting of incentive payments to mortgages  that are at greater risk because of home price declines.
Treasury does not plan to limit HPDP incentives to modifications that  would otherwise not be made without the incentives, due to concerns  about potential manipulation of inputs by servicers to maximize  incentive payments and the additional burden of re-running the NPV  test for many loans.
Institute a system to routinely review and update key  assumptions and projections about the housing market  and the behavior of mortgage-holders, borrowers, and  servicers that underlie Treasury’s projection of the  number of borrowers whose loans are likely to be  modified under HAMP and revise the projection as  necessary in order to assess the program’s effectiveness  and structure.
According to Treasury, on a quarterly basis it is updating its  projections on the number of non-GSE first-lien modifications  expected when it revises the amount of TARP funds allocated to each  servicer under HAMP.
Treasury is gathering data on servicer performance in HAMP and  housing market conditions in order to improve and build upon the  assumptions underlying its projections about mortgage market  behavior.
Place a high priority on fully staffing vacant positions in  the Homeownership Preservation Office (HPO)— including filling the position of Chief Homeownership  Preservation Officer with a permanent placement—and  evaluate HPO’s staffing levels and competencies to  determine whether they are sufficient and appropriate to  effectively fulfill its HAMP governance responsibilities.
A permanent Chief Homeownership Preservation Officer was hired on  November 9, 2009.
According to Treasury, staffing levels for HPO have been revised from  36 full-time equivalent positions to 29.
According to Treasury, as of March 2010, HPO had filled 27 of the  total of 29 full-time positions.
Expeditiously finalize a comprehensive system of internal  control over HAMP, including policies, procedures, and  guidance for program activities, to ensure that the  interests of both the government and taxpayer are  protected and that the program objectives and  requirements are being met once loan modifications and  incentive payments begin.
According to Treasury, it will work with Fannie Mae and Freddie Mac  to build and refine the internal controls within these financial agents’  operations as new program components are implemented.
Treasury expects to finalize a list of remedies for servicers not in  compliance with HAMP guidelines by April 2010.
Expeditiously develop a means of systematically  assessing servicers’ capacity to meet program  requirements during program admission so that Treasury  can understand and address any risks associated with  individual servicers’ abilities to fulfill program  requirements, including those related to data reporting  and collection.
According to Treasury, a servicer self-evaluation form, which provides  information on the servicer’s capacity to implement HAMP, has been  implemented beginning with servicers who started signing Servicer  Participation Agreements in December 2009.
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Lynda Downing, Harry Medina,  John Karikari (Lead Assistant Directors); and Tania Calhoun, Emily  Chalmers, Heather Latta, Rachel DeMarcus, Karine McClosky, Marc  Molino, Mary Osorno, Winnie Tsen, and Jim Vitarello made important  contributions to this testimony.
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