Troubled Asset Relief Program: Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs
Published: 2010-06-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress created the Troubled Asset Relief Program (TARP) to, among other things, preserve homeownership and protect home values. In March 2009, the U.S. Department of the Treasury (Treasury) announced the Home Affordable Modification Program (HAMP) as its cornerstone effort to achieve these goals. This report examines (1) the extent to which HAMP servicers have treated borrowers consistently and (2) the actions that Treasury has taken to address the challenges of trial modification conversions, negative equity, redefaults, and program stability. GAO obtained information from 10 servicers that account for 71 percent of HAMP funds and spoke with Treasury, Fannie Mae, and Freddie Mac officials.
section_title: What GAO Found
paragraphs: While one of Treasury's stated goals for HAMP was to standardize the loan modification process across the servicing industry, GAO found inconsistencies in how servicers were treating borrowers under HAMP that could lead to inequitable treatment of similarly situated borrowers. First, because Treasury did not issue guidelines for soliciting borrowers for HAMP until a year after announcing the program, servicers notified borrowers about HAMP anywhere from 31 days to more than 60 days after a delinquency. Many borrowers also complained that they did not receive timely responses to their HAMP applications and had difficulty obtaining information about the program. Treasury has recently issued guidelines on borrower communications, and plans to monitor compliance with the guidelines. Second, Treasury has emphasized the importance of reaching borrowers before they are delinquent but has not issued guidelines for determining when borrowers are in imminent danger of default. As a result, the 10 servicers that GAO contacted reported 7 different sets of criteria for determining imminent default. Third, while Treasury required servicers to have internal quality assurance procedures to ensure compliance with HAMP requirements, Treasury did not specify how loan files should be sampled for review or what the reviews should contain. As a result, some servicers did not review trial modifications or HAMP denials as part of their quality assurance procedures. Fourth, Treasury has not specified which HAMP complaints should be tracked, and several servicers track only certain types of complaints. Fifth, Treasury has not clearly informed borrowers that the HOPE Hotline can be used to raise concerns about servicers' handling of HAMP loan modifications and to challenge potentially incorrect denials, likely limiting the number of borrowers who have used the hotline for these purposes. Finally, Treasury does not have clear consequences for servicers that do not comply with program requirements, potentially leading to inconsistencies in how instances of noncompliance are handled.

section_title: Letter
paragraphs: In response to the recent financial crisis, the federal government has been  seeking ways to help stem the wave of foreclosures and defaults that has  affected not only homeowners who have lost or are in danger of losing  their homes, but also neighborhoods, local businesses, lenders, and  investors. On October 3, 2008, the President signed into law the  Emergency Economic Stabilization Act of 2008 (the act) which, among  other things, called for the Department of the Treasury (Treasury) to  stabilize the financial markets, preserve homeownership, and protect  home values. The act authorized Treasury to establish the $700 billion  Troubled Asset Relief Program (TARP), which initially focused on  stabilizing financial markets and increasing lending to businesses and  consumers. Treasury initially intended to purchase troubled mortgages  and mortgage-related assets and to use its ownership position to influence  loan servicers and achieve more aggressive mortgage modification  standards. However, within 2 weeks of the act’s passage, Treasury  determined it needed to move more quickly to stabilize financial markets  and announced it would use $250 billion of TARP funds to inject capital  directly into qualified financial institutions by purchasing equity in them.  On February 18, 2009, Treasury announced the Home Affordability and  Stability Plan, which contained the framework for a mortgage  modification plan that later became the Home Affordable Modification  Program (HAMP). HAMP would use up to $50 billion in TARP funds to  help at-risk homeowners avoid potential foreclosure by modifying their  mortgages to reduce their monthly mortgage payments.
Under HAMP, Treasury’s Office of Financial Stability (OFS) provides  financial incentives to servicers, borrowers, and mortgage holders (or  investors for loans that have been securitized and sold in the secondary  market) to modify loans that are not owned or guaranteed by Fannie Mae  or Freddie Mac. Treasury shares the cost of reducing monthly payments  on first-lien mortgages with mortgage holders or investors. The initial  descriptions of HAMP also identified a number of subprograms—for  example, to modify or pay off second-lien loans for borrowers whose first  mortgages were modified under HAMP and to provide incentives to target  specific groups of homeowners and geographic areas that were especially  hard hit by foreclosures. More recently, in March 2010 Treasury  announced additional HAMP-funded programs to assist unemployed  borrowers and borrowers who were “underwater”—that is, those who  owed more on their mortgages than the value of their homes. Further,  Treasury announced that up to $14 billion of the original $50 billion in  TARP funds allocated for HAMP would be put toward a refinancing  program that would allow borrowers to receive principal reductions and  refinance into loans insured by the Federal Housing Administration (FHA).  Additionally, Treasury has designated $2.1 billion of the $50 billion to be  provided to 10 states under the Housing Finance Agency (HFA) Innovation  Fund for the Hardest-Hit Housing Markets (HFA Hardest-Hit Fund) with  the expectation that the states will use this money to develop innovative  programs that meet the act’s goals of preserving homeownership and  protecting home values. To date, most of the subprograms have yet to be  implemented.
The act also requires GAO to conduct ongoing oversight of actions taken  under TARP and to report at least every 60 days on TARP activities and  performance. Under this statutory mandate, we are continuing to report  on Treasury’s use of TARP funds to preserve homeownership and protect  home values. In July 2009, we reported on Treasury’s design and initial  implementation of HAMP, making a range of recommendations designed  to improve HAMP’s transparency and accountability. In March 2010, we  testified on continued HAMP implementation challenges that threatened  the successful implementation of the program. This 60-day report expands  on our March 2010 testimony and examines (1) the extent to which  servicers have been treating borrowers consistently under HAMP and the  actions that Treasury and its financial agents have taken to ensure  consistent treatment of borrowers, and (2) the actions that Treasury has  taken to address the challenges involved in converting trial modifications  to permanent modifications, limiting potential foreclosures among  borrowers with negative equity, reducing the likelihood of redefault  among borrowers with permanent modifications, and ensuring program  stability and effective program management.
To examine these questions, we spoke with and obtained information from  10 HAMP servicers of various sizes that collectively had been designated  71 percent of the TARP funds allocated to participating servicers to date  and visited 6 of them. In addition, we reviewed the HAMP program  documentation that Treasury issued, including supplemental directives for  the first-lien program and announcements of new HAMP-funded  homeowner assistance programs. We obtained and analyzed information  from Treasury on servicer HAMP loan modification activity. Our work  focused on non-GSE HAMP activity using TARP funds, but the information  obtained from Treasury did not always break out GSE and non-GSE  activity. We also spoke with officials at Treasury and its financial agents— Fannie Mae and Freddie Mac—to understand their rationale for program  changes, their efforts to ensure compliance with HAMP guidelines, and  their processes for resolving HAMP complaints. In addition, we spoke to  the administrators of the HOPE Hotline and representatives of  NeighborWorks, which funds a large network of housing counselors, to  learn more about the process for resolving HAMP-related complaints. We  also met with a trade association that represents both investors and  servicers, and an organization representing a national coalition of  community investment organizations. Finally, we reviewed the  Government Performance and Results Act of 1993 (GPRA), and the  Standards for Internal Control in the Federal Government to determine the  key elements needed to ensure program stability and adequate program  management. We coordinated our work with other oversight entities that  TARP created—the Congressional Oversight Panel, the Office of the  Special Inspector General for TARP (SIGTARP), and the Financial  Stability Oversight Board.
We conducted this performance audit from August 2009 through June 2010  in San Francisco, Santa Ana, and Simi Valley, California; Littleton,  Colorado; West Palm Beach, Florida; Waterloo, Iowa; Boston,  Massachusetts; and Washington, D.C., 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.
subsections: section_title: Background
paragraphs: National default and foreclosure rates rose sharply from calendar year  2005 through 2009 to the highest level in at least 29 years (fig. 1). Default  rates declined slightly from the fourth quarter of 2009 to the first quarter of  2010 but, at 4.91 percent, were still more than six times higher than they  were at the start of 2005. Foreclosure start rates—the percentage of loans  that entered the foreclosure process each quarter—grew nearly three-fold  in the 5-year period from 0.42 percent to 1.23 percent in the first quarter of  2010. Put another way, more than half a million mortgages entered the  foreclosure process in the first quarter of 2010, compared with about  165,000 in the first quarter of 2005. Finally, foreclosure inventory—the  number of houses for which the lender has initiated foreclosure  proceedings but has not yet sold the properties—rose more than 325  percent from the first quarter of 2005 to the first quarter of 2010,  increasing from 1.08 percent to 4.63 percent, with most of that growth  occurring after the second quarter of 2007. As a result, as of the end of the  first quarter of 2010, more than 2 million loans were in the foreclosure  inventory.
As we reported in December 2008, Treasury has established an Office of  Homeownership Preservation within OFS to address the issues of  preserving homeownership and protecting home values. On February 18,  2009, Treasury announced the broad outline of a three-pronged effort to  help homeowners avoid foreclosure and provided additional program  descriptions on March 4, 2009; April 28, 2009; and May 14, 2009:    The Home Affordable Refinance Program (HARP), which provides a  refinancing vehicle for homeowners who are current on their mortgage  payments with mortgages held or guaranteed by Fannie Mae and Freddie  Mac, interest rates higher than the prevailing market rates, and loan-to- value ratios of between 80 and 105. Using the prevailing interest rates in  February 2009, Treasury estimated that between four and five million  borrowers could refinance their mortgages through this program. No  TARP funds will be used to refinance these loans. Instead, Fannie Mae or  Freddie Mac, as the owner or guarantor of the loan, purchased or  guaranteed the refinanced mortgages. The program has resulted in  relatively few refinances—between February 2009 and March 2010, fewer  than 292,000 borrowers were refinanced through this program. In March  2010, the program’s end date was extended from June 10, 2010, to June 30,  2011.
An increased funding commitment from Treasury for preferred stock  purchases from Fannie Mae and Freddie Mac to strengthen confidence in  the two government-sponsored enterprises (GSE) and help support low  mortgage rates. The preferred stock purchase agreements, authorized by  the Housing and Economic Recovery Act of 2008 (HERA), were amended  in May 2009 to increase Treasury’s commitment to each GSE from $100  billion to $200 billion. On December 24, 2009, the preferred stock purchase  agreements were again amended with the provision that the $200 billion  cap increase as necessary. The increased funding commitment would be  made under HERA and would not require the use of TARP funds. Through  March 2010, the cumulative reduction in the net worth of the two GSEs  required them to draw $111 billion from the Treasury under the senior  preferred stock purchase agreements. In May 2010, the Federal Housing  Finance Agency requested an additional $10.6 billion in Treasury  assistance for Freddie Mac and an additional $8.4 billion for Fannie Mae.
HAMP, which was designed to commit up to $75 billion of GSE and TARP  funds to offer loan modifications to up to three to four million borrowers  who were struggling to pay their mortgages. According to Treasury  officials, HAMP would use up to $50 billion of TARP funds, primarily to  encourage the modification of non-GSE 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 are expected to provide up to an additional $25  billion to encourage servicers and borrowers to modify loans owned or  guaranteed by the two GSEs.
As outlined in the March 4, 2009, program guidelines, HAMP’s eligibility  requirements for first-lien modifications stipulate that:  the property must be owner-occupied and the borrower’s primary  residence (the program excludes vacant and investor-owned properties); the property must be a single-family property (one to four units) with a  maximum unpaid principal balance on the unmodified first-lien mortgage  that is equal to or less than $729,750 (for a one-unit property); the loan must have been originated on or before January 1, 2009; the borrower must complete a HAMP Hardship Affidavit documenting a  financial hardship; and  the first-lien mortgage payment must be more than 31 percent of the  homeowner’s gross monthly income.
The HAMP first-lien modification program has four main features:  1.  Cost sharing. Mortgage holders and 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. For non-GSE loans,  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, investors no longer receive payments for cost sharing, and the  borrowers’ interest rate 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 was prepared, and the borrower’s payments  would increase to accommodate the increase in interest rate. The  interest rate and monthly payments are then 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, based on 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 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 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, interest rates  must be reduced in increments of one-eighth percent until the 31  percent debt-to-income target is reached, but servicers may not reduce  interest rates below 2 percent. If the interest rate reduction does not  result in a debt-to-income 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 debt-to-income ratio is still  over 31 percent, 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 principal reduction  is allowed by the investor.  4.  Incentive payment structure. Treasury will use HAMP funds to  provide both one-time and ongoing (“pay-for-success”) incentives for  up to 5 years to non-GSE loan servicers, mortgage 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.
Borrowers must also demonstrate their ability to pay the modified amount  by successfully completing a trial period of at least 90 days before the 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 HAMP. Fannie Mae, as the  HAMP program administrator, is responsible for developing and  administering program operations including registering servicers and  executing participation agreements with and collecting data from them. A  separate division within Freddie Mac, the Making Home Affordable- Compliance (MHA-C) team is the HAMP compliance agent, and is  responsible for assessing servicer compliance with non-GSE program  guidelines, including conducting onsite and remote servicer reviews and  audits.
subsections: section_title: Status of HAMP First-Lien Modification Program
paragraphs: As of mid-June 2010, 109 active servicers had signed HAMP Servicer  Participation Agreements to modify first-lien mortgages not owned or  guaranteed by Fannie Mae and Freddie Mac. Roughly $39.9 billion in  TARP funds has been committed to these servicers for modification of  non-GSE loans. Based on the HAMP Servicer Performance Report through  May 2010, more than 1.5 million HAMP trial modifications had been  offered to borrowers of GSE and non-GSE loans, and more than 1.2 million  of these had begun HAMP trial modifications. Of the trial modifications  begun, approximately 468,000 were in active trial modifications, roughly  340,000 were in active permanent modifications, roughly 430,000 trial  modifications had been canceled, and roughly 6,400 permanent  modifications had been canceled. As of May 17, 2010, more than $132  million in TARP funds had been disbursed to HAMP servicers.
Borrowers who received permanent first-lien HAMP modifications had  high levels of total debt and high loan-to-value ratios. Through the end of  May 2010, borrowers receiving permanent HAMP modifications had a  median back-end debt ratio (the ratio of total monthly debts to gross  monthly income) of roughly 80 percent prior to loan modification. The  median reduction in monthly mortgage payments as a result of HAMP was  roughly $514, which reduced these borrowers’ median back-end debt-to- income ratio to 64 percent. In addition, according to Fannie Mae, through  mid-April 2010, many borrowers continued to be underwater after a HAMP  modification, with an average loan-to-value ratio more than 150 percent.
section_title: Recently Announced HAMP-Funded Programs
paragraphs: In addition to first-lien modifications, in March 2010 Treasury issued  revised guidelines for the second-lien modification program under HAMP  (2MP), as well as the Home Affordable Foreclosures Alternatives Program  (HAFA). However, Treasury has not stated how much of the $50 billion in  TARP funds these two programs are expected to use. 2MP provides  incentives to investors, servicers, and borrowers for the modification of  second liens if the first lien has been modified under HAMP. Under 2MP,  servicers who sign agreements to participate in the program must modify,  partially extinguish, or fully extinguish second liens where the first lien  has been modified under HAMP. As of June 2010, seven servicers had  signed up for 2MP, and at least one of these servicers has initiated trial  modifications for second liens. According to Treasury, four of these seven  servicers hold more than 50 percent of all second liens. Regarding HAFA,  as of April 5, 2010, non-GSE servicers could also begin offering foreclosure  alternatives, such as short sales and deeds-in-lieu, in cases where the  servicer was unable to approve the borrower for HAMP, the borrower did  not accept a HAMP trial modification, or the borrower defaulted on a  HAMP modification. The program provides incentive payments to  investors, servicers, and borrowers for completing these foreclosure  alternatives in lieu of foreclosure.
In March 2010, Treasury announced four additional HAMP-funded  programs—one for principal reduction under HAMP, one for temporary  forbearance for unemployed borrowers, an FHA refinancing program and  the HFA Hardest-Hit Fund. Principal reduction and temporary forbearance  for unemployed borrowers could be implemented in the summer of 2010,  and the FHA refinancing program in the fall, but implementation of the  HFA Hardest-Hit Fund programs will vary by state.
The principal reduction program under HAMP will require servicers to  consider principal reduction for HAMP-eligible borrowers with loan-to- value ratios greater than 115 percent. Treasury has not yet finalized the  potential amount of TARP funds that will be spent on this HAMP program  or the number of borrowers expected to receive principal reductions.  Initial program guidelines were issued in June 2010 and the program is  expected to be effective for participating HAMP servicers in the fall of  2010.
Under the plan for temporary forbearance for unemployed borrowers,  which will be effective July 1, 2010, servicers will be required to consider  unemployed borrowers for a forbearance plan to reduce mortgage  payments to an affordable level for the lesser of 3 months or upon  notification that the borrower has become reemployed. To be considered,  unemployed borrowers must request forbearance before falling behind on  three monthly mortgage payments. The servicers must offer forbearance if  the borrower’s monthly mortgage payments exceed 31 percent of monthly  gross income, including unemployment benefits. Treasury has not  established how many borrowers are likely to be helped with this feature.
Once the borrower has found employment, or 30 days before the  forbearance period has expired, the servicer must evaluate the borrower  for eligibility for a HAMP first-lien modification. According to Treasury,  there will be no HAMP incentive payments made for these forbearance  plans, so the program will not require TARP funds. Missed payments  during the forbearance period are capitalized, and servicers may not  collect late fees during the forbearance period. According to Treasury,  representatives of investors and the four largest servicers, some servicers  are already offering similar forbearance programs to unemployed  borrowers.
The new FHA refinance program will be designated a maximum of $14  billion of the $50 billion originally intended for HAMP and will be a  voluntary program for servicers. However, if servicers choose this option,  they must reduce borrowers’ original first-lien principal by at least 10  percent, and the resulting ratio of all mortgage debt, including junior liens,  to the value of the house can be no greater than 115 percent. The principal  balance of the refinanced first-lien loan cannot exceed 97.75 percent of the  home’s value. The borrower must be current on existing mortgage  payments to qualify and have a credit score of at least 500. The terms and  uses of the $14 billion have yet to be specified.
The HFA Hardest-Hit Fund designated $2.1 billion out of the $50 billion  originally intended for HAMP to 10 state housing finance agencies to  develop more localized programs to preserve homeownership and protect  home values. As of mid-May 2010, Treasury was in the process of  reviewing program proposals submitted by the first five housing finance  agencies that received funding and expected to receive proposals from the  second five state agencies on June 1, 2010. However, according to initial  proposals, some program efforts may require significant implementation  periods. For example, one state agency reported that some of its program  features may not be available until 5 months after Treasury approves the  program.
As shown in table 1, the implementation dates for a number of the HAMP-  funded homeowner assistance programs have not yet been specified, and  Treasury has not announced how many borrowers the programs are  expected to help. With the exception of the HFA Hardest-Hit Fund, the  cutoff date for borrowers to be accepted into any of the HAMP-funded  programs is December 31, 2012, and disbursements of TARP funds may  continue until December 2017. The cutoff date and last possible  disbursement for the HFA Hardest-Hit Fund has yet to be determined.
section_title: Servicers’ Solicitation and Evaluation of Borrowers for HAMP Have Been Inconsistent, and More Treasury Action Is Immediately Needed To Ensure Equitable Treatment of Borrowers with Similar Circumstances
paragraphs: Although one of Treasury’s stated goals for HAMP is to standardize the  loan modification process across the servicing industry, we identified  several areas of inconsistencies in how servicers treat borrowers under  HAMP. These areas of inconsistency could lead to inequitable treatment of  similarly situated borrowers, and borrowers in similar circumstances  could have different outcomes. First, we found that servicers differed in  when and how they solicited borrowers for HAMP, and numerous  borrowers had complained that they did not receive timely responses to  their HAMP applications or had difficulty getting information from their  servicers about the program. Until March 2010, a year into the program,  Treasury had only minimal requirements for soliciting borrowers for  HAMP and had yet to finalize comprehensive measures that addressed  servicers’ performance in this area. Further, Treasury had not issued  specific guidelines for servicers on how to determine whether borrowers  current on their mortgage payments were in imminent danger of default or  for conducting internal quality assurance reviews. Treasury also had not  provided servicers with specific requirements detailing how servicers  should handle and track borrowers’ complaints about HAMP. As a result,  some servicers that we contacted did not systematically track all HAMP  complaints or their resolutions, and borrowers may not have been aware  that an independent escalation process existed to handle complaints about  servicers or to challenge HAMP eligibility denial determinations. Lastly,  Treasury had not yet determined specific remedies for servicer  noncompliance with HAMP program requirements—a key enforcement  mechanism for ensuring that servicers treated borrowers equitably under  HAMP.
subsections: section_title: Treasury Has Taken Steps to Improve Servicer Communications with Borrowers about HAMP but Issues Remain
paragraphs: For the first year of the HAMP first-lien program, Treasury’s key guidance  on its requirements for the initial outreach to or solicitation of borrowers  for participation in HAMP stated that servicers should follow their existing  practices for soliciting borrowers. The 10 servicers we contacted reported  varying practices, with a few soliciting borrowers who were 31 days  delinquent on payments and some others not soliciting borrowers until  borrowers were at least 60 days delinquent on payments. However, even  when servicers said their practice was to solicit borrowers who were 60  days past due, they very often did not. The proportion of borrowers who  were 60 days delinquent on their mortgages and who were solicited for  HAMP ranged from 16 to 95 percent. On average, the 10 servicers we  contacted solicited approximately 60 percent of such borrowers. Some  servicers explained that they did not solicit certain borrowers because, for  example, the borrowers did not meet basic eligibility criteria or because  the investors for that particular pool of mortgage-backed securities did not  allow HAMP modifications. However, as of December 2009, the MHA-C  group within Freddie Mac, the compliance agent for HAMP, identified four  servicers through their onsite Management Compliance Audits that could  not always provide evidence that borrowers who were potentially eligible  for HAMP had been solicited.
In March 2010, more than a year after the program was first announced,  Treasury issued additional guidelines governing solicitation efforts.  Effective June 2010, servicers must prescreen all first-lien loans with two  or more mortgage payments are due and unpaid to determine if the loans  meet the basic HAMP eligibility criteria (e.g. the home is an owner- occupied, primary residence and a single family one-to-four unit property;  the loan originated before January 1, 2009; and the loan balance is within  specified limits). Servicers must make a “reasonable effort” to solicit for  HAMP any borrower who passes this prescreening—that is, servicers must  make a minimum of four telephone calls to the borrower’s last known  phone number at different times of the day and send two written notices,  by different means, to the borrower’s last known address within 30 days.  Because these are new requirements, we could not determine how  effective they might be in standardizing solicitation practices, but  standardizing solicitation requirements may help ensure that all potentially  eligible borrowers are notified about HAMP in a timely manner.
Moreover, it appears that some borrowers had problems reaching their  servicers and obtaining information on the status of their applications and  on HAMP in general. For example, between the end of June 2009 and mid- April 2010, approximately 27,000 of the more than 48,000 borrower  complaints to the HOPE Hotline—a 24-hour telephone line that provides  borrowers with free foreclosure prevention information and counseling— were about this issue. The most common complaints involved the  difficulty of reaching servicers or not hearing back from them in a timely  manner after submitting documentation. During our visits to six HAMP  servicers, we observed a small sample of phone calls between borrowers  and their servicers, several of which involved complaints about the  difficulty of contacting servicers about HAMP. For example, four out of  the nine calls we observed at one of the large HAMP servicers involved  complaints related to servicers’ communications with borrowers. These  included complaints that the servicer had lost documentation and that the  borrower was not able to speak with a representative knowledgeable  about the status of the HAMP application.
In October 2009 and in March 2010 Treasury implemented guidelines  attempting to address some of these issues. Guidelines issued in October  2009 mandated that servicers acknowledge in writing the receipt of  borrowers’ initial HAMP application packages within 10 business days and  that they include in their responses a description of their evaluation  process and timeline for processing paperwork. Additionally, in March  2010, servicers were required to include a toll-free number in all  communications with borrowers, which would allow them to reach a  representative capable of providing specific details about the HAMP  modification process. In April 2010, the Congressional Oversight Panel  recommended that Treasury monitor program participants and enforce the  new borrower outreach and communication standards and timelines to  increase program transparency. Treasury plans to include the new  program requirements in MHA-C’s compliance reviews of HAMP servicers,  and it will be important for Treasury to review findings from these reviews  to determine whether these requirements do improve servicers’  communications with borrowers and fully address differences among  servicers in soliciting borrowers for HAMP.
Treasury first drafted metrics to assess HAMP servicers’ performance in  communicating with borrowers in October 2009, but these metrics have  not yet been finalized. In December 2009, Treasury requested that nine of  the largest HAMP servicers provide information on a revised version of  these metrics, and Treasury officials told us they were using the results of  this request to further revise the metrics to ensure consistent and  comparable responses. According to Treasury, the preliminary metrics  include measures such as the average speed for answering loss mitigation  calls and the number of attempts made to contact each borrower who is in  the initial stages of foreclosure. Preliminary results showed  inconsistencies among servicers’ responses that could indicate differences  either in how servicers were interpreting the questions or in how they  treated borrowers. In our July 2009 report, we noted that Treasury lacked  finalized performance measures for HAMP. Since then, the Congressional  Oversight Panel and SIGTARP have recommended that Treasury collect  additional program data and publicly report on the metrics to ensure  transparency and evaluate program success. Treasury officials told us  they would continue to work with servicers on their responses to these  metrics to finalize them and establish a common reporting standard.  Treasury plans to collect these metrics for the eight largest HAMP  servicers and publicly disclose the results in July 2010. Without  establishing key performance metrics and reporting of individual servicer  performance with respect to those metrics, Treasury cannot achieve full  transparency and accountability for the HAMP first-lien modification  program results and progress.
section_title: Servicers May Be Inconsistently Treating Similarly Situated Borrowers for HAMP Due to Treasury’s Lack of Guidance on Determining Imminent Default and Conducting Quality Assurance Reviews
paragraphs: While Treasury’s goal is to create uniform, clear, and consistent guidance  for loan modifications across the servicing industry, as we noted in March  2010, Treasury has not provided specific guidance on how to determine  whether borrowers are in imminent danger of default. As also noted in  SIGTARP’s March 2010 report on HAMP, this lack of consistent and clear  standards could mean that servicers are inconsistently applying criteria in  this area and thereby inequitably treating borrowers across the program.  According to HAMP guidelines, borrowers who are current or less than 60  days delinquent on their mortgage payments but in imminent danger of  defaulting may be eligible for HAMP modifications, and Treasury has  emphasized the importance of reaching borrowers before they are  delinquent. In particular, Treasury instituted additional incentives to  servicers and investors for modifying loans for such borrowers. According  to Treasury, 22.9 percent of all trial modifications started as of May 2010  were in this category. Treasury stated that it did not create such guidelines  when developing HAMP because it was focused primarily on delinquent  borrowers. However, Fannie Mae and Freddie Mac have had standardized  imminent default criteria since late April 2009 for modifications of loans  owned or guaranteed by the GSEs, and in January 2010 (with an effective  date of March 1, 2010) further aligned these guidelines to provide greater  consistency between the two GSEs. Treasury officials have stated that  they plan to monitor the impact of servicers’ implementation of the new  GSE imminent default guidance over the next few months. Treasury then  plans to determine whether it will adopt similar criteria for non-GSE loans.
As a result of the lack of specific guidance, we found seven different sets  of criteria for determining imminent default among the 10 servicers we  contacted. The seven sets of criteria that we found varied in both the types  of information the servicers considered and in the thresholds they set for  factors such as income and cash reserves. Two servicers considered  borrowers who met the basic HAMP eligibility requirements (greater than  31 percent monthly mortgage debt-to-income ratio, one-to-four unit single  family residence, etc.) in imminent default and the servicers did not  impose any additional criteria on them. Three 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. In addition to the basic HAMP eligibility requirements, these criteria  require borrowers to have cash reserves of no more than 3 months of  housing payments (including monthly principal, interest, property tax,  insurance, and either condominium, cooperative, or homeowners’  association payments) and a ratio of disposable net income to monthly  housing payments (debt coverage ratio) of less than 120 percent. One  servicer had begun using the new GSE criteria that sets a new maximum  cash reserves limit of $25,000 and does not have debt coverage ratio  requirements for its non-GSE loans. The remaining four servicers included  various additional considerations among their criteria, including:    a sliding income scale for the borrower’s mortgage debt-to-income ratio;    an increase in expenses or decrease in income that is more than a certain    a loan-to-value ratio that is above a certain percentage; and    a “hardship” situation lasting longer than 12 months.
These differences in criteria may result in one borrower being approved  for HAMP, and another with the same financial situation and loan terms  being denied by a different servicer. In addition, if a servicer has few or no  additional imminent default criteria, the servicer may be offering HAMP  modifications to borrowers who may not actually be at true risk of  defaulting on their loan. However, if a servicer has very stringent criteria,  it may be denying HAMP modifications to borrowers who will ultimately  default on their loans because of unaffordable monthly mortgage  payments.
To account for differences in servicers’ loan portfolios, Treasury  specifically allows some differences in how servicers evaluate borrowers  for HAMP that could result in inconsistent outcomes for borrowers. For  example, servicers may add a risk premium of up to 2.5 percent to the  Freddie Mac rate for 30-year fixed mortgages when inputting the discount  rate to the NPV model used in evaluating eligibility for HAMP. The NPV  model compares the net present value of expected cash flows to the  investor from a loan that receives a HAMP modification with the expected  cash flows of the same loan with no modification (also considering the  likelihood that the loan would end in foreclosure). If the estimated cash  flow with a modification is “positive” (i.e., equal to or more than the  estimated cash flow of the unmodified loan), the loan servicer is required  to make the HAMP modification. The higher the risk premium a servicer  chooses, the fewer the number of loans that are likely to pass the NPV  model, because expected future cash flows would have less value.  Servicers must apply one risk premium to all loans held in their portfolio  and one to loans serviced for other investors. Treasury noted that it chose  to allow this variation because mortgage holders and investors could have  different opportunity costs of capital and different interpretations of risk.  Of the 10 servicers we interviewed, 3 servicers (2 large and 1 medium- sized servicers) added the full 2.5 percent risk premium allowable, while  the other 7 servicers did not add an additional risk premium. According to  our analysis of Treasury data, as of April 17, 2010, 11 servicers used a risk  premium, most of them the full 2.5 percent.
Of concern, MHA-C, through its compliance audits, found that 15 of the  largest 20 participating servicers did not comply with various aspects of  the program guidelines in their implementation of the NPV model. This  lack of compliance likely resulted in differences in how borrowers were  evaluated, and could have resulted in the inequitable treatment of similarly  situated borrowers. Servicers have two options for implementation of the  NPV model. Either they may use the Treasury version of the NPV model  housed on a Web portal hosted by Fannie Mae in its capacity as Treasury’s  financial agent, or they may recode the NPV model to run it on their own  internal systems. Among seven servicers that had recoded the NPV model  to run it on their own internal systems, MHA-C found that the servicers  had failed to hold certain data constant when rerunning the NPV model for  borrowers they were evaluating for a permanent HAMP modification.  HAMP guidelines state that only income-related inputs or incorrect data  can be changed during a second NPV model run. But because these  servicers often linked the NPV model with their servicing system, values  for inputs such as property values and credit scores were erroneously  updated during the rerunning of the NPV model. In these cases, MHA-C  required the servicer to make the appropriate fixes so that their in-house  models were consistent with the Treasury model. Until such fixes were  made, MHA-C required the servicers to refrain from denying permanent  modifications because of negative NPV results unless these results were  validated by the Treasury version of the NPV model housed on the Fannie  Mae Web portal with the appropriate data values. In addition, MHA-C has  required these servicers to proactively resolicit any borrowers who were  incorrectly denied a permanent HAMP modification due to the NPV errors.
Eight servicers that exclusively use the Fannie Mae Web portal had similar  problems with their NPV inputs when rerunning the NPV model while  evaluating borrowers for a permanent modification. In these cases,  servicers have been required to reanalyze loans that were affected by the  error and outline a corrective action plan. Although MHA-C notified almost  all of the 15 servicers of these errors in February 2010, some of the  servicers are still in the process of analyzing which borrowers were  affected, and MHA-C is monitoring the servicers’ progress in these  analyses and has instructed servicers not to conduct foreclosure sales  until remediation activities are complete. According to Treasury, the  number of borrowers who were denied because of a servicer’s NPV errors  could range from a handful to thousands, depending on the size of the  servicer and the extent of the error.
In addition, servicers themselves have identified process errors that led to  inconsistencies in how they were evaluating borrowers for HAMP through  their quality assurance reviews. We reviewed quality assurance reports  from the 10 servicers we interviewed and found that the error rates for the  calculation of borrower income were well above the servicers’ own  established error thresholds, often set at 3 to 5 percent. In fact, half of  these servicers reported at least a 20-percent error rate for the loan  modifications sampled during the most recent review provided to us.  Without accurate income calculations, similarly situated borrowers  applying for HAMP may be inequitably evaluated for the program and may  be inappropriately deemed eligible or ineligible for the program. Some  servicers also found other types of errors, such as failing to include  condominium association dues in the monthly target housing payment;  charging borrowers fees prohibited by HAMP guidelines—for example, for  property valuation; and not reducing the monthly mortgage payment for  the HAMP modification to 31 percent or less of the borrower’s gross  monthly income. As a result of these audit findings, servicers implemented  process improvements and corrective actions. Some of the servicers  resolicited borrowers who were incorrectly turned down for HAMP, while  others implemented additional controls to their evaluation processes, such  as additional reviews and enhanced technology systems to aid in the  income calculation process. Most of the servicers implemented additional  training for staff in the specific areas in which errors were found. For  example, one servicer held training on calculating rental income and  income for self-employed borrowers, since these types of income  calculations accounted for a large portion of errors.
However, a lack of specific guidelines has also led to significant variations  in servicers’ quality assurance programs for HAMP. According to the  Standards for Internal Control in the Federal Government, the scope of  internal program evaluations should be appropriate and reflect the  associated risks. Treasury guidance requires servicers to develop and  execute internal quality assurance programs to ensure compliance with  HAMP, but its guidelines are not sufficiently specific to ensure that  servicers are mitigating all of the potential program risks. For example,  potential program risks include improper offers of permanent and trial  HAMP modifications, as well as improper denials of both permanent and  trial modifications. However, while Treasury’s guidelines state that  servicers must include either a statistically based sample (with a 95  percent confidence level) or a 10-percent stratified sample of loans  modified, drawn within 30 to 45 days of the final modification, Treasury  does not specify whether trial and permanent modifications should be  sampled separately or whether denied modifications should be sampled at  all. According to Treasury, MHA-C has suggested to servicers that their  quality assurance procedures should include evaluations of the whole  HAMP population, including those in trial modifications and those denied  HAMP, but servicers receive this feedback only after MHA-C completes its  compliance reviews. Only 4 of the 10 servicers we interviewed separately  sampled active trial modifications, approved permanent modifications,  denied trial modifications, and denied permanent modifications, a  methodology that allowed them to review statistically significant samples  within each of these categories. Three of the servicers we interviewed did  not review a representative sample of approved trial modifications, and  two of the servicers did not review a representative sample of denied  modifications. In addition, one servicer we interviewed did not sample its  HAMP modifications separately from its proprietary modifications and  therefore reviewed too few HAMP modifications to result in HAMP- specific findings.
Treasury guidelines also do not specify required areas of review, and we  found variations in the content of servicers’ quality assurance reviews. For  example, while most servicers we interviewed recalculated borrowers’  income for the loans that they sampled as part of their quality assurance  procedures, half of the servicers did not review the inputs for the NPV  model despite the key role that the model plays in determining whether or  not a borrower qualifies for HAMP. In addition, while 8 of the 10 servicers  we interviewed performed some type of quality assurance review on  denied HAMP modifications, one of these servicers focused its reviews  only on whether denial letters were sent to the borrowers and not on  whether the borrowers were appropriately denied HAMP. As part of its  HAMP compliance procedures, MHA-C has outlined more specific  expectations for what servicers should include in their internal quality  assurance reviews, but these expectations are not published or shared  with servicers prior to their MHA-C compliance reviews. Without more  specific guidance in this area from Treasury, some servicers may continue  to have less robust quality assurance procedures and thereby risk not  identifying practices that may lead to inequitable treatment of borrowers  or harm taxpayers through greater potential for fraud or waste in the  program.
section_title: Servicers Had Different Processes for Handling HAMP Complaints and Treasury Had Not Clearly Communicated to Borrowers about or Ensured the Effectiveness of the Process for Challenging HAMP Eligibility Determinations
paragraphs: 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. However, some servicers were not systematically  tracking HAMP complaints or their resolutions, making it difficult for  Treasury to determine whether this requirement was being met. For  example, according to Treasury, a compliance review conducted by MHA- C in the fall of 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 instance, several servicers told us that they tracked only  written HAMP complaints and handled these written complaints  differently depending on the addressee. Without tracking all complaints, it  is not possible for any internal or external review to determine whether  complaints had been properly handled.
Fannie Mae, in its role as the administrator for HAMP, has contracted with  the HOPE Hotline to handle incoming borrower calls about HAMP.   Borrowers may obtain information about the program and assess their  preliminary eligibility, or discuss their individual situations, which may  include complaints about their servicer or about potentially incorrect  denials. Borrowers calling the hotline with a HAMP complaint can be  transferred to a housing counseling agency approved by the Department of  Housing and Urban Development (HUD), and when the complaint pertains  to a borrower assertion that they have been wrongfully denied a  modification or that their servicer has not applied program guidelines  appropriately, the borrower is transferred to the Making Home Affordable  (MHA) Escalation Team, which is housed within a HUD-approved  counseling agency. If additional intervention is needed, the counselor is to  “escalate” the complaint to the housing counseling agency’s management  (fig. 2). As of mid-April 2010, more than 37,000 borrower complaints had  been escalated to the MHA Escalation Team, and an unknown number had  been escalated to the housing counseling agency’s management. Through  mid-April 2010, more than 4,000 calls to the HOPE Hotline were about  potentially incorrect denials for a HAMP modification. According to  Fannie Mae, between January and April 2010 the housing counseling  agency that handles HOPE Hotline escalations resolved 99 percent of its  complaints within 4 days.
Complaints that the counseling agency’s management cannot resolve are  referred to an escalation team within Fannie Mae known as the HAMP  Solution Center, which also handles escalations on behalf of borrowers  referred by housing counselors and government agencies outside of the  HOPE hotline. As of April 1, 2010, more than 3,700 complaints had been  escalated to this team. Of these escalated complaints, nearly 2,900 had  been resolved, with 19 percent of the resolved escalations resulting in the  initiation of a trial or permanent modification and approximately 35  percent in a determination of ineligibility. An additional 17 percent were  referred back to the servicers or the HOPE Hotline, and the remaining 29  percent had other outcomes—for example, some were referred to other  loss mitigation alternatives, and no action was taken on others. Fannie  Mae has set a goal of 7 business days for the HAMP Solution Center to  resolve complaints, but as of mid-April 2010, the average resolution time  was 23 days.
It is unclear whether the HOPE Hotline and escalation processes are  effective mechanisms for resolving concerns about potentially incorrect  HAMP denials. At each level of the escalation process, the party handling  the complaint works with the servicer and the borrower (or borrower  advocate) to obtain information or actions that would resolve it. Neither  the MHA Escalation Team counselor nor HAMP Solution Center staff  review the borrower’s application or loan file; rather, further reviews of  borrowers are to be conducted by the servicers. According to Treasury, it  would be difficult to obtain borrower’s loan files because they are so large.  Instead, Treasury officials told us that they were working toward  providing MHA Escalation Team counselors and HAMP Solution Center  staff with access to some information from the loan files, such as whether  the investor would allow the loan to be modified under HAMP, that could  be used during the escalation process. In addition, Fannie Mae has set up a  quality assurance process for housing counselors who handle MHA  escalations that includes monitoring and scoring of counselors’ calls with  borrowers. Although this quality assurance process evaluates the way  counselors resolve borrowers’ concerns, it is not clear how the evaluators  could determine whether the resolutions were correct, since the  evaluators also lack access to the borrowers’ loan files. As a result,  servicers maintain discretion in determining how to resolve borrowers’  concerns about potentially incorrect HAMP denials. Further calling into  question the effectiveness of the escalation process, in its April 2010 report  on HAMP, the Congressional Oversight Panel raised additional concerns  about the effectiveness of the HOPE Hotline by stating that it is unclear  whether the HUD-approved housing counseling agencies that work with  the HOPE Hotline have sufficient capacity or adequate training to properly  handle borrower requests for assistance.
While the HOPE Hotline escalation process is the primary means for  borrowers to raise concerns about their servicer’s handling of their HAMP  applications and potentially incorrect denials, Treasury has not explicitly  informed borrowers that the hotline can be used for these purposes. For  example, the Making Home Affordable Web site states only that the HOPE  Hotline provides help with the program and no-cost access to counselors  at a HUD-approved housing counseling agency. Treasury also requires that  servicers provide information in their denial letters about the HOPE  Hotline, with an explanation that the borrower can seek assistance at no  charge from a counselor at a HUD-approved housing counseling agency  and can request assistance in understanding the denial notice. Neither of  these communication mechanisms fully informs borrowers that they can  call the HOPE Hotline to voice concerns about their servicer’s  performance or decisions and therefore may limit the number of  borrowers who use the hotline for these purposes. For example, as of mid- April 2010, less than 2 percent of the more than 48,000 calls to the hotline  were from borrowers who felt they had wrongfully been denied under the  Making Home Affordable program, which could include HAMP.
section_title: Treasury has Taken Steps to Address Servicers’ Compliance with HAMP Requirements but Has Not Clearly Stated the Consequences for Noncompliance
paragraphs: Treasury has taken some steps to ensure that servicers comply with HAMP  program requirements, including those related to the treatment of  borrowers, but has yet to establish specific consequences or penalties for  noncompliance with HAMP guidelines. We first reported in July 2009 that  Treasury had not yet formalized a policy to assess remedies for  noncompliance among servicers. The HAMP servicer participation  agreement describes actions that Fannie Mae, as program administrator  (at Treasury’s direction), may take if a servicer fails to perform or comply  with any of its material obligations under the program, but does not lay  out the specific conditions under which these actions should be taken. In  October 2009, Treasury established the HAMP Compliance Committee to  monitor the performance and activities of servicers based on information  gathered by Fannie Mae, MHA-C, and others. According to Treasury, the  compliance committee—comprised of staff from Treasury, Fannie Mae,  and MHA-C—has drafted a policy to establish consequences for servicer  noncompliance with HAMP program requirements. Treasury officials told  us that the policy was initially approved in October 2009, but following an  internal review the compliance committee determined that it needed more  experience with servicers’ performance before finalizing the policy. The  committee is still redrafting the policy, and Treasury expects that it will be  internally reviewed again in June 2010. Until the policy is finalized, the  committee has instructed MHA-C to report all issues of servicer  noncompliance to the committee which then evaluates these issues on a  case-by-case basis, leaving open opportunities for inconsistencies in how  incidences of noncompliance are remedied. According to Treasury, no  financial remedies have been issued to date, though Treasury has required  MHA-C to perform more targeted reviews, as well as directed MHA-C to  require some servicers to take action to correct areas of noncompliance.  In its April report on HAMP, the Congressional Oversight Panel  recommended that Treasury ensure compliance through established  enforcement mechanisms that provide a clear message of the  consequences for servicer actions to increase program accountability.  Without standardized remedies for noncompliance, Treasury risks  inconsistent treatment of servicer noncompliance and lacks transparency  with respect to the severity of the steps it will take for specific types of  noncompliance.
section_title: Treasury Has Taken Steps to Address Conversion, Negative Equity, Redefault, and Program Stability but Needs to Expeditiously Implement a Prudent Design for Remaining HAMP-Funded Programs
paragraphs: In our testimony on March 25, 2010, we noted that Treasury faced several  additional challenges as it continues to implement HAMP. These  challenges include (1) converting trial modifications to permanent status,  (2) addressing the growing issue of negative equity, (3) reducing redefaults  among borrowers with modifications, and (4) ensuring program stability  and effective program management. While Treasury has taken some  steps to address these challenges, such as announcing a principal  reduction program under HAMP and finalizing the second-lien  modification program, it needs to expeditiously finalize and implement  remaining programs in a manner that ensures transparency and  accountability. Our review of HAMP suggests that potential concerns exist  in the areas of program stability and adequacy of program management as  Treasury continues to add or revise HAMP-funded programs.
subsections: section_title: Treasury Has Reached Out to Servicers and Simplified Program Requirements to Increase the Number of Permanent Modifications, but Conversion Rates Remain Low
paragraphs: HAMP servicers reported a wide range of conversion rates and gave a  variety of reasons to explain why trial modifications were not converting  to permanent modifications. Through the end of May 2010, servicers  reported conversion rates ranging from 11 percent to 86 percent.  Furthermore, a few servicers reported that more than half of their active  trial modifications had been in the trial period for more than 6 months.  The 10 servicers we contacted reported conversion rates ranging from 1  percent to 57 percent for non-GSE HAMP modifications that had been in  trial periods for 3 or more months as of December 31, 2009 (fig. 3). Of  these 10 servicers, the 3 we contacted that required borrowers to provide  full documentation of their income before starting trial modifications  reported the highest conversion rates (38 percent to 57 percent). The  seven servicers that used stated income to determine eligibility for trial  modifications had conversion rates ranging from 1 percent to 18 percent.
We asked these servicers for the percentages of nonconversions that had  resulted from incomplete or problematic documentation, missed trial  period payments, or having to wait for a servicer to take action to  complete the conversion. Several of the servicers reported that these  scenarios were responsible for fewer than half of their nonconversions  (fig. 3). Not surprisingly, the servicers that used verified income reported  lower rates of nonconversions because of incomplete or problematic  documentation (1 percent to 14 percent) compared with the servicers that  used stated income (4 percent to 58 percent). Servicers also reported a  wide range of nonconversions that could be attributed to missed payments  during trial modifications—roughly 2 percent to more than 70 percent.  However, 9 of the 10 servicers reported that these types of nonconversions  accounted for less than a quarter of the total, and the highest percentage  (71 percent) was reported by a servicer that primarily serviced subprime  loans. Finally, some servicers reported having borrowers who had  submitted all documentation and made all trial payments but were waiting  on action from the servicer to receive permanent modifications. For  example, one servicer reported that nearly a third of borrowers who had  been in trial modifications for at least 3 months, but had not been  converted to permanent modifications, were in this situation.
In November 2009, Treasury launched a conversion campaign and revised  the first-lien HAMP guidelines in an effort to address the challenges  associated with converting trial modifications to permanent modifications.  The conversion campaign included a temporary review period lasting  through January 31, 2010, that did not allow servicers to cancel trial  modifications for any reason other than failure to meet HAMP property  requirements (for example, if the property was not owner-occupied). In  addition, Treasury required the eight largest servicers to submit  conversion action plans that included strategies such as having people  knock on doors to collect missing documentation from borrowers, having  call center staff follow up on trial payments, and developing call scripts to  include a description of incentives available to borrowers after completion  of the trial period. Treasury also formed “SWAT” teams comprised of  Treasury and Fannie Mae staff to visit large servicers’ offices and offer on- site assistance with conversions. During the conversion campaign, the  number of new conversions each month increased from roughly 26,000 in  November to roughly 35,000 in December and roughly 50,000 in January.
To address the specific challenge of obtaining complete documentation  from borrowers, Treasury has made several changes to streamline and  improve documentation requirements. In October 2009, Treasury  announced a streamlining of required documentation that, among other  things, allows borrowers to use a standard application form that  incorporates income, expense, and hardship information. Treasury further  simplified the documentation requirement in January 2010 when it  announced that pay stubs used to verify income no longer needed to be  consecutive, provided the pay stubs included year-to-date income and the  servicer judged that the borrower’s income had been accurately  established. While the streamlining of documentation could make it easier  for certain borrowers to provide all required documentation, therefore  improving conversion rates, it could also increase the risk of fraud or  abuse in the program. Also in January 2010, Treasury announced that  beginning in mid-April, servicers would be required to evaluate borrowers  for trial modifications based on fully documented income. While using  fully documented income will potentially be a significant change for some  servicers, particularly given Treasury’s July 2009 statement that servicers  should evaluate borrowers for trial modifications based on stated income,  it could help improve conversion rates. As we have seen, among the 10  servicers we spoke with, the 3 already requiring full documentation up  front generally reported higher conversion rates.
However, converting trial modifications continues to be a challenge. As of  the end of May 2010, Treasury data showed that only 31 percent of trial  modifications started at least 3 months prior, and therefore potentially  eligible for conversion, had converted to a permanent modification. In  fact, the total number of permanent modifications started through May  2010 was less than the total number of trial modifications canceled during  the same time period (roughly 347,000 versus 430,000). Furthermore, as  servicers focus on conversions and began the transition to evaluating  borrowers using verified income, the number of trial modifications begun  has decreased significantly. In May 2010, roughly 30,000 trial modifications  were started, compared with nearly 63,000 in March 2010 (fig. 4). As of the  end of May 2010, Treasury reported that there were roughly 1.7 million  estimated eligible 60-day delinquent borrowers. According to Treasury  officials, Treasury is not planning on taking any additional steps to address  nonconversions because the agency’s current focus is on clearing the  backlog of trial modifications awaiting conversion decisions. The officials  noted that servicers had committed to clearing their backlogs by the end  of June 2010. Going forward, Treasury anticipates that the requirement for  up-front documentation will reduce the challenge of converting trial  modifications to permanent modifications.
Borrowers may not convert to permanent modifications for several  reasons, including ineligibility for HAMP and failure to make the required  trial modification payments. Some borrowers who do not receive  permanent modifications may be eligible for other non-HAMP loan  modification programs that servicers offer or for alternatives to  foreclosure such as those offered under the HAFA program. For example,  Treasury reported that through April 2010, among the top eight HAMP  servicers, nearly half of borrowers who had trial modifications canceled  received non-HAMP loan modifications.
section_title: Recent Program Announcements Aim to Address Negative Equity, but Programs May Lack Transparency
paragraphs: The proportion of homeowners who owe more than the value of their  homes continues to be high in many states and, as we reported in July  2009, HAMP as initially designed may not address the growing number of  foreclosures among borrowers with negative equity (“underwater”  borrowers). According to data reported by CoreLogic, a company that  collects and analyzes U.S. real estate and mortgage data, more than 11.2  million (24 percent) of borrowers across the country had negative equity  at the end of the first quarter of 2010. In addition, of borrowers with loan- to-value ratios greater than 150 percent, more than 14 percent had  received a notice of default—the first step in the public recording of  default—compared with roughly 2 percent of those with at least some  equity in their homes. As we have seen, according to Fannie Mae,  borrowers have loan-to-value ratios of roughly 150 percent, on average,  after a HAMP modification. While HAMP’s initial design focused on  bringing mortgage payments to an affordable level, severe levels of  negative equity and expectations that house prices will continue to decline  may lead some borrowers to choose to default on their mortgage  payments even if the payments are affordable or could be modified to  affordable levels.
In an effort to help address the challenge of negative equity, in March 2010  Treasury announced a principal reduction program under HAMP.  According to the initial program guidelines issued in June 2010, the  principal reduction HAMP program will allow some underwater  homeowners to reduce the balance owed on their mortgage in steps over 3  years, if they remain current on their payments. Servicers will be required  to run both the standard NPV test and an alternative that considers  principal reduction and to compare the results. Under the alternative  approach, servicers will assess the NPV of a modification that starts by  forbearing the principal balance to 115 percent of the home’s value, or to  an amount necessary to bring the borrower’s payments to 31 percent of  income, whichever requires less principal reduction.
If forbearing principal to 115 percent of the home’s value does not reduce  monthly payments to 31 percent of income, the servicer will follow  HAMP’s standard procedures for modifying loans—lowering the interest  rate, extending the term of the loan, forbearing additional principal, or a  combination of these steps in this order. If the NPV under this approach is  higher than it is for a modification without principal forbearance, the  servicer will have the option—but will not be required—to forgive  principal. Servicers will initially treat the reduced principal amount as  forbearance and will forgive the forborne amount in three equal steps over  3 years, as long as the homeowner remains in good standing. Investors will  receive incentives for reducing principal, and the incentive amounts vary  based on the delinquency level of the borrower and the current loan-to- value ratio. Servicers will be required to establish written policies detailing  when principal reduction will be offered, and, according to Treasury,  MHA-C will review these policies to ensure that similarly situated  borrowers are treated equitably with respect to principal reduction.
Some program details continue to be unspecified. In particular, the  alternative NPV model has not yet been specified, and it is unclear how it  will evaluate the impact of principal reduction, including the changes in  the likely redefault rate of borrowers receiving principal reductions.  According to Treasury, the alternative NPV model will be ready in  September or October 2010. In addition, although the original program  announcement stated that servicers would be required to retroactively  consider borrowers for principal forgiveness who had already received a  trial or permanent modification, it is unclear whether and how servicers  will be required to do this. According to Treasury, additional guidance  addressing this issue will be issued in July 2010. Servicers will be required  to start evaluating borrowers for principal reduction on the later of  October 1, 2010, or the implementation date of the new version of the NPV  model, though servicers could begin offering principal reduction and  receiving incentives as of June 3, 2010. Due to the continued severity of  the foreclosure crisis and negative equity problem, Treasury will need to  expeditiously finalize all program details.
While this program could help some borrowers whose loans are greater  than 115 percent of the home’s value, servicers could vary in when they  choose to offer principal reduction. In some cases, servicers may  reasonably refuse to reduce principal, even when the NPV using principal  reduction is higher than the NPV without using it. For example, servicers  may have contractual agreements with investors that prohibit principal  reduction. According to Treasury, principal reduction is not mandatory  because HAMP is a voluntary program and the HAMP Servicer  Participation Agreement allows servicers to opt out of material program  changes made after the agreement was signed. In addition, the  Congressional Oversight Panel reported in April 2010 that allowing  servicers to choose whether to offer principal reduction could help limit  moral hazard. Specifically, if borrowers do not know whether their  servicers will forgive principal, they will not be motivated to change their  behavior in order to receive it. According to Treasury, servicers will be  required to report to Treasury the NPV outcomes with and without  principal reduction, as well as whether the borrower was offered it.  Further, Treasury officials noted that beginning in late 2010 or early 2011,  public reports on servicer performance will include information such as  the proportion of borrowers who were offered principal reduction.  Because servicers will have significant discretion in whether and when to  offer principal reduction under this program, Treasury will need to ensure  that public reporting of servicer activity related to principal forgiveness  provides sufficient program transparency and addresses potential  questions of whether similarly situated borrowers are being treated fairly  and consistently.
Households with second-lien mortgages are more likely to be underwater  than those without second-lien mortgages. According to CoreLogic, in the  first quarter of 2010, 38 percent of borrowers with junior liens such as  second-lien mortgages were underwater, compared with 19 percent of  borrowers with only first-lien mortgages. Offering relief on second-lien  mortgages is therefore an important factor in addressing the challenge of  underwater borrowers. According to the initial guidelines for the principal  reduction program, second-lien holders must agree to reduce principal on  the second lien mortgage in the same proportion as the principal reduction  on the first lien mortgage. Separately, under the guidelines for 2MP,  incentives are offered for the extinguishment or partial extinguishment of  second liens.
In addition, Treasury announced a new FHA refinancing program, which is  expected to be implemented by the fall of 2010 and will allow lenders to  refinance underwater first-lien loans into FHA-insured loans if the  borrower is current on mortgage payments. This program has been  designated up to $14 billion in funds that were originally intended for  HAMP and, as with the principal reduction program under HAMP, will be  voluntary for servicers. According to initial program descriptions,  investors must agree to a principal write-down on the original first-lien  loans of at least 10 percent and the combined loan-to-value ratio, which  includes both first and junior liens, cannot be greater than 115 percent  after the refinancing (97.75 percent for the first lien only). The new FHA  refinance option is available only to homeowners who are current on an  existing first-lien mortgage that is not insured by FHA. Eligible underwater  loans are refinanced into FHA loans on FHA terms based on full  documentation, income ratios, and complete underwriting. Total debt  including all forms of household debt cannot be greater than  approximately 50 percent except for some borrowers with especially  strong credit histories.
Investors we spoke with supported principal reduction in conjunction with  an FHA refinance, because even though they would suffer a loss on the  reduction, they would not bear the risk of the borrower redefaulting, as  the loan would then be FHA-insured and out of their pools. However, they  also noted that the program might reach only a limited number of  borrowers as it would only help borrowers who are current on existing  first-lien mortgage payments, underwater, and have mortgage payments  that could be reduced to 31 percent of income with a loan-to-value ratio  for the new loan no greater than 97.75 percent of the appraised value of  the home. Treasury has stated that FHA will publish quarterly data on  numbers of loans refinanced in this way, including average percentages for  loans that are written down and amounts of principal that are reduced.  However, Treasury has not yet specified what servicers will be required to  report for borrowers considered for the program, including those  considered for, but not offered, the refinance. Also, though Treasury has  designated up to $14 billion for this program, it has not specified how  these funds will be used or the number of borrowers likely to be helped by  this program.
Finally, Treasury has designated $2.1 billion in HAMP funds for the HFA  Hardest-Hit Fund, providing 10 states with the opportunity to design  programs to prevent foreclosure and improve housing market stability,  potentially including programs to address negative equity. As of May 11,  2010, Treasury had not yet approved any programs under this fund, so the  extent to which the programs will address negative equity remains to be  seen. The first five states were required to submit proposals on April 16,  2010, and according to Treasury, it is evaluating them to determine  whether they meet the act’s requirements and support its goals of  preserving homeownership and protecting housing market stability.  However, according to initial proposals, some program efforts may require  significant implementation periods. For example, one state reported that  some of its program features might not be available until 5 months after  Treasury approved the program. To promote transparency, each state HFA  will be required to establish monitoring mechanisms and to implement a  system of internal controls that minimize the risk of fraud, mitigate  conflicts of interest, and maximize operational efficiency and  effectiveness. In addition, HFAs will report data to Treasury on a periodic  basis, including the metrics that are used to measure program  effectiveness against stated objectives. According to Treasury, all program  designs will be posted online, along with metrics measuring performance  of each HFA program. Treasury has stated that the principal reduction  program under HAMP, the FHA refinance program, and the HFA Hardest- Hit Fund will be the primary efforts to address the challenge of negative  equity, and no new programs are expected.
section_title: Treasury Has Not Fully Implemented Measures to Limit Redefault
paragraphs: Limited information is available on redefaults on permanent modifications  to date, largely because few trials have become permanent. Treasury’s  expectations of the number of redefaults may be changing, although  Treasury has not specified the number of successful permanent HAMP  modifications it expects. Through the end of May 2010, 6,233 of the 346,816  permanent modifications had redefaulted and 124 loans had been paid off.  Treasury has begun to publish the debt levels of those receiving  permanent HAMP modifications. As we have seen, as of the end of May  2010, these borrowers had a median total debt-to-income ratio of roughly  64 percent after the HAMP modification. In April 2010, the Congressional  Oversight Panel noted that with such high debt levels, a small disruption in  income or increase in expenses could result in many redefaults. Treasury  said that it would examine redefault rates after borrowers had been in  HAMP permanent modifications for longer than 3 months.
As we reported in July 2009, the redefault rates Treasury anticipated at the  inception of HAMP were consistent with the Office of the Comptroller of  the Currency’s (OCC) and the Office of Thrift Supervision’s (OTS) analyses  of loan modifications, as well as with the Federal Deposit Insurance  Corporation’s estimates for the IndyMac loan modification program. At  the time, OCC and OTS reported that about 52 percent of modifications  redefaulted after 12 months, and IndyMac estimated a redefault rate of 40  percent. However, more recently Treasury officials told us that the  redefault rate could be higher for a typical HAMP modification, noting that  borrowers entering the HAMP program to date had low credit scores and  high loan-to-value ratios relative to those in other modification programs,  further increasing the risk of redefault. As noted, Treasury has not publicly  disclosed its redefault estimates or the number of successful permanent  modifications it expects.
In December 2008, we noted that limiting the likelihood of redefault would  be a significant challenge as Treasury began its efforts to establish a loan  modification program, and Treasury continues to struggle with this  challenge. As we pointed out, Treasury’s primary effort to limit redefaults  under the HAMP first-lien program was to require that borrowers with  high total debt agree to obtain counseling. However, it is unclear how  many borrowers have actually received this counseling, and Treasury does  not plan either to monitor whether borrowers actually obtain counseling  or to assess the requirement’s effectiveness in limiting redefaults.  According to Fannie Mae, the HOPE Hotline had received 104,253 calls  about this counseling through April 4, 2010, but Fannie Mae did not track  whether these borrowers actually obtained counseling. However, the best  available information shows that few borrowers have obtained such  counseling to date. Specifically, according to NeighborWorks, whose  National Foreclosure Mitigation Counseling network consists of roughly  1,700 entities that must be either HUD-approved counseling agencies or  state housing finance agencies, as of March 2010 it had only funded about  2,700 HAMP counseling sessions for borrowers with high total debt. This  further underscores the importance of monitoring and assessing HAMP’s  counseling requirement, as we recommended in July 2009.
In March 2010, Treasury issued revised guidelines for the HAMP second- lien program, 2MP, which, to the extent that it reduces borrowers’ total  debt, could help limit redefaults on first-lien modifications. However,  although a second-lien modification program was initially announced at  the inception of HAMP, Treasury has yet to issue estimates of the number  of borrowers that the program could help. Treasury officials noted that  they would examine the redefault rates of borrowers receiving 2MP  modifications. As of June 2010, seven servicers have signed agreements to  modify or extinguish second liens under HAMP. However, Treasury will  not begin making incentive payments or tracking modifications under 2MP  until the fall of 2010. Until recently, servicers may not have been able to  identify whether borrowers of second liens in their portfolios have been  modified by the first-lien servicer if they do not also service the first lien.  First liens must be in HAMP trial periods before second liens begin trial  modifications, so in order to modify a second lien, a servicer must first  know whether the corresponding first lien has been modified. Treasury  developed a database to match first and second liens, which, according to  Treasury, was ready in May 2010.
Under 2MP, non-GSE servicers can receive up-front and pay-for-success  incentive payments, borrowers can receive pay-for-performance  incentives, and investors can receive payment reduction cost-share  incentives. When a borrower’s first lien is modified under HAMP, a  participating second-lien servicer must offer to modify the borrower’s  second lien. The modification steps for 2MP are similar to those for HAMP  first-lien modifications. As with first liens, servicers first capitalize accrued  interest and servicing advances, then reduce the interest rate, then extend  the term of the mortgage, and finally, forbear or forgive principal.  However, with second liens, the interest rate is generally reduced to 1  percent; the term is extended to match, at a minimum, the term of the  HAMP-modified first lien; and the principal forbearance or forgiveness is  expected to be proportional to the amount of principal forbearance or  reduction on the first lien. Servicers are not required to reduce principal  under 2MP, unless principal was forgiven on the first lien, but may offer  principal reduction and will receive additional incentives for doing so. The  incentive amount for reducing second liens varies depending on the  combined loan-to-value ratio, or the ratio of the first and second liens to  the value of the home.
The terms of the first-lien modification will be used to determine the terms  of the second-lien modification, and no additional evaluation is done to  determine eligibility for 2MP. The second-lien servicer relies on the  information the borrower provides for the first-lien loan modification. In  particular, the second-lien servicer is not required to perform an additional  NPV model of the related second-lien mortgage, since it can be reasonably  concluded that the combined modifications will result in a positive NPV  outcome if the first lien was NPV positive. According to Treasury, because  the HAMP-modified first-lien mortgage is delinquent or facing imminent  default, the servicer may reasonably conclude that the borrower is in  imminent danger of defaulting on the second lien. Further, Treasury has  stated that postforeclosure recoveries on second liens are likely to be  minimal if the first lien is delinquent or at risk of default, so it is  reasonable for servicers to conclude that modifications of second liens are  likely to result in higher expected cash flows than foreclosure.
section_title: Implementation of Other HAMP-Funded Homeowner Assistance Programs Could Benefit from Lessons Learned from Initial HAMP Design and Implementation Challenges
paragraphs: While servicers were performing loan modifications prior to HAMP, HAMP  is a new, complex, and large-scale program that places a significant  amount of taxpayer dollars at risk. We have previously reported that  Treasury faced challenges in implementing first-lien modifications,  including finalizing program guidelines and establishing a comprehensive  system of internal controls. Since then, Treasury has announced several  new programs and program features. Going forward, in designing and  implementing the programs, Treasury could benefit from lessons learned  from the initial design and implementation of HAMP. In particular, it will  be important for Treasury to expeditiously develop and implement these  programs while also developing sufficient program planning and  implementation capacity, meaningful performance measures, and  appropriate risk assessments in accordance with standards for effective  program management. In its April 2010 report, the Congressional  Oversight Panel likewise noted that Treasury’s response has lagged behind  the pace of the crisis and underscored the need for Treasury to get its new  initiatives up and running quickly and to ensure program accountability.  We will continue to monitor Treasury’s implementation and management  of HAMP-funded programs as part of our ongoing oversight of TARP to  ensure that new programs are appropriately designed and operating as  intended.
Program planning and implementation capacity. In July 2009, we  recommended that Treasury finalize a comprehensive system of internal  control for HAMP. According to GAO’s Standards for Internal Control in  the Federal Government, effective internal controls include activities to  ensure the appropriate planning and implementation of government  programs. Effective program planning includes having complete policies,  guidelines, and procedures in place prior to program implementation. As  we noted in March 2010, servicers told us that they faced significant  challenges implementing HAMP first-lien modifications because of  numerous changes to program guidance. For example, Treasury’s new  requirement that servicers evaluate borrowers for trial modifications using  verified rather than stated income will likely mean that some servicers will  need to alter their policies and processes, as well as retrain staff. Treasury  officials told us that it did not anticipate any new programs or significant  changes to HAMP going forward. Nonetheless, to avoid potential  implementation challenges with the newly announced programs Treasury  must balance the need to fully establish guidelines and reporting  requirements in advance of implementation by servicers while  implementing these programs as quickly as possible.
In addition, GAO’s Internal Control Management and Evaluation Tool,  which is based on GAO’s Standards for Internal Control in the Federal  Government, states that program managers must identify and define tasks  required to accomplish particular jobs and fill all necessary positions. 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. However, Treasury has  reduced staffing levels in HPO from 36 to 29 full-time positions without  formally assessing staffing levels or determining whether HPO staff have  the necessary skills to govern the program effectively. Treasury officials  told us that it was in the process of approving two additional positions for  administering the HFA Hardest-Hit Fund. In addition, they noted that the  responsibilities of the policy development staff in HPO would be largely  concluded after the final policy documents were issued, and these staff  would then be able to support program implementation. However, as of  May 14, 2010, Treasury still had not conducted a workforce assessment of  HPO, despite the office’s additional administrative responsibilities for the  recently announced FHA refinancing program, and ongoing HAMP  implementation, including first- and second-lien modifications, HAFA,  principal reductions, and forbearance for unemployed borrowers. We  noted in July 2009 that having enough staff with appropriate skills was  essential to governing HAMP effectively, and we continue to believe that it  will be an important factor in Treasury’s ability to design and implement  the new HAMP-funded programs both quickly and effectively.
According to Treasury, its financial agents—Fannie Mae and MHA-C—are  developing a two-stage approach to assessing the capacity and readiness  of the top 25 HAMP servicers to implement the recently announced  programs. First, servicers will conduct a self-assessment of their readiness  using a HAMP checklist. According to Treasury, the self-assessment will  be provided to Fannie Mae for review, and Fannie Mae will provide further  training, additional guidance, and other support as needed. Treasury  officials told us that the second stage would involve on-site walk-throughs  conducted by MHA-C that will consist of discussions with management,  reviews of documentation such as project plans and testing results, and an  end-to-end walk-through of processes. Treasury officials told us that as of  the end of April 2010, 21 servicers had been sent a self-assessment on  capacity to implement HAFA, and that as of May 2010 on-site readiness  reviews for HAFA and 2MP had begun. However, Treasury has not  specified a time frame for the completion of either of the two stages of  readiness assessment for the other recently announced HAMP-funded  programs.
Meaningful performance measures. We reported in July 2009 that  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. As noted in GPRA, meaningful and useful performance  measures should focus on program outcomes and provide a basis for  comparing actual program results with performance goals. However,  Treasury did not develop performance measures before implementing the  first-lien modifications. According to Treasury, revised performance  measures were drafted in March 2010, a year after program  implementation. Performance measures include process measures such as  the number of servicers participating in the program, as well as outcome  measures such as average debt-to-income ratios (pre- and  postmodification) and redefault rates. Treasury had not yet developed  expected performance measures for 2MP, or the recently announced  principal reduction, forbearance for unemployed borrowers, or FHA  refinance programs as of May 14, 2010.
To ensure clear standards for accountability for the newly announced  programs, Treasury will need to establish specific outcomes-based  performance measures at the outset of the programs. For example, to  assess the success of the HAMP principal reduction and FHA refinance  programs, Treasury will need to develop measures and goals to assess the  extent to which these programs are helping borrowers with negative  equity and limiting foreclosures among this population—Treasury’s stated  goals for the program. Similarly, early development of meaningful  performance measures and goals could help Treasury evaluate the extent  to which the 3-month forbearance program is helping unemployed  borrowers avoid foreclosure. Such measures could be used to determine  whether program parameters, including the amount of time allowed for  borrowers to find new employment, are appropriate and sufficient for  ensuring program success. As noted by both the Congressional Oversight  Panel and SIGTARP, it will be imperative for Treasury to clearly define  performance measures for HAMP to ensure program accountability.
Furthermore, Treasury has yet to develop benchmarks, or goals, for  specific performance measures. According to Treasury, draft first-lien  performance measures include metrics such as conversion and redefault  rates. But in the absence of predefined goals to indicate what Treasury  considers acceptable conversion and redefault rates, assessing the results  of these measures will be difficult. Likewise, as Treasury develops  performance measures for the recently announced HAMP-funded  programs, it must also establish benchmarks for them.
Appropriate risk assessments. Also in our July 2009 report, we noted  that while some processes and internal controls had been developed  during the early stages of HAMP’s implementation, many more controls  needed to be finalized as the program progressed to ensure that taxpayer  dollars were safeguarded, program objectives achieved, and program  requirements met. The adequacy of Treasury’s internal controls for HAMP  continues to be an area of concern as Treasury refines the first-lien  program and adds new HAMP programs. According to GAO’s Standards  for Internal Control in the Federal Government, there are five key  components or standards for effective internal control: (1) the control  environment, (2) risk assessment, (3) control activities, (4) information  and communications, and (5) monitoring. The internal control standards  state that agencies must identify the risks that could impede the success of  the newly announced programs and determine appropriate methods of  mitigating these risks. After risks have been identified, the agency should  undertake a thorough and complete analysis of the possible effects of the  risks that includes an assessment of how likely the risks are to materialize.  Finally, agencies should determine how best to manage or mitigate risk  and what specific actions they should take.
Treasury, in conjunction with Fannie Mae as the HAMP program  administrator, has developed risk control matrixes that identify various  risks associated with the first-lien modification process, such as potential  inaccuracies in accruals of incentive payments or data reporting, and the  controls they have developed to mitigate the identified risk. However,  other programmatic risks may exist that Treasury has not addressed. For  example, as noted above, Treasury requires that borrowers demonstrate a  hardship to qualify for HAMP but does not require servicers to verify the  hardship. For example, if the borrower indicates that the household has  experienced a decrease in income, the servicer is not required to obtain  documentation on past income to compare to current income. As a result,  taxpayer funds may be used to support modifications of borrowers who  have not in fact experienced a hardship. Furthermore, in December 2008  we noted that one of the key challenges for loan modification programs  was mitigating the risk of moral hazard—the possibility that borrowers  might choose to default when they otherwise would not in order to benefit  from the loan modification. Requiring borrowers to demonstrate  hardship is one means of mitigating this risk, but by not requiring servicers  to verify the hardship, Treasury has not fully realized the potential benefit s  of this co ntrol.
Our prior work looking at the implementation of the first-lien program  underscores the importance of fully identifying and assessing the potential  risks associated with the newly announced HAMP-funded homeowner  assistance efforts. Further, Treasury needs to develop appropriate controls  to mitigate those risks prior to the implementation date for the newly  announced HAMP programs. For example, moral hazard is of particular  concern for the programs that include principal reduction. Treasury has  built some features into HAMP to manage the risk of moral hazard, such as  requiring a positive NPV model in order to have principal reduced,  something that borrowers cannot easily calculate in advance. Further, the  principal reduction is initially treated as forbearance and forgiven in three  equal steps over 3 years as long as the homeowner remains current on  payments. Under the FHA refinance program, borrowers must be current  on their mortgage payments to qualify, eliminating the risk that they will  default on their mortgages when they otherwise would not in order to  qualify for this program. However, the issue of moral hazard is one that  will require Treasury’s continued attention to ensure that the safeguards  that are put in place sufficiently limit this risk. The adequacy of Treasury’s  risk assessments and control activities for the newly announced HAMP- funded programs is an area that we plan to monitor and report on as part  of our ongoing oversight of Treasury’s use of TARP funds to preserve  homeownership and protect property values.
section_title: Conclusions
paragraphs: Treasury’s HAMP program is part of an unprecedented response to a  particularly difficult time in our nation’s mortgage markets. The  Emergency Economic Stabilization Act called for Treasury to, among  other things, preserve homeownership and protect home values, and  HAMP continues to be Treasury’s cornerstone effort for doing this.  However, more than a year after Treasury’s initial announcement of HAMP  and the program’s goal of bringing consistency to foreclosure mitigation,  servicers continue to treat borrowers seeking to avoid foreclosures  inconsistently in part because of a lack of specific guidelines from  Treasury. In particular, Treasury did not specify requirements for soliciting  potentially eligible borrowers for HAMP during the first year of the  program, even though outreach is important in the early phases of  program implementation. While Treasury has recently issued more  specific requirements on communicating with borrowers, it is continuing  to finalize measures of servicer performance in this area. In addition, while  Treasury’s stated goals are to standardize the loan modification process  and reach borrowers before they are delinquent on their loans, Treasury’s  lack of guidelines on how servicers should determine whether borrowers  who are current in their payments but may be in imminent danger of  default has led to significant differences in how servicers are evaluating  these borrowers for HAMP. By specifying clear and specific guidelines,  such as those implemented by the GSEs for their HAMP modifications,  Treasury could better ensure that similarly situated borrowers receive  equitable treatment under HAMP. Furthermore, Treasury has not fully  specified parameters for servicers’ internal quality assurance programs for  HAMP and therefore is not maximizing the potential for servicers’ quality  assurance procedures to ensure equitable treatment of borrowers. With  greater specificity from Treasury on how to categorize loans for sampling  and what servicers should be evaluating in their reviews, servicers would  be more likely to have robust HAMP quality assurance programs. Finally,  although Treasury drafted a policy that established consequences for  servicer noncompliance with HAMP requirements in October 2009, as of  May 2010 it had not yet finalized the policy. As a result, Treasury lacks  transparency and risks inconsistency in how it enforces HAMP servicer  requirements.
Treasury requires servicers to have procedures and systems in place to  respond to HAMP complaints and utilizes the HOPE Hotline to escalate  borrowers’ concerns about servicers’ handling of HAMP applications and  potentially incorrect denials. However, because Treasury has not specified  requirements on the types of complaints that servicers should track, some  servicers are tracking only certain types of complaints such as those  addressed to a company executive. Without consistent tracking of HAMP  complaints, Treasury cannot determine with certainty whether servicers  are ensuring fair and timely resolutions of HAMP complaints. Treasury has  set up the HOPE Hotline escalation process as the primary means for  borrowers to raise concerns about their servicer’s performance on the  HAMP loan modification request and potentially incorrect denials. But  whether this is an effective mechanism to resolve such concerns remains  unclear because neither MHA Escalation Team counselors, their quality  assurance reviewers, nor HAMP Solution Center staff independently  review borrowers’ applications or loan files. As a result, discretion over  how to resolve borrowers’ concerns about potentially incorrect HAMP  denials largely remains with the servicers. Therefore, Treasury needs to  monitor the effectiveness of this escalation mechanism, particularly to  resolve potentially incorrect denials, and make improvements to this  mechanism or replace it as appropriate. In addition, Treasury has not  taken steps to specifically inform borrowers that the hotline can be used  to escalate concerns about servicers’ handling of HAMP applications and  potentially incorrect denials. As a result, borrowers facing foreclosure  who have been told by their servicers that they do not qualify for a HAMP  loan modification may feel that they cannot challenge the servicer’s  determination and may lose their homes to foreclosures that might have  been prevented.
As we noted in our March 2010 testimony, Treasury faces several  challenges in implementing HAMP going forward, including converting  trial modifications to permanent modifications, addressing the growing  number of foreclosures among borrowers with negative equity, limiting  redefaults among borrowers who receive HAMP modifications, and  ensuring adequate program stability and management. While Treasury has  taken some steps toward addressing these challenges, the multitude of  problems facing U.S. mortgage markets call for swift and deliberate action,  and it remains to be seen how effective Treasury’s efforts will be. For  example, to address the challenge of converting trial modifications to  permanent modifications, Treasury launched a conversion campaign,  streamlined required documentation, and switched to verified income  documentation to start a trial. In addition, in March 2010 Treasury  announced several potentially substantial new HAMP-funded efforts, but it  did not say how many borrowers these programs were intended to reach  or discuss the specifics of these programs. In particular, Treasury  announced a principal reduction program under HAMP that could help  borrowers with negative equity. However, Treasury has stated that  principal reduction will be voluntary for servicers and will need to ensure  that future public reporting of this program ensures program transparency  and addresses potential questions about whether all borrowers are being  treated fairly.
In our July 2009 report, we made a number of recommendations to  improve HAMP’s effectiveness, transparency, and accountability. For  example, we recommended that Treasury consider methods of monitoring  whether borrowers who receive HAMP modifications and continue to have  high total household debt (more than 55 percent of their income) obtain  the required HUD-approved housing counseling. While Treasury has told  us that monitoring borrower compliance with the counseling requirement  would be too burdensome, we continue to believe that it is important that  Treasury determine whether consumers are actually receiving counseling  and whether the counseling requirement is having its intended effect of  limiting redefaults. In addition, we recommended that Treasury place a  high priority on fully staffing HPO and noted that having enough staff with  appropriate skills was essential to governing HAMP effectively. However,  Treasury has since reduced the number of HPO staff without formally  assessing staffing needs. We believe that having sufficient staff is critical  to Treasury’s ability to design and implement HAMP-funded programs  both quickly and effectively. We also recommended that Treasury finalize  a comprehensive system of internal controls for HAMP that will continue  to be important as Treasury implements new HAMP-funded programs.
Finally, as Treasury continues with first-lien modifications, and  implements 2MP, HAFA, and the newly announced programs, it will be  important to adhere to standards for effective program management and  to establish sufficient program planning and implementation capacity,  meaningful performance measures, and appropriate risk assessments. 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 the  program’s transparency and accountability. Additionally, without  preestablished performance measures and goals, Treasury will not be able  to effectively assess the outcomes of the newly announced programs.  Given the magnitude of the investment of public funds in HAMP, it will be  imperative that Treasury take the steps needed to expeditiously implement  a prudent design for the remaining HAMP-funded programs. We will  continue to monitor Treasury’s implementation and management of  HAMP-funded programs as part of our ongoing oversight of TARP to  ensure that such programs are appropriately designed and operating as  intended.
section_title: Recommendations for Executive Action
paragraphs: As part of its efforts to continue improving the transparency and  accountability of HAMP, we recommend that the Secretary of the Treasury  take actions to expeditiously:    establish clear and specific criteria for determining whether a borrower is  in imminent default to ensure greater consistency across servicers;   develop additional guidance for servicers on their quality assurance  programs for HAMP, including greater specificity on how to categorize  loans for sampling and what servicers should be evaluating in their  reviews;   specify which complaints servicers should track to ensure consistency and  to facilitate program oversight and compliance;   more clearly inform borrowers that the HOPE Hotline may also be used if  they are having difficulty with their HAMP application or servicer or feel  that they have been incorrectly denied HAMP, monitor the effectiveness of  the HOPE Hotline as an escalation process for handling borrower  concerns about potentially incorrect HAMP denials, and develop an  improved escalation mechanism if the HOPE Hotline is not sufficiently  effective; finalize and issue consequences for servicer noncompliance with HAMP  requirements as soon as possible; report activity under the principal reduction program, 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; finalize and implement benchmarks for performance measures under the  first-lien modification program, as well as develop measures and  benchmarks for the recently announced HAMP-funded homeowner  assistance programs; and implement a prudent design for remaining HAMP-funded programs.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Treasury for its review and comment.  We received written comments from the 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 would review  our final report and provide Congress with a detailed description of the  actions that Treasury had taken and intended to take regarding the  recommendations in the report. Treasury also stated that while GAO notes  the progress Treasury has made in implementing HAMP, it believed that  the draft report did not sufficiently take into the account the scope and  complexity of the challenges Treasury faced when it developed and  implemented a modification initiative, the scale of which had never been  previously attempted. We acknowledge that the HAMP program is part of  an unprecedented response to a particularly difficult time in our nation’s  mortgage markets. As noted by Treasury when it first announced the  HAMP framework in February 2009, the deep contraction in the economy  and the housing market had devastating consequences for homeowners  and communities throughout the country. However, more than a year after  Treasury first announced HAMP, the number of permanent modifications  has been limited and key HAMP program components have not been fully  implemented. Treasury noted in its written comments that the servicing  industry did not have the capacity or infrastructure needed to implement a  national loan modification program such as HAMP. This issue of servicer  capacity to successfully implement HAMP was one that we raised in our  July 2009 report as needing Treasury’s attention and remains a concern as  Treasury implements the additional programs and components it has  announced to supplement the HAMP first-lien modification program.  While Treasury has taken some steps to address the challenges we and  others have previously identified, the continuing problems in the U.S.  mortgage markets call for swift and deliberate action. Given the challenges  involved and the magnitude of public funds invested—up to $50 billion in  TARP funds and $25 billion in GSE funds—it remains to be seen how  effective Treasury’s efforts will be. As part of our ongoing monitoring of  Treasury’s implementation of TARP, we will continue to monitor  Treasury’s progress in implementing these and other planned initiatives in  future reports.
We are sending copies of this report to the Congressional Oversight Panel,  Financial Stability Oversight Board, Special Inspector General for TARP,  interested congressional committees and members, 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  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 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 servicers’ treatment of borrowers under the Home Affordable  Modification Program (HAMP), between November 2009 and March 2010,  we spoke with and obtained information from 10 HAMP servicers of  various sizes that collectively represented 71 percent of the Troubled  Asset Relief Program (TARP) funds allocated to participating servicers,  visiting 6 of them. The six servicers we visited were: Aurora Loan Services,  LLC; Bank of America, NA; Carrington Mortgage Services, LLC; GMAC  Mortgage, Inc.; Ocwen Financial Corporation, Inc.; and Wells Fargo Bank,  NA. The four additional servicers we spoke with and obtained data from  were: CitiMortgage, Inc.; J.P. Morgan Chase Bank, NA; Saxon Mortgage  Services, Inc.; and Select Portfolio Servicing. For each of these 10  servicers, we reviewed their HAMP policies, procedures, and quality  assurance reports; and interviewed management and quality assurance  staff. We also requested and reviewed data about these servicers’  solicitations of borrowers for HAMP between when they began  participating in the program and December 31, 2009. We determined that  these data were reliable for the purposes of our report. In addition, for the  servicers we visited, we observed a sample of HAMP-related phone calls  between borrowers and their servicers. We also reviewed HAMP program  documentation issued by the Department of the Treasury (Treasury),  including the supplemental directives related to first-lien modifications  and servicer communications with borrowers, press releases detailing  aspects and goals of the program, and draft operational metrics. We  obtained and analyzed information from Treasury on servicers’ HAMP loan  modification activity. Our work focused on non-GSE HAMP activity using  TARP funds, but the information obtained from Treasury did not always  break out GSE and non-GSE activity. We also spoke with officials at  Treasury and its financial agents—Fannie Mae and Making Home  Affordable-Compliance—to understand their rationale for program  changes, what they were doing to ensure compliance with HAMP  guidelines, and their processes for resolving HAMP complaints. In  addition, we reviewed data on the content and resolution of these  complaints. To understand the characteristics of borrowers in the  program, we analyzed data from IR/2, the HAMP database managed by  Fannie Mae to track the status of HAMP modifications, and we determined  that these data were reliable for the purposes used in our report. To learn  more about the process for and resolution of HAMP-related complaints,  we spoke to the administrators of the HOPE Hotline and representatives  of NeighborWorks, 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 also met with a trade association that represents both  investors and servicers, and an organization representing a national  coalition of community investment organizations.
To examine actions Treasury has taken to address the challenges of (1)  converting trial modifications to permanent modifications, (2) addressing  potential foreclosures among borrowers with negative equity, (3) limiting  the likelihood of redefault among borrowers with permanent  modifications, and (4) ensuring program stability and effective program  management, we reviewed the program announcements of current and  upcoming HAMP-funded homeowner assistance programs to determine  the extent to which they address these challenges. We also spoke with  Treasury officials to understand the goals of these programs, and the steps  Treasury has taken to ensure program stability and adequate program  management in light of these programs. In addition, we requested and  reviewed data from Treasury and servicers relevant to each challenge.  Specifically, we requested information from the 10 HAMP servicers  described above on the number of borrowers who had been in trial  modifications for at least 3 months, as of December 31, 2009, and of these,  the number that had converted to permanent modifications. We also  reviewed Treasury reports on conversion rates and documentation related  to Treasury’s conversion campaign. To understand the extent to which  borrowers may be facing negative equity, we reviewed data from American  Core Logic for the first quarter of 2010. Finally, we reviewed the  Government Performance and Results Act and the Standards for Internal  Control in the Federal Government to determine the key elements needed  to ensure program stability and adequate program management. 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 Stability Oversight Board.
section_title: Appendix II: 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 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 Home Price Decline  Protection (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 net present value model 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 TARP-funded 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 April 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 programs are implemented.
Treasury expects to finalize a list of remedies for servicers not in  compliance with HAMP guidelines by June 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 III: Comments from the Department of the Treasury
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; Heather Latta; Rachel DeMarcus; Karine McClosky; Marc  Molino; Mary Osorno; Jared Sippel; Winnie Tsen; and Jim Vitarello made  important contributions to this report.