Troubled Asset Relief Program: Treasury Could More Consistently Analyze Potential Benefits and Costs of Housing Program Changes
Released: 2015-07-06T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Treasury has allocated $37.5 billion in TARP funds to help struggling homeowners avoid potential foreclosure since 2009. The Emergency Economic Stabilization Act of 2008 includes a provision for GAO to report every 60 days on TARP activities. This 60-day report examines (1) the status of TARP-funded housing programs and (2) the extent to which Treasury's analytic framework for considering recent program changes was consistent with federal guidance and best practices. To do this work, GAO analyzed borrower participation levels, reviewed program documentation, and interviewed Treasury officials.

section_title: What GAO Found
paragraphs: Between February 2009 and May 2015, the U.S. Department of the Treasury (Treasury) disbursed approximately $16.3 billion of the $37.5 billion in Troubled Asset Relief Program (TARP) funds allocated to support housing programs. The number of new borrowers with permanent modifications added to the Home Affordable Modification Program (HAMP), the key component of these programs, began to decline in late 2013 but has stabilized at between 9,000 and 15,000 additions per month. Activity under HAMP Tier 1, the original modification for qualified borrowers seeking to reduce their mortgage payments to affordable levels (rates periodically reset), has gradually declined. HAMP Tier 2, a broader fixed rate modification announced in 2012, has gradually grown to account for the majority of new entrants. Since October 2014, Treasury has expanded incentives in order to draw new entrants into the programs and further assist existing participants.

In making program changes, Treasury took steps to assess their benefits and costs but did not fully meet all of the key elements of federal benefit-cost analysis guidance, and thus has limited assurance that the additional expenditures are an effective and efficient use of taxpayer dollars (see figure below). For example, it is unclear whether the recent changes, such as extending performance incentives to borrowers in the sixth year of their HAMP modification (estimated to cost $4-6 billion), will reduce redefaults. Treasury officials told GAO that borrower surveys confirmed that borrowers responded to performance incentives. But Treasury does not have the estimates needed to fully assess the effectiveness of this or other recent changes. Treasury officials said that program benefits and costs depended on unknown factors and macroeconomic trends and that program benefits were difficult to quantify. Office of Management and Budget guidance and GAO's past work stress that analyzing benefits and costs can help decision makers choose among alternatives. Without full and comprehensive analyses, Treasury will be challenged to determine whether program changes are actually achieving desired goals and are an efficient use of taxpayer dollars.

section_title: What GAO Recommends
paragraphs: To bring greater rigor and efficiency to decisions about the use of federal funds, GAO recommends that Treasury develop and implement policies and procedures that establish a standard process to better ensure that TARP-funded housing program changes are based on benefit-cost analyses that meet key elements. Treasury agreed to consider applying GAO's recommendation going forward.

section_title: Letter
paragraphs: The U.S. Department of the Treasury (Treasury) has allocated $37.5  billion of the $700 billion Troubled Asset Relief Program (TARP),  authorized by the Emergency Economic Stabilization Act of 2008 (EESA),  to assist struggling homeowners avoid foreclosure, among other goals.  The cornerstone program under Treasury’s Making Home Affordable  (MHA) efforts is the Home Affordable Modification Program (HAMP),  which provides financial incentives for servicers, mortgage  holders/investors, and borrowers for mortgage loan modifications. These  modifications are intended to prevent foreclosure by reducing  homeowners’ monthly mortgage payments to more affordable levels.  Treasury has also allocated TARP funds to state housing finance  agencies to help borrowers in the areas most affected by the housing  crisis and to the Department of Housing and Urban Development’s  Federal Housing Administration (FHA) to support its refinance program  for borrowers with negative equity in their homes.

Treasury has made extensive modifications to MHA programs, including  HAMP, since their introduction. These modifications include extending the  deadline for participation in HAMP, expanding the program to cover  additional homeowners and investors, providing additional payment relief,  and granting certain borrowers principal reduction. According to data  provided by Treasury, the combined cost of these modifications will result  in billions of dollars in additional outlays of program funds. To implement  these program modifications, Treasury issues Supplemental Directives to  servicers participating in MHA programs. Treasury has issued over 60  Supplemental Directives since the MHA programs were announced in  2009.

EESA includes a provision for GAO to report at least every 60 days on  TARP’s performance in meeting the purposes of the act, among other  things, including the TARP-funded housing programs. In previous  reports, we looked at Treasury’s design and implementation of HAMP and  other MHA and TARP-funded housing programs and made several  recommendations to improve Treasury’s oversight of the programs and  the programs’ effectiveness.of TARP-funded housing programs and (2) the extent to which Treasury’s  analytic framework for considering recent program changes was  consistent with federal guidance and best practices.

This 60-day report examines (1) the status  To address these objectives, we reviewed periodic reports on funding  allocation and disbursement and program participation issued by  Treasury and the Congressional Budget Office, analyzed TARP housing- related program documentation, and interviewed Treasury officials on  program activities and future plans. For example, we analyzed data on  the number of borrowers participating in the program and program- specific information on the help they received from Treasury’s MHA  performance reports from July 2009 through the first quarter of 2015. To  assess Treasury’s analytic framework, we analyzed program  documentation, including Supplemental Directives for three recent  program changes and program handbooks. We selected the three  program changes based on key MHA changes that Treasury had initiated  since our October 2014 report that would likely result in additional TARP  program expenditures. We compared Treasury’s process to key elements  of effective benefit-cost analyses contained in guidance from the Office of  Management and Budget (OMB). We analyzed internal Treasury  memorandums, internal policy committee meeting agendas, and other  internal documents. We also interviewed Treasury officials and staff about  their process for making program changes. Additionally, we reviewed  guidance from OMB and prior GAO reports to identify the key elements of  effective benefit-cost analysis.  To assess the reliability of the Treasury  data, we reviewed related documentation and interviewed knowledgeable  agency officials.  We determined that the data were sufficiently reliable for  the purposes of this report. For additional information on our scope and  methodology, see appendix I.

We conducted this performance audit from November 2014 to July 2015  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: Treasury’s Office of Homeownership Preservation within the Office of  Financial Stability, which administers Treasury’s TARP-related efforts, is  tasked with finding ways to help struggling homeowners avoid foreclosure  and assist in stabilizing the housing market. Treasury has established  three initiatives funded under TARP to address these issues: MHA, the  Housing Finance Agency Innovation Fund for the Hardest Hit Housing  Markets (Hardest Hit Fund), and support for loans insured by FHA  through the FHA Refinance of Borrowers in Negative Equity Positions  program (FHA Short Refinance).
subsections: section_title: Making Home Affordable Programs
paragraphs: Treasury allocated $29.8 billion of the $37.5 billion in TARP housing  funds to MHA to encourage the modification of eligible mortgages and  provide other relief to distressed borrowers. Only loans originated on or  before January 1, 2009, that meet certain requirements are eligible for  assistance under MHA. Several programs have been designed under  MHA to help struggling homeowners and prevent avoidable foreclosures.

HAMP first-lien modifications. The largest component of MHA is the  first-lien modification program. The program was intended to help  eligible borrowers stay in their homes and avoid potential foreclosures  by reducing monthly mortgage payments to affordable levels.  Modifications are available for single-family properties (one to four  units) with mortgages no greater than $729,750 for a one-unit  property. Borrowers are eligible only if the companies servicing their  mortgages have agreed to participate in the program.  To determine  whether a participating loan servicer is required to modify a loan,  HAMP uses a standardized net present value (NPV) model to  compare expected cash flows from a modified loan to the same loan  with no modifications, using certain assumptions. If the expected cash  flow with a modification is positive (i.e., more than the estimated cash  flow of the unmodified loan), the participating loan servicer is required  to make the loan modification. Treasury uses TARP funds to provide  both one-time and ongoing incentives to mortgage investors, loan  servicers, and borrowers for up to 6 years after a loan is modified.  These incentives are designed to increase the likelihood that the  program will produce successful modifications over the long term and  take into consideration the servicers’ and investors’ costs for making  the modifications.

Only financial institutions that signed a Commitment to Purchase Financial Instrument  and Servicer Participation Agreement on or before October 3, 2010, are eligible to receive  TARP financial incentives under the MHA program. Treasury pays the incentives for  HAMP modifications for loans not owned or guaranteed by the housing enterprises Fannie  Mae or Freddie Mac. Fannie Mae and Freddie Mac bear the cost of HAMP modifications  for loans they own or guarantee. primary residence and whose first-lien mortgage payments are more than  31 percent of their monthly gross income, as calculated using the debt-to- income (DTI) ratio. HAMP Tier 2, which was announced in January  2012, is available for both owner-occupied and rental properties, and  borrowers’ monthly mortgage payments prior to modification may be less  than 31 percent DTI.

As part of the HAMP Tier 1 modification, servicers reduce a borrower’s  interest rate until the DTI is 31 percent or the interest rate falls to 2  percent. modification. It then gradually increases by increments of no more than 1  percent per year (interest rate step-ups) until it reaches the cap, which is  the Freddie Mac Primary Mortgage Market Survey rate at the time of the  evaluation for the modification. The interest rate is then fixed at that rate  for the remaining loan term. In contrast, under HAMP Tier 2 the interest  rate is based on the weekly Freddie Mac Primary Mortgage Market  Survey Rate at the time of the modification and remains fixed for the life  of the loan.

Servicers are not required to reduce interest rates below 2 percent. Interest rate  reduction is one step in the HAMP Tier 1 standard modification waterfall. Under the  waterfall, servicers must first capitalize accrued interest and certain expenses paid to third  parties and add this amount to the loan balance (principal) amount. Next, servicers must  reduce the interest rate until the 31 percent DTI target is reached or the interest rate is  reduced to 2 percent. If the interest rate reduction does not result in a DTI ratio of 31  percent, servicers must then extend the maturity and/or amortization period of the loan up  to 40 years. Finally, if the target DTI ratio is still not reached, the servicer must forbear, or  defer, principal until the payment is reduced to the 31 percent target, subject to an  excessive forbearance cap. The mortgage holder/investor absorbs the reduced payment  until 38 percent DTI is reached, and Treasury and the lender then share payment  reductions until 31 percent DTI is reached. period of least 3 months before a loan is permanently modified and any  government payments made. Borrowers who redefault on a permanent  HAMP loan modification—that is, who miss three consecutive mortgage  payments—no longer qualify for borrower incentives under the program.  In addition, the servicer and investor do not continue to receive incentives  for that loan. Borrowers who experience a subsequent hardship after  receiving a HAMP Tier 1 modification or who redefault on a HAMP Tier 1  modification may be eligible for a HAMP Tier 2 modification under certain  conditions. These include having undergone a change in circumstances  that show a clear need for the program (such as default or imminent  default).

The Second Lien Modification Program (2MP). According to Treasury,  2MP is designed to work in tandem with HAMP modifications to  provide a comprehensive solution to help borrowers afford their  mortgage payments. When a borrower’s first lien is modified under  HAMP and the servicer of the second lien is a 2MP participant, that  servicer must offer modification and/or full or partial extinguishment of  the second lien. Treasury provides incentive payments to second- lien mortgage holders, including in the form of a percentage of each  dollar in principal reduction on the second lien. Treasury has doubled  the incentive payments offered to second-lien mortgage holders for  2MP permanent modifications that include principal reduction and  have an effective date on or after June 1, 2012.

Principal Reduction Alternative (PRA). In October 2010, PRA took  effect as a component of HAMP to give servicers more flexibility in  offering relief to borrowers whose homes were worth significantly less  than their mortgage balance. Under PRA, Treasury provides  mortgage holders/investors with incentive payments in the form of a  percentage of each dollar in principal reduction. Treasury has tripled  the PRA incentive amounts offered to mortgage holders/investors for  permanent modifications with trial periods effective on or after March  1, 2012. Participating servicers of loans not owned by the housing  enterprises Fannie Mae or Freddie Mac must evaluate the benefit of  principal reduction for mortgages with a loan-to-value (LTV) ratio that  is greater than 115 percent when evaluating a homeowner for a  HAMP first-lien modification.principal under HAMP, even when the NPV calculations show that the  expected value of the loan’s cash flows would be higher with a  principal reduction than without it. However, servicers must adopt and  follow PRA policies that treat all similarly situated loans in a consistent  manner. When servicers include principal reduction in modifications  under PRA, the principal reduction amount is initially treated as non- interest-bearing principal forbearance. If the borrower is in good  standing on the first, second, and third anniversaries of the effective  date of the modification’s trial period, one-third of the principal  reduction amount is forgiven on each anniversary.

There is no requirement to forgive

Home Affordable Foreclosure Alternatives (HAFA) Program. Under  this program, servicers offer foreclosure alternatives (short sales and  deeds-in-lieu of foreclosure) to borrowers who meet the basic  eligibility requirements for HAMP and who do not qualify for a HAMP  trial modification, do not successfully complete a HAMP trial  modification, default on a modification (miss three or more  consecutive payments), or request a short sale or deed-in-lieu. The  program provides incentive payments to investors, servicers, and  borrowers for completing these foreclosure alternatives.

Home Affordable Unemployment Program. This program offers  assistance to borrowers who are suffering financial hardship due to  unemployment. Borrowers are eligible for a 12-month forbearance  period during which monthly mortgage payments are reduced or  suspended. Servicers can extend the forbearance period at their  discretion if the borrowers are still unemployed after the 12-month  period. Servicers are required to consider borrowers who later find  employment or whose forbearance period expires for a HAMP loan  modification or a foreclosure alternative, such as the HAFA program.  No TARP funds are provided to servicers under this program.

FHA and the Department of Agriculture’s Rural Housing Service  (RHS) modification programs. These programs are similar to HAMP  Tier 1 and cover FHA-insured and RHS-guaranteed mortgage loans.  If a modified FHA-insured or RHS-guaranteed mortgage loan meets  Treasury’s eligibility criteria, the borrower and servicer can receive  TARP-funded incentive payments from Treasury.

In 2009, Treasury entered into agreements with Fannie Mae and Freddie  Mac to act as financial agents for MHA. Fannie Mae serves as the MHA  program administrator and is responsible for developing and  administering program operations, including registering, executing  participation agreements with, and collecting data from servicers and  providing ongoing servicer training and support. Freddie Mac serves as  Treasury’s compliance agent and has a designated independent division,  Making Home Affordable Compliance, that is responsible for assessing  servicers’ compliance with program guidelines, including conducting on- site and remote servicer loan file reviews and audits.

section_title: Hardest Hit Fund Program
paragraphs: Treasury established the Hardest Hit Fund program in February 2010, 1  year after announcing MHA. The goal of the program is to fund innovative  measures developed by state housing finance agencies and approved by  Treasury to help borrowers in states hit hardest by the aftermath of the  housing bubble. By September 2010, Treasury had completed the full  allocation of $7.6 billion in funds across 18 states and the District of  Columbia. States were selected for funding either because their  unemployment rates were at or above the national average or they had  experienced housing price declines of 20 percent or more that left some  borrowers owing more on their mortgages than the value of their homes.  Although the type of assistance provided varies by state, all states use  some portion of their funds to help unemployed homeowners make  mortgage payments. Other states have programs of principal reduction to  help make mortgage payments more affordable, reduce or eliminate  borrowers’ second liens, and provide transition assistance to borrowers  leaving their homes.

section_title: FHA Short Refinance
paragraphs: Under TARP, Treasury and FHA established the FHA Short Refinance  program. The program took effect in September 2010 and provides  underwater borrowers—those with properties that are worth less than the  principal remaining on their mortgage—whose loans are current and are  not insured by FHA with the opportunity to refinance into an FHA-insured  mortgage. The investor must agree to forgive a certain level of principal in  order to reach a specified LTV ratio. In the event of a default on the  refinanced loan, Treasury pays up to a certain percentage of the claim  after FHA has paid its part. In 2013, Treasury reduced the amount  obligated to the FHA Short Refinance program from $8.1 billion to $1.0  billion, in part because participation levels were lower than originally  projected. According to Treasury officials, the reduction was also intended  to minimize the administrative costs associated with the program. In  March 2015, Treasury subsequently reduced the amount obligated to the  program from $1.0 billion to $125 million.

section_title: Treasury Continues Its Efforts to Reach More Borrowers and Address Interest Rate Increases
subsections: section_title: Treasury Has Disbursed More Than 40 Percent of Allocated TARP Housing Funds
paragraphs: Between February 2009 and May 2015, Treasury disbursed  approximately $16.3 billion (43 percent) of the $37.5 billion in TARP funds  allocated to support housing programs. The amounts disbursed to each of  the three TARP-funded housing programs varied (see fig. 1). Of the  $29.8 billion allocated to MHA, the largest TARP-funded program,  Treasury had disbursed $11 billion (37 percent) as of May 2015. Of the  $7.6 billion allocated to the Hardest Hit Fund program, $5.1 billion (67  percent) had been disbursed as of that date, and of the $125 million  allocated to the FHA Short Refinance program, $20 million (15 percent)  had been disbursed. The original deadline for borrowers to be accepted  into MHA programs was December 31, 2012.  Treasury has since  extended the program three times, most recently through at least  December 2016.  Treasury officials said that they anticipated using all of  the remaining funds allocated to MHA.

In March 2015, the Congressional Budget Office (CBO) increased its  estimate of likely outlays of TARP-funded housing programs by $2 billion,  primarily because of Treasury’s announcement of an additional $5,000 in  principal reduction for participants in the sixth year of a mortgage  modification in November 2014.dollar surplus in the amount that Treasury has estimated, because CBO  anticipates that fewer households will participate in housing programs.

Nonetheless, CBO projects a $9 billion  When HAMP, the largest MHA program, was announced in February  2009, Treasury projected that up to 3 million to 4 million borrowers who  were at risk of default and foreclosure would be helped. As we noted in  our July 2009 report, reaching the projected number of borrowers would  be difficult for several reasons. In addition, as we found in our February  2014 report, the pool of mortgages eligible for MHA programs was  declining.

As shown in figure 2, HAMP participation, as measured by trial and  permanent modifications started each month, peaked at 145,000 in  January 2010, generally declined in 2011, and then held relatively steady  until the end of 2013. Since March 2015, the total amount of new  modifications has ranged from 9,000 to 15,000 per month through April  2015 (the most recent month for which data were available).

With the introduction of HAMP Tier 2 in 2012, the decline in HAMP Tier 1  modifications has been compensated by an increasing number of HAMP  Tier 2 modifications (see fig. 3). As of March 2015, HAMP Tier 2  accounted for more than half of all new trial and permanent modifications.

As shown in table 1, from April 2010 through April 2015 the HAFA  program has assisted the second-largest number of borrowers after  HAMP, with approximately 363,000 transactions. In addition, about  182,000 borrowers had principal forgiven through the PRA program  through March 2015.

Some states have made more progress than others in disbursing  allocated funds and meeting state-level targets for household participation  for the Hardest Hit Fund. Through May 2015, the Hardest Hit Fund  program had disbursed approximately 68 percent of allocated funds ($5.2  billion of $7.6 billion). The District of Columbia, Oregon, Rhode Island,  Tennessee, New Jersey, Illinois, North Carolina, and Ohio had each  disbursed more than 75 percent of their allocated funds, and one state— Alabama—had disbursed less than 30 percent (see fig. 4). State housing  finance agencies for the 18 states and the District of Columbia  participating in the program originally estimated that the total number of  Hardest Hit Fund participants would reach approximately 335,000  households by the end of the program in December 2017. As of  December 2014, the states, along with the District of Columbia, had  assisted approximately 219,000 households, or 65 percent of their goal.

section_title: Treasury Has Expanded Incentives under HAMP to Reach More Borrowers and Further Assist Existing Program Participants
paragraphs: Treasury has taken steps to increase participation in its housing programs  and further assist existing program participants. Since October 2014 (the  date of our last report on HAMP), Treasury has on three occasions made  substantive policy changes to its TARP-funded housing programs,  including HAMP and HAFA:

HAMP Tier 2 Interest Rate Adjustment: In October 2014 Treasury  announced that it would adjust the HAMP Tier 2 loan modification  interest rate from 0 basis points above the primary mortgage market  survey rate to 50 basis points below the primary mortgage market  survey rate. According to Treasury, this action was taken primarily to  assist borrowers who cannot sustain or do not qualify for a HAMP Tier  1 modification and otherwise expand the population of homeowners  eligible for HAMP Tier 2. Treasury had previously expanded the  eligibility for the HAMP Tier 2 program to borrowers who had lost their  good standing on their Tier 1 loan modification or were experiencing  financial duress, such as that associated with a higher monthly  mortgage payment due to an interest rate increase. Treasury  estimated that the reduction would provide a median savings of $258  on the median monthly HAMP Tier 1 payment after the first interest  rate step-up.

HAFA Relocation Assistance Payment Increase: At the same time,  Treasury increased HAFA’s relocation assistance payment to  borrowers from $3,000 to $10,000.

Treasury noted that the costs of  relocating—such as rental deposits and moving expenses—could be  especially burdensome for recently delinquent homeowners who were  often struggling with unemployment and/or may have exhausted their  cash reserves. According to Treasury, increasing the relocation  assistance payment could also provide an alternative to foreclosure  for HAMP Tier 1 borrowers unable to make their monthly mortgage  payments due to interest rate step-ups. Further, Treasury also  increased the incentive payments an investor can receive for  extinguishing a subordinated second lien from $8,500 to a minimum of  $12,000, noting that participation by subordinate lien holders, who  were in a first-loss position, was critical to the success of a short sale  or deed-in-lieu under HAFA. According to Treasury, without the  incentive, investors might resort to foreclosure, leaving a struggling  borrower with no other alternative.

Year Six Pay-for-Performance Incentive and Recast: In November  2014, Treasury extended the HAMP Tier 1 pay-for-performance  principal balance reduction payment for a sixth year and increased the  payment from $1,000 to $5,000 in year six as of November 2014.  According to Treasury officials, increasing financial incentives for  homeowners who remain in good standing after receiving a HAMP  modification can help lower the risk of redefault by (a) providing a  stronger incentive for borrowers to remain current on their modified  loans, (b) lessening the impact of the interest rate step-up, and (c)  helping homeowners build equity in their homes, something that is  particularly beneficial for those struggling with negative equity.  Treasury also extended the Year Six Pay-for-Performance Incentive  to borrowers with HAMP Tier 2 loan modifications. Before the  directive, HAMP Tier 2 borrowers, whose mortgage interest rate is  fixed, did not receive performance incentives.

The $5,000 principal balance reduction payment becomes  payable one month after the sixth anniversary of the month the  HAMP trial period plan became effective. The loan must be in  good standing and not paid in full. This Supplemental Directive  also requires servicers to offer to recast an eligible HAMP Tier 1  borrower’s loan after the 6-year anniversary of the trial period  plan.borrowers’ monthly mortgage payment by a median of $56 per  month. In addition, servicers may, but are not required to, offer to  recast the unpaid principal balance for HAMP Tier 2 borrowers  who are in good standing after the application of borrower  incentives in year 6.

Treasury estimates that a recast could lower HAMP Tier 1  Subsequently, in January 2015, Treasury extended the $5,000  Year Six Pay-for-Performance Incentive and Recast to HAMP  loans owned or guaranteed by the enterprises. This change  represented the first use of TARP dollars to assist borrowers with  enterprise-backed loans. The requirements are similar to those  that are already in place for non-enterprise loans. If the servicer  has not signed an amended MHA servicer participation agreement  with respect to enterprise loans on or before March 15, 2015, the  enterprise pays the cost of the incentive, according to internal  guidance.

section_title: Treasury Has Not Fully Assessed the Benefits and Costs of Recent MHA Program Changes
paragraphs: Treasury had taken steps to assess the benefits and costs of the three  recent MHA program changes we reviewed but did not fully meet all of  the key elements of effective benefit-cost analyses. Among the stated  purposes of the legislation that created the TARP program are protecting  home values and preserving homeownership, while key considerations  include minimizing the impact on the national debt, among other things.  OMB has issued guidance on using benefit-cost analyses to help federal  agencies efficiently allocate resources through well-informed decision  making. While Treasury is not required to follow the OMB guidance  because MHA program changes are not issued under a rulemaking  framework, the guidance does contain practices that are still relevant and  may be useful for Treasury to consider. Additionally, since the formal  rulemaking process does not apply in this instance and no public  comment period is required, it is therefore even more important that a  framework is used to maintain accountability and efficiency in the use of  public funds. In our 2010 report on Treasury’s decision to extend TARP  we found that Treasury could improve its decision making by establishing  a robust analytic framework that included clear objectives and meaningful  measures. A benefit-cost analysis provides such a framework by linking  potential agency actions to program goals, delineating the benefits and  costs of potential actions, comparing potential actions to alternative  actions, and developing mechanisms to track the performance of the  proposed actions. We also have noted in prior work that the systematic  process of analyzing benefits and costs can help decision makers  organize and evaluate information about alternatives and determine  trade-offs among them.

OMB’s guidance outlines four key elements of a benefit-cost analysis—a  policy rationale, explicit assumptions, evaluation of alternatives, and  verification (see table 2).

Treasury officials told us they do consider the benefits and costs of their  program changes. However, Treasury officials also explained that they  must balance a number of additional factors, such as operational and  time constraints. Treasury officials described how Treasury is trying to be  proactive and quickly implement changes, especially those intended to  assist homeowners facing interest rate step-ups in the near future. As a  result, Treasury officials explained they are required to make  programmatic decisions based on limited information. Also, Treasury  officials indicated that program benefits and costs are dependent upon a  number of unknown factors, such as national mortgage delinquency rates  and other macroeconomic trends, borrower application rates and the  performance of modified loans over time. Further, program benefits  extend beyond individual borrowers to the larger community and are  difficult to quantify.

Based on our review of available documentation and discussions with  Treasury officials for this review, we determined that Treasury  substantially or partially met some but not all four of the OMB elements in  considering benefits and costs of the three recent program changes we  reviewed—the HAMP Tier 2 Interest Rate Reduction, HAFA Relocation  Assistance, and the Year Six Pay-for-Performance Incentive and Recast  (see fig. 5). Treasury used action memorandums to summarize the need  for and basis of these program changes. However, the action  memorandums and the additional supporting documentation provided by  Treasury varied in terms of the content of the material discussed and the  degree to which they addressed the key elements of benefit-cost  analysis.

Policy rationale: Treasury substantially met this element. Treasury  considered lowering the interest rate as a way of making HAMP Tier 2  modifications a more effective alternative for homeowners that cannot  sustain, or do not qualify, for a HAMP Tier 1 modification. These  borrowers include, in particular, HAMP Tier 1 borrowers who may  struggle with interest rate increases in years 6 and beyond of their loan  modification. According to Treasury, after all of the HAMP Tier 1 interest  rate increases, the median monthly HAMP Tier 1 payment will increase  about $212. Increasing a borrower’s monthly payment by increasing the  interest rate, something that will happen to many HAMP Tier 1 borrowers  in 2015, increases the borrower’s risk of defaulting. Treasury has reported  that 83 percent of HAMP Tier 1 borrowers (approximately 752,000) will  experience at least one interest rate increase and that the majority of  them will experience two or three increases.

Treasury determined that reducing a borrower’s monthly mortgage  payments continues to be the primary driver of the long-term  effectiveness of HAMP modifications. Likewise, in our June 2012 HAMP  report, our econometric analysis showed that reducing a borrower’s  monthly payment by reducing either their mortgage interest rate or  principal balance reduced the borrower’s risk of defaulting on the loan,  but only up to a certain point. HAMP Tier 2 loan modifications offer  borrowers a below-market interest rate that is fixed for the life of the loan  and that may be lower than the scheduled interest rate increases under  HAMP Tier 1. For example, the average interest rate cap would be 5.04  percent for borrowers who received a HAMP Tier 1 loan modification in  2009. When Treasury made the program change, it assumed a Freddie  Mac Primary Mortgage Market Survey rate of approximately 4 percent  resulting in an expected fixed rate under Tier 2 of about 3.5 percent (after  50 basis point discount).

Explicit assumptions: Treasury partially met this element. Treasury  assumed that reducing HAMP Tier 1 borrowers’ monthly payments  through a HAMP Tier 2 loan modification would offset the increased risk  of redefault caused by the HAMP Tier 1 interest rate reset. Treasury  determined that the median HAMP Tier 1 monthly payment would rise by  $95 after the first interest rate increase and would have risen by $212  after the last increase. Assuming a Freddie Mac Primary Mortgage Market Survey rate of approximately 4 percent and 50 basis points  discount, Treasury estimated that the HAMP Tier 2 interest rate reduction  would provide a median savings of $258 from the median payment under  HAMP Tier 1 after the first interest rate increase.

Treasury conducted significant analysis to arrive at its decision to lower  the HAMP Tier 2 interest rate. Before Treasury’s most recent change, the  HAMP Tier 2 interest rate was the same as the Freddie Mac Primary  Mortgage Market Survey rate. Treasury officials provided analysis  showing that, assuming a 4-percent primary mortgage market survey  rate, reducing the HAMP Tier 2 interest rate 50 basis points below the  market rate could help a number of HAMP Tier 1 borrowers experiencing  an interest rate increase by increasing the number of HAMP Tier 1  borrowers passing the HAMP Tier 2 NPV eligibility test. However,  Treasury’s analysis also found that a more deeply discounted HAMP Tier  2 interest rate decreased the number of HAMP Tier 1 borrowers who  might benefit. That is, with a deeper discounting of the HAMP Tier 2  interest rate, fewer HAMP Tier 1 borrowers would pass the HAMP Tier 2  NPV eligibility test. Treasury’s analysis showed that setting the HAMP  Tier 2 interest rate at 50 basis points below the market rate allowed the  largest number of HAMP Tier 1 borrowers (approximately 192,000) to be  NPV positive while giving them some payment reduction. Treasury’s  analysis also showed setting the rate at 100 basis points (instead of 50  basis points) below the market rate would increase the amount of Tier 1  borrowers’ payment reduction (an additional $22 or from $258 to $280)  but would decrease the number of Tier 1 borrowers eligible for a Tier 2  loan modification (approximately 12,000 fewer loans).

However, Treasury does not appear to have estimated the percentage of  the 192,000 HAMP Tier 1 borrowers who would likely redefault or be in  imminent default (i.e., future HAMP Tier 1 beneficiaries of this program  change). According to Treasury officials, Treasury data shows that  approximately 25 percent of HAMP Tier 2 modifications relate to  borrowers who previously received HAMP Tier 1 trial or permanent  modifications that they could not thereafter sustain. Treasury officials  stated that given the unique criteria and circumstances of HAMP Tier 1  borrowers, it would be difficult to predict how many additional borrowers  will redefault as a result of an interest rate increase. However, an Urban  Institute study on interest rate resets, which Treasury officials told us they  reviewed and considered, using Treasury published loan file information  assumed a 10 percent increase in redefaults.

In addition to not estimating redefaults, Treasury did not estimate future  costs to the HAMP program as a result of this program change. Treasury  officials told us that because their goal was to help as many homeowners  as possible avoid foreclosure, they settled on the rate that would benefit  the larger number of HAMP Tier 1 borrowers. As a result of the reduction  in the HAMP Tier 2 interest rate, Treasury’s share of the costs of the  monthly reductions will increase a maximum of 25 basis points for the first  five years of all new HAMP Tier 2 loan modifications.HAMP Tier 2 transactions represented more than half of all new HAMP  transactions. According to Treasury, because the $29.8 billion in  obligated funds remains unchanged, the interest rate change will have no  impact on the MHA budget and will fit into Treasury’s existing budgetary  authority. However, this assessment does not take into account the fact  that unused MHA program funds could be returned to the federal  government general fund if deobligated by Treasury, ultimately reducing  federal government expenditures and minimizing the impact on the  national debt.

Evaluation of alternatives: Treasury partially met this element, primarily  due to the lack of documentation of some alternatives considered.  Treasury provided documentation showing that it considered lowering the  interest rate in increments of 50 basis points, 100 basis points, 150 basis  points, 200 basis points and not lowering the interest rate at all. Treasury  also evaluated the effect of the interest rate reduction at various Primary  Mortgage Market Survey rates, (e.g., 4 percent, 5 percent, etc.) given that  such rates may change over time.  Although Treasury did not provide any  supporting documentation, officials told us that they had considered a  number of other alternatives as well. For example, Treasury officials said  they considered limiting the reduction to HAMP Tier 1 borrowers only.  However, Treasury officials told us that limiting the change to redefaulting  HAMP Tier 1 borrowers only would have limited the overall assistance  provided and would not have increased the overall number of potentially  eligible borrowers.

Treasury officials said they also considered further targeting the rate  reduction only at the Tier 1 borrowers most in risk of default. Treasury  officials told us that HAMP Tier 2 already does that by virtue of its  eligibility criteria. In order to quality for HAMP Tier 2, a HAMP Tier 1  borrower must meet basic eligibility criteria, which includes being either  delinquent or at risk of imminent default. Treasury officials added that  creating a bifurcated rate would add considerable operational complexity  that would have reduced effectiveness by delaying implementation and  putting borrowers at risk until the changes could be implemented.

Treasury officials also told us that they had considered a stakeholder’s  suggestion of freezing HAMP Tier 1 borrowers’ interest rate (i.e.,  eliminate interest rate increases). However, Treasury officials told us they  rejected the suggestion as unfeasible because stakeholders advised  them that it would have required the remodification of all Tier 1 loans,  including executing new loan documents. Officials also added that  freezing rates would likely cost significantly more than the selected  approach.

Verification: Treasury partially met this element. Treasury identified the  maximum number of HAMP Tier 1 borrowers who could possibly benefit  from its decision to reduce the HAMP Tier 2 interest rate. However,  Treasury did not estimate the number of these HAMP Tier 1 borrowers  that it expected to use HAMP Tier 2 or the total number of borrowers  (both existing Tier 1 and new borrowers) expected to benefit from HAMP  Tier 2. According to Treasury officials, they do not attempt to estimate the  number of borrowers it expects to serve under HAMP Tier 2 or other  programs because Treasury found servicer estimates of future  participation to not be reliable predictors of future participation. Treasury  officials said that their objective is to serve the greatest number of  borrowers possible. However, as we found in July 2009 and June 2010,  Treasury will be unable to effectively evaluate the success of program  changes if it does not establish specific outcomes-based performance  measures (expected benefits) at the outset to compare actual results  versus the additional program outlays.

Further, according to Treasury officials it is difficult to estimate the  number of borrowers that will ultimately receive assistance under HAMP  Tier 2 or other programs, given borrowers’ unique situations, the dynamic  nature of the housing market, and broader economic forces including  changes in unemployment rates and rates of new mortgage defaults.  OMB’s guidance recognizes that uncertainty is basic to many analyses  and therefore its effects should be analyzed and reported. For example,  OMB’s guidance states that the analysis should include information  surrounding the key sources of uncertainty, expected value estimates of  outcomes, sensitivity of results to sources of uncertainty, and where  possible, probability distributions of benefits, costs, and net benefits.

Treasury officials told us that they would closely track the number of  homeowners who entered HAMP Tier 2 before and after the discounted  rate went into effect to identify the impact of the change and the percent  of HAMP Tier 2 borrowers who come from HAMP Tier 1. According to  officials, this information will help Treasury fully assess the effectiveness  of the program change. While following trends is a necessary component  of a verification plan, it remains unclear how Treasury will be able to  assess the effectiveness of this program change (i.e. whether anticipated  benefits and costs have been realized, and whether it is minimizing the  impact on the national debt) without a specific estimate or benchmark to  track.
subsections: section_title: HAFA Relocation Assistance
paragraphs: Policy rationale: Treasury substantially met this element. Treasury noted  that negative equity continued to be a persistent problem for many  communities in the United States, with nearly 1 in 10 homeowners still  underwater. Treasury also concluded that HAFA would be an important  alternative for underwater homeowners facing interest rate increases and  at risk of default. Treasury officials said they increased the HAFA  relocation assistance after reviewing relocation costs, including moving  expenses and rental deposits. Additionally, Treasury officials told us that  HAFA can provide a safety net for borrowers who cannot sustain, or do  not quality for, HAMP Tier 1 including those struggling with interest rate  increases. While not a home retention option, HAFA can provide an  alternative to foreclosure for those borrowers through the use of short  sales and deeds-in-lieu. Treasury officials provided us with academic  research they used when making changes to HAFA supporting these  conclusions. According to Treasury, this research indicated that such  mobility helped resolve regional unemployment differences through the  movement of individuals to areas with greater employment opportunity.  Treasury also demonstrated that some of the states with the most HAFA  transactions also had above-average unemployment rates.

Explicit assumptions: Treasury partially met this element. As noted  above, Treasury noted that nearly 1 in 10 homeowners were still  underwater. Being underwater effectively prevents many borrowers from  selling their homes to pay off their mortgages. Treasury also concluded  that the costs of relocating, such as rental deposits and moving  expenses, could be especially burdensome for recently delinquent  homeowners, who were often struggling with unemployment, may have  exhausted their cash reserves, or both. However, Treasury did not fully  meet this element because while it provided arguments for a higher  assistance amount, the assumptions that went into its decision to more  than triple the amount of assistance provided from $3,000 to $10,000 per  borrower remain unclear. Treasury’s action memorandum noted rental  rates in California, Florida, and Arizona (the states with the highest  number of HAFA transactions) were steadily increasing. For example,  Treasury focused on California when calculating rental deposits, because  California accounted for more HAFA transactions than any other state.  Treasury estimated rental deposits for a two-bedroom apartment to be  approximately $4,500 in California. Officials also explained that the  increase would help ensure that interstate moves remained a viable  option for borrowers seeking employment opportunities. Treasury officials  told us that the average cost of moving a two-bedroom household out of  state was estimated at more than $5,600, almost five times more than an  intrastate move, which was estimated at $1,170 based on data from the  American Moving and Storage Association.

In its action memorandum, Treasury noted that the funds obligated to  MHA remain unchanged at $29.8 billion and that the changes would have  no impact on the MHA budget or TARP overall. However, this  assessment does not take into account the fact that unused MHA  program funds could be returned to the federal government general fund  if deobligated by Treasury.

Evaluation of alternatives: Treasury partially met this element. Treasury  did not provide evidence that it conducted research or analysis that would  allow it to evaluate a potential alternative of adjusting the benefits  provided on a needs-based approach to assistance. Treasury officials told  us that they had considered basing the relocation assistance on borrower  location, but because HAFA is a national program Treasury wanted to  treat borrowers in all states equally. Also, Treasury officials said they had  concerns about servicers communicating the details of a needs-based or  tiered approach to borrowers. Using a tiered approach might have led to  borrower confusion about how much assistance they would receive and  would require borrowers to provide additional documentation evidencing  their relocation costs. Treasury officials also stated that using a needs- based or tiered approach would have required significant adjustments to  both Treasury’s and servicers’ systems and processes, and that ease of  implementation was an important consideration. Treasury officials noted  that if Treasury had chosen a different approach it would not have had the  assistance in place by February 2015. A more complicated alternative  could not have been implemented until summer 2015 at the earliest. It  remains unclear what impact such a delay might have had, particularly if it  had permitted a more tiered approach that recognized borrowers’ unique  circumstances and needs. Providing equal amounts of relocation  assistance regardless of borrowers’ location and circumstances can result  in inequitable treatment and potentially unintended results. For example,  borrowers with underwater mortgages residing in low-cost areas might be  more likely to seek the HAFA incentive, even if they were likely to remain  current on their modified mortgage without it.

Verification: Treasury partially met this element. Treasury did not provide  specific estimates on the number of homeowners, including HAMP Tier 1  borrowers, whom it expected to receive HAFA assistance. Treasury noted  that the amount that would be ultimately disbursed in connection with the  HAFA relocation assistance payment increase would depend on a  number of factors that it could not predict at the time (e.g., national  mortgage delinquency rates and other economic conditions, borrower  application rates, and the performance of modified loans over time).

Treasury officials said they will continue to track the number of HAFA  transactions before and after the relocation assistance increase.  However, without specific estimates, Treasury will be unable to assess  the expected effectiveness of this program change, particularly for HAMP  Tier 1 borrowers. Treasury officials told us they would be unable to  determine whether the increased incentive influenced borrowers’  decisions to seek a HAFA transaction.

section_title: Year Six Pay-for-Performance Incentive and Recast
paragraphs: Policy rationale: Treasury partially met this element, but did not fully  justify key aspects of the program change. Treasury provided three main  justifications for making this change. First, Treasury officials noted that  increasing financial incentives for homeowners in good standing after a  HAMP modification could help lower the risk of redefault by providing a  strong incentive for remaining current on modified loans. Previously,  Treasury conducted a survey of active HAMP Tier 1 borrowers. The  survey showed that nearly two-thirds of borrowers were aware of the  incentives, and 73 percent of those respondents said they were motivated  by them. Treasury officials said that the survey’s results confirmed that  borrowers responded to performance incentives. Second, Treasury  officials told us that having more equity in their homes—something this  incentive provided—was important to lower the risk of redefault,  particularly for those struggling with negative equity. Research by  Treasury found higher redefault risks associated with underwater  borrowers, who have no or negative equity in their homes. Third,  officials said that they decided to offer the $5,000 incentive at the end of  year 6 to lessen the financial impact of HAMP Tier 1 interest rate  increases. Specifically, they said that the combination of a recast of the  HAMP Tier 1 loan (which servicers are required to offer in conjunction  with this program change) and all of the pay-for-performance incentives  would lower monthly payments for a large population of homeowners  facing increasing interest rates. Treasury officials also noted that this  incentive was among options that they believed both Treasury and MHA  servicers could implement relatively quickly because it did not require  complex infrastructure changes.

However, it is less clear why Treasury extended the $5,000 Year Six Pay- for-Performance Incentive to borrowers with HAMP Tier 2, RD-HAMP,  and Treasury FHA-HAMP loan modifications. Borrowers in these  programs do not face interest rate increases, because the modified  interest rate of their loans is fixed for the life of the loan. Also, prior to  Supplemental Directive 14-05, HAMP Tier 2 borrowers did not receive  any pay-for-performance incentives. According to Treasury officials,  borrowers in HAMP Tier 2, RD-HAMP and FHA-HAMP can still benefit  from the increased equity that performance incentives provide. Officials  stated that HAMP data showed that redefault rates fell as a loan’s post- modification LTV ratio decreases, and lowering the LTV ratio is especially  important for those homeowners who remain underwater. In addition,  officials said that increasing borrower incentives for these three programs  could also incentivize more borrowers to apply for assistance with HAMP  in the future.

In addition to the survey results showing that borrowers are motivated by  existing incentives, Treasury officials pointed to their own analysis to  support the year 6 incentive’s expansion to those programs. Treasury’s  research showed that holding all other factors constant, borrowers with  HAMP modifications performed better than similarly situated borrowers   Officials stated that HAMP’s borrower  with proprietary modifications.incentives were a probable explanation for these results. However, the  borrower incentives were not included in the study’s analytical model. As  a result, we believe the research cannot be used as evidence to support  Treasury’s conclusions. Lastly, Treasury was unable to provide  documentation to explain how it determined that $5,000 was the  appropriate dollar amount for the incentive, given its stated goal of  reducing loan modification redefaults.

Explicit assumptions: Treasury partially met this element. Treasury  assumed that providing these changes would incentivize HAMP  borrowers to remain current in their monthly payments. While Treasury  officials pointed to surveys of HAMP Tier 1 borrowers to demonstrate the  effect of performance incentives, Treasury did not provide data supporting  a greater willingness of borrowers already current on their modified  mortgages—including HAMP Tier 2, RD-HAMP, FHA-HAMP and  enterprise HAMP borrowers—to continue paying because of an increase  in incentives.

Treasury also assumed that the incentive would encourage HAMP Tier 1  borrowers in good standing and facing interest rate increases to remain  current. Treasury estimated that the median HAMP Tier 1 monthly  payment would increase by $95 after the first interest rate increase and  by $212 after all interest rate increases. Treasury further estimated that  the proposed recast would result in a median monthly payment reduction  of $56 for HAMP Tier 1 borrowers. Treasury estimated that the reduction  would offset 27 percent of the $211 cumulative payment increase for the  median borrower. Treasury has reported that payment reduction strongly  correlates with decreased defaults on HAMP loan modifications.  However, our June 2012 report found that certain levels of payment  reductions have a greater effect on reducing redefaults and that beyond  these levels greater payment reductions have a diminishing impact on  reducing redefault. It is unclear whether Treasury determined the extent  to which this offset would help HAMP Tier 1 borrowers experiencing  interest rate increases avoid redefault because of the increase in their  monthly mortgage payments.

HAMP Tier 1 borrowers will see their first rate increase at the beginning of  year 6, and these borrowers will not receive the benefit until the beginning  of year 7. Treasury officials told us that they expected many borrowers to  be able to absorb the first interest rate increase. However, according to  an Urban Institute study on interest rate resets, all HAMP borrowers with  resetting loans in 2017 and 2018 will have an average increase of 33  percent, or about $254 in monthly payment increases. Moreover,  according to a study by the Urban Institute large numbers of 2010 HAMP  Tier 1 borrowers (nearly 235,000) in 2017 and 2011 HAMP Tier 1  borrowers (nearly 160,000) in 2018 are expected to encounter much  higher monthly payment increases of $318 (a 43 percent increase) and  $313 (a 41 percent increase), respectively.

According to Treasury, approximately one million total borrowers already  in HAMP are potentially eligible for the incentive, of which 752,000 in  HAMP Tier 1 will see at least one interest rate increase. The balance of  the one million represents homeowners in HAMP Tier 1, HAMP Tier 2,  RD HAMP and Treasury FHA-HAMP who will not experience an interest  rate change on their loan modifications. Treasury officials told us that they  had not estimated how many of these potentially eligible borrowers will  benefit from the additional incentive. Further, Treasury has not indicated  the number of redefaults it expects the new incentive to prevent.

Treasury estimated the total cost of the additional incentives at between  $4 billion and $6 billion in additional TARP fund outlays, depending on  how many potentially eligible homeowners participate and remain current.  According to Treasury, this number includes the cost of extending the  incentives to all HAMP programs and the maximum cost of Treasury’s  agreement to fund the extension of the additional incentive to enterprise  HAMP loans meeting the requirements of Supplemental Directive 15-01.  Treasury did not report the expected costs for each specific program,  making a cost comparison across programs difficult.

Officials told us that Treasury’s goal was more than to prevent HAMP Tier  1 borrowers from defaulting and that Treasury wanted to increase the  performance and sustainability of all HAMP modifications. However, while  Treasury’s action memorandum did discuss the general benefits of  incentive payments, Treasury’s analysis did not address its decision to  extend the incentive to HAMP Tier 2, RD-HAMP, and FHA-HAMP  borrowers.

Evaluation of alternatives: Treasury partially met this element. Treasury  officials noted that they had explored options to enhance MHA programs  to provide continued assistance to homeowners at risk of default,  including those facing interest rate increases under HAMP. For example,  the Special Inspector General for the Troubled Asset Relief Program  (SIGTARP) recommended that Treasury increase the amount of the  annual borrower incentives and require servicers to apply the annual  incentive against the borrowers’ monthly mortgage payment rather than  using it as a principal curtailment. Treasury did increase borrower  incentives (e.g., by adding the sixth year $5,000 incentive), but officials  said that they found multiple complications with SIGTARP’s suggestion to  apply the annual incentive against the borrower’s monthly mortgage  payment. For instance, borrowers on an automatic payment plan might  have trouble making payments as the monthly payment amount changed,  depending on whether it included the month’s incentive. According to  Treasury officials, the mechanics of a monthly incentive would be difficult  to explain to borrowers.

Treasury officials told us that they had discussed SIGTARP’s suggestion  with servicers, one of which suggested utilizing a recast option as an  alternative means of lowering the borrower’s monthly payment. Treasury  officials also told us that they had discussed SIGTARP’s recommendation  with housing advocates that had expressed some concerns regarding  logistics and changing monthly payments.

Treasury officials told us that because servicers already had infrastructure  in place to apply incentives to borrowers’ principal balance, they could  quickly implement the additional incentive after the sixth year. Officials  also told us that given Treasury’s experience implementing HAMP,  Treasury had to consider implementation difficulties, feasibility for  servicers, time constraints, and costs associated with any potential  solution.  Because interest rate increases had already begun and officials  wanted to get assistance to borrowers as quickly as possible, Treasury  had to consider the limitations of its administrative system and servicers’  systems when making its decision.

Treasury internal documents said that they had considered variations of  the pay-for-performance incentive, such as limiting it to borrowers with the  most demonstrated need, reducing the amount of the incentive, or limiting  the number of eligible HAMP programs. Treasury officials told us that they  had made the judgment that a $5,000 amount in the sixth year with a  recast option appropriately balanced the effect of a significant incentive,  the desire for a timely and substantial payment relief option, and the time  required to implement program changes. With regard to the selected  amount of the incentive—$5,000—Treasury documents discussed how it  considered providing smaller or larger amounts but reached the current  amount after taking into account a number of possible factors. However,  Treasury officials could not point to analysis of this and alternative  amounts, and their relative impact on reducing redefault (i.e., HAMP Tier  1 program redefaults or the other included programs redefault rates), or  other expected outcomes.

Verification: Treasury partially met this element. Treasury identified the  universe of potentially eligible HAMP borrowers for the additional  incentive but did not estimate how many borrowers would likely qualify  (e.g., remain in good standing for six years and, as to enterprise  borrowers, be serviced by a participating SPA servicer. Further, Treasury  does not have a plan for evaluating the effectiveness of the pay-for- performance incentive on HAMP Tier 2, RD-HAMP, FHA-HAMP, and  enterprise borrowers. Treasury did identify the universe of potentially  eligible HAMP Tier 1 borrowers but did not provide specific numbers on  the number of HAMP Tier 1 borrowers most likely to receive the benefit.

Treasury officials told us that they would continue to collect performance  data on all of the HAMP programs. According to officials, the data will  allow them to monitor the incentive’s impact on default curves after  borrowers are notified of the increased incentive by comparing borrowers’  performance over time. However, such an approach would not permit  isolating the impact of this incentive, because it is unable to control for  other factors that could affect the number of HAMP Tier 1 borrowers that  redefaulted. As a result, Treasury will be limited in its ability to adequately  determine whether the incentive has helped prevent redefaults after the  interest rate increases.

section_title: Conclusions
paragraphs: Approximately 1.5 million borrowers have received permanent HAMP  first-lien modifications, and $18.8 billion (63 percent) of TARP funds  allocated to MHA remain to be disbursed (as of May 2015). Treasury has  recently made a series of program changes that are intended to increase  participation in MHA programs and mitigate the impact of HAMP Tier 1  interest rate increases. Treasury’s analysis showed that these changes  could result in additional outlays of TARP funds in the billions of dollars.   However, inconsistencies we saw with regards to Treasury’s analysis  suggest the lack of a standard process in place to ensure that program  changes were subject to a comprehensive benefit-cost analysis. Treasury  did not fully meet all of the key elements of benefit-cost analysis for the  three program changes that we reviewed. As noted in OMB guidance and  our past work, benefit-cost analysis improves decision-making by  providing a framework for systematic analysis of objectives, influencing  factors, and their effects.  Each of the four elements of a benefit-cost  analysis—policy rationale, explicit assumptions, evaluation of alternatives,  and verification—are important in promoting efficient resource allocation  through well-informed decision-making. Since such program changes do  not require Treasury to engage in a formal rulemaking process that  includes a public comment period, standardizing the process might allow  for increased accountability of Treasury’s program changes. Because  Treasury did not comprehensively address each of the four key elements  of an effective benefit-cost analysis, when it has made recent program  changes, it has limited assurance that the changes will effectively mitigate  expected rate increases in a manner that minimizes the impact on the  national debt. It is important that MHA program changes that will result in  additional TARP outlays be based on key elements of benefit-cost  analysis since any unused MHA funds could be returned to the federal  government general fund and available for other purposes, thereby  reducing the national debt.

section_title: Recommendations for Executive Action
paragraphs: To bring greater rigor and efficiency to decisions about the use of federal  funds allocated for TARP housing programs, we recommend that the  Secretary of the Treasury develop and implement policies and  procedures that establish a standard process to better ensure that TARP- funded housing program changes are based on analyses that  comprehensively and consistently meet the key elements of benefit-cost  analysis.

section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Treasury for review and comment.  Treasury provided written comments, which are presented in appendix II.  We also received technical comments from Treasury that are  incorporated as appropriate in the report. In its written comments,  Treasury agreed that it is important to assess the costs and benefits of  proposed program modifications. Treasury highlighted some of its efforts  to evaluate alternatives along with costs and benefits of the recent  changes made to the MHA program. Treasury stated that it would  seriously consider the extent to which it can apply our recommendation  going forward.

In its comment letter, Treasury noted that the recent enhancements to the  MHA program can be implemented with existing allocated financial  resources since any costs associated with these program changes will  draw from funds already allocated.  However, any unused allocated funds  can be deobligated and returned to the general fund, allowing the funds to  be used for other purposes.  For this reason, we believe it is important  that Treasury consider carefully whether the additional costs associated  with these program changes are consistent with the expected benefits  provided.  In fact, Treasury has previously deobligated significant funds  when it determined that a program was unnecessary. For example,  Treasury recently deobligated almost $8 billion in allocated TARP funds  based on lower than expected participation in the FHA Short Refinance  Program. Moving forward, it will be important that Treasury follow the best  practices discussed in OMB’s Circular A-94 to ensure taxpayer funds are  spent efficiently and effectively and to minimize the impact on the national  debt.

In its technical comments, Treasury also raised concern about how we  evaluated its plans to meet the verification element of benefit-cost  analysis for the three program changes we reviewed. Specifically,  Treasury expressed concern that we did not fully credit Treasury for its  plans to monitor the effects of the program changes. Based on our review  of the additional information provided by Treasury during the agency  comment period, we made modifications to our draft report ratings for the  verification element for all three program changes and the evaluation of  alternatives element for the HAFA relocation assistance program change.  However, even with the consideration of this additional information, our  analysis found that Treasury has not fully addressed critical components  of OMB’s guidance for the verification element. As we discussed in the  report, without estimating the number of potential beneficiaries, Treasury  will be limited in its ability to conduct results-oriented evaluations of the  effectiveness of the changes. Further, we maintain that it is important that  Treasury estimate the number of borrowers who are likely to receive an  additional benefit in order to effectively evaluate the outcomes of  providing those additional benefits.

We are sending copies of this report to the appropriate congressional  committees. This report will be available at no charge on our website at  http://www.gao.gov.

If you or your staffs have any questions about this report, please contact  me at (202) 512-8678 or sciremj@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made major contributions to this report  are listed in appendix III.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: In response to a provision in the Emergency Economic Stabilization Act of  2008 (EESA), this report examines (1) the status of TARP-funded  housing programs and (2) the extent to which Treasury’s analytic  framework for considering recent program changes was consistent with  federal guidance and best practices.

To assess the status of TARP housing programs, we collected and  analyzed data on participation levels and spending for the Making Home  Affordable (MHA), the Housing Finance Agency Innovation Fund for the  Hardest Hit Housing Markets (Hardest Hit Fund), and the Federal  Housing Administration (FHA) Refinance of Borrowers in Negative Equity  Positions (FHA Short Refinance) programs. For MHA and FHA Short  Refinance programs, we collected data on the number of borrowers  participating in the program and program-specific information on the help  they received from Treasury’s MHA monthly performance reports through  May 2014 and its quarterly reports through March 2015. For the Hardest  Hit Fund, we collected data from participating states’ program  agreements with Treasury on the total amount of funds allocated and the  projected number of households to be assisted, as well as from  Treasury’s quarterly data and performance summary reports. We used  these data to calculate the percentage of households assisted and  percent of funds disbursed. Further, we analyzed the Congressional  Budget Office’s analysis of projected TARP spending and interviewed  Treasury officials about the status of the programs, including any future  program changes, and their projections for completing disbursement of  TARP-housing funds. To assess the reliability of the Treasury data, we  reviewed related documentation and interviewed knowledgeable agency  officials. From this, we determined that the data were sufficiently reliable  for the purposes of this report.

To assess Treasury’s efforts to consider the costs and benefits of a range  of policy options when making program changes, we interviewed  Treasury officials about their process for making program changes; we  reviewed MHA Monthly Performance Reports, quarterly Special Inspector  General for TARP reports to Congress, the MHA program handbook,  Treasury’s supplemental directives communicating program changes,  internal Treasury documents, prior GAO work, and reviewed Treasury’s  website. We also interviewed one organization that acts as the sole  contractor for Treasury’s borrower hotline and a think tank that recently  issued a relevant study. We compared Treasury’s process to key  elements of effective cost-benefit analysis contained in guidance from the  Office of Management and Budget (OMB).

We conducted this performance audit from November 2014 to July 2015  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on the audit objectives.

section_title: Appendix II: Comments from the Department of the Treasury

section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Harry Medina (Assistant  Director), Jon D. Menaster, (Analyst-in-Charge), Bethany M. Benitez,  Christina S. Cantor, Emily R. Chalmers, William R. Chatlos, Lynda E.  Downing, Cheryl L. Jones, John A. Karikari, Susan E. Offutt, Jena Y.  Sinkfield, Estelle M. Tsay-Huang, James D. Vitarello, and William T.  Woods made key contributions to this report.


Question-summary annotations: questions: question: What was Treasury's role in TARP?
answer: Between February 2009 and May 2015, the U.S. Department of the Treasury (Treasury) disbursed approximately $16.3 billion of the $37.5 billion in Troubled Asset Relief Program (TARP) funds allocated to support housing programs.
child_questions: question: How did the number of new borrowers in HAMP change?
answer: The number of new borrowers with permanent modifications added to the Home Affordable Modification Program (HAMP), the key component of these programs, began to decline in late 2013 but has stabilized at between 9,000 and 15,000 additions per month.

question: How has HAMP Tier 1 activity changed?
answer: Activity under HAMP Tier 1, the original modification for qualified borrowers seeking to reduce their mortgage payments to affordable levels (rates periodically reset), has gradually declined.

question: How has HAMP Tier 2 activity changed?
answer: HAMP Tier 2, a broader fixed rate modification announced in 2012, has gradually grown to account for the majority of new entrants.

question: How does Treasury plan on expanding the program participant base?
answer: Since October 2014, Treasury has expanded incentives in order to draw new entrants into the programs and further assist existing participants.

questions: question: To what extent did Treasury assess the effectiveness of the program changes?
answer: In making program changes, Treasury took steps to assess their benefits and costs but did not fully meet all of the key elements of federal benefit-cost analysis guidance, and thus has limited assurance that the additional expenditures are an effective and efficient use of taxpayer dollars (see figure below).
child_questions: question: What ambiguities persist regarding redefault reduction?
answer: For example, it is unclear whether the recent changes, such as extending performance incentives to borrowers in the sixth year of their HAMP modification (estimated to cost $4-6 billion), will reduce redefaults.

question: What did the results of Treasury surveys show?
answer: Treasury officials told GAO that borrower surveys confirmed that borrowers responded to performance incentives.

question: What factors do program costs and benefits rely on?
answer: Treasury officials said that program benefits and costs depended on unknown factors and macroeconomic trends and that program benefits were difficult to quantify.

question: How will the lack of through analysis be detrimental to Treasury?
answer: Without full and comprehensive analyses, Treasury will be challenged to determine whether program changes are actually achieving desired goals and are an efficient use of taxpayer dollars.

questions: question: How does Treasury help struggling homeowners?
answer: Treasury has allocated $37.5 billion in TARP funds to help struggling homeowners avoid potential foreclosure since 2009.

question: Why does GAO report on TARP activities?
answer: The Emergency Economic Stabilization Act of 2008 includes a provision for GAO to report every 60 days on TARP activities.

question: What does this report address?
answer: This 60-day report examines (1) the status of TARP-funded housing programs and (2) the extent to which Treasury's analytic framework for considering recent program changes was consistent with federal guidance and best practices.
child_questions: question: How did GAO collect data for this report?
answer: To do this work, GAO analyzed borrower participation levels, reviewed program documentation, and interviewed Treasury officials.