In March 2009, Treasury issued the first HAMP guidelines for modifying first-lien mortgages in an effort to help homeowners avoid foreclosure. The goal of the first-lien mortgage modification program is to reduce struggling homeowners’ mortgage payments to more affordable levels— specifically to 31 percent of the borrower’s income. To reduce mortgage payments, servicers may modify the loan by lowering the interest rate, extending the amortization period, or forbearing principal. According to Treasury officials, the program was intended to offer reduced monthly payments to up to 3 to 4 million homeowners. Through December 2010, there were a total of 143 active servicers under the TARP-funded portion of HAMP. Through December 2010, over 1.7 million HAMP trial modifications had been offered to borrowers, nearly 1.5 million of which had begun HAMP trial modifications. Of the trial modifications begun, approximately 152,000 were active trial modifications, and roughly 522,000 were active permanent modifications. Approximately 735,000 trial modifications and around 58,000 permanent modifications had been canceled (fig. 1). As of December 31, 2010, $1 billion in TARP funds had been disbursed for TARP-funded housing programs, of which roughly $840 million was disbursed to servicers for HAMP-related activity. Most of the disbursements to date have been made for the first-lien modification program. In addition to first-lien modifications, Treasury has announced a number of TARP-funded housing programs, including those for modifying second liens held by borrowers with first-lien modifications under HAMP, reducing principal, offering temporary forbearance for unemployed borrowers, and providing alternatives to foreclosure (see table 1). At the current time, with the exception of the Housing Finance Agency (HFA) Hardest-Hit Fund, the cutoff date for borrowers to be accepted into TARP- funded programs is December 31, 2012, and disbursements of TARP funds may continue until December 2017. Although one of Treasury’s stated goals for HAMP is to standardize the loan modification process across the servicing industry, in our June 2010 report, we identified several inconsistencies in the way servicers treated 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, the servicers we contacted solicited borrowers differently. A few solicited those who were 31 days delinquent on their payments, but other servicers waited until borrowers were at least 60 days delinquent. We also noted that many borrowers had complained they did not receive timely responses to their HAMP applications and had difficulty obtaining information about the program. In March 2010, Treasury issued guidelines to address some of the issues related to communicating with borrowers about the program, and said it planned to monitor servicers’ compliance with the guidelines. Second, Treasury’s lack of specific guidelines for determining HAMP eligibility for borrowers current or less than 60 days delinquent, but in imminent danger of defaulting has led to inconsistencies in how servicers evaluate them. The 10 servicers who GAO contacted reported seven different sets of criteria for determining imminent default. Two servicers considered borrowers in imminent default if they met basic HAMP eligibility requirements, but other servicers had additional criteria, such as requiring that a hardship situation has existed for more than 1 year. Treasury’s goal was to create uniform, clear, and consistent guidance for loan modifications across the servicing industry, but these differences may result in one borrower’s being approved for HAMP and another borrower with the same financial situation and loan terms being denied by a different servicer. We recommended that Treasury establish clear, specific criteria for determining whether a borrower was in imminent default to ensure greater consistency across servicers. However, Treasury believes the impact of these variations on borrowers is inconsequential and has declined to implement this recommendation. We continue to believe that further actions are warranted. In addition, Treasury has not clearly informed borrowers that they can use the HOPE Hotline 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. The HOPE Hotline also has procedures for referring borrowers who need additional assistance to the Making Home Affordable Escalation Team. However, it is unclear whether borrowers are aware of and using the HOPE Hotline to raise concerns about their servicers and challenge potentially incorrect denials. We recommended that Treasury (1) more clearly inform borrowers that the HOPE Hotline may also be used for these purposes and (2) monitor the effectiveness of the HOPE Hotline as a process for handling borrower concerns. Finally, Treasury has taken some steps to ensure that servicers comply with HAMP program requirements, but has yet to establish specific remedies for noncompliance with HAMP guidelines. For instance, the HAMP servicer participation agreement describes actions that could be taken in response to noncompliance and the HAMP Compliance Committee monitors servicers’ performance and activities. But without standardized remedies for noncompliance, Treasury risks treating servicer noncompliance inconsistently and its methods of responding to incidents of noncompliance lack transparency. In our June 2010 report, we recommended that Treasury finalize and expeditiously issue consequences for servicers who do not comply with HAMP requirements. We made eight recommendations to improve the transparency and accountability of HAMP in June 2010. Treasury stated that it intended to implement some of the recommendations, but little action has been taken to date. The implementation of Treasury’s 2MP, HAFA, and PRA programs has been slow, and limited activity has been reported to date. This slow pace is attributed in part to several implementation challenges, including the following. Difficulty matching first and second liens for 2MP. Because eligibility for 2MP required a first-lien HAMP modification, Treasury contracted with a database vendor to provide data on existing second liens that corresponded with these modifications. However, the servicers we contacted noted that even differences in the spelling of addresses—for example, in abbreviations or spacing—could prevent an accurate identification. Initial 2MP guidelines stated that servicers could not offer a second-lien modification without confirming a match with the database vendor, even if they had serviced both first and second liens on the same property. In November 2010, Treasury provided updated program guidance that allowed servicers to offer a 2MP modification if they could identify a first- and second-lien match within their own portfolio or had evidence that a corresponding first lien existed, even if the database had not identified it. Extensive program requirements for HAFA. All six of the large MHA servicers we spoke with identified extensive program requirements as reasons for the slow implementation of HAFA, including the initial requirement that applicants first be evaluated for a HAMP first-lien modification. Because of this requirement, potential HAFA borrowers had to submit extensive income and other documentation required for a modification, even if they simply wanted to sell. In cases where a borrower had already identified a potential buyer before executing a short-sale agreement with the servicer, the additional time required for a HAMP first- lien evaluation may have dissuaded the buyer from purchasing the property. Restrictive short-sale requirements and a requirement that mortgage insurers waive certain rights may have also contributed to the limited activity under HAFA. Servicers said that given these requirements, they did not expect HAFA to increase their overall number of short sales and deeds-in-lieu. In response to this concern, Treasury released updated HAFA guidance on December 28, 2010, to no longer require servicers to document and verify a borrower’s financial information to be eligible for HAFA. Voluntary nature of the PRA program. Treasury officials told us that 13 of the 20 largest MHA servicers were planning to offer principal reduction to some extent, but some servicers we spoke with said they would limit the conditions under which they would offer principal forgiveness under PRA. Treasury’s PRA guidelines require all servicers participating in HAMP to consider principal forgiveness for HAMP-eligible borrowers with mark-to- market loan-to-value ratios (LTV) greater than 115 percent. But servicers are not required to offer principal reduction, even if the net present value (NPV) is higher when principal is forgiven. For example, one servicer had developed a “second look” process that used internal estimates of default rates to determine NPV and did not forgive principal unless these estimates—not those calculated using program guidelines—indicated a higher NPV with forgiveness. As a result, only 15 to 25 percent of those who otherwise would have received principal forgiveness received it, according to this servicer. We recommended in June 2010 that Treasury report activity under PRA, including the extent to which servicers determined that principal reduction was beneficial to mortgage investors but did not offer it, to ensure transparency in the implementation of this program. Treasury officials told us they would report PRA activity at the servicer level once the data were available. We plan to continue to monitor Treasury’s reporting of PRA and other TARP-funded housing programs. In addition, we found that Treasury could do more to build on the lessons learned from its first-lien modification program. For example, we previously reported that Treasury had not sufficiently assessed the capacity of servicers to implement the first-lien program. More recently, we observed that Treasury has not obtained all required documentation to demonstrate that servicers have the capacity to successfully implement the newer programs. According to Treasury, Fannie Mae has conducted program-specific readiness reviews for the top-20 large servicers for 2MP, HAFA, and PRA, including all 17 servicers participating in 2MP.