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entitled 'Troubled Asset Relief Program: Treasury Continues to Face
Implementation Challenges and Data Weaknesses in Its Making Home
Affordable Program' which was released on March 17, 2011.
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United States Government Accountability Office:
GAO:
Report to Congressional Committees:
March 2011:
Troubled Asset Relief Program:
Treasury Continues to Face Implementation Challenges and Data
Weaknesses in Its Making Home Affordable Program:
GAO-11-288:
GAO Highlights:
Highlights of GAO-11-288, a report to congressional committees.
Why GAO Did This Study:
Two years after the Department of the Treasury (Treasury) first made
available up to $50 billion for the Making Home Affordable (MHA)
program, foreclosure rates remain at historically high levels.
Treasury recently introduced several new programs intended to further
help homeowners. This report examines (1) the status of three of these
new programs, (2) characteristics of homeowners with first-lien
modifications from the Home Affordable Modification Program (HAMP),
and (3) the outcomes for borrowers who were denied or fell out of
first-lien modifications. To address these questions, GAO analyzed
data from Treasury and six large MHA servicers.
What GAO Found:
The implementation of Treasury’s programs to reduce or eliminate
second-lien mortgages, encourage the use of short sales or deeds-in-
lieu, and stimulate the forgiveness of principal has been slow and
limited activity has been reported to date (see table). This slow pace
is attributed in part to several implementation challenges. For
example, servicers told GAO that the start of the second-lien
modification program had been slow due to problems with the database
Treasury required them to use to identify potentially eligible loans.
Additionally, borrowers may not be aware of their potential
eligibility for the program. While Treasury recently revised its
guidelines to allow servicers to bypass the database for certain
loans, servicers could do more to alert HAMP first-lien modification
borrowers about the new second-lien program. Implementation of the
foreclosure alternatives program has also been slow due to program
restrictions, such as the requirement that borrowers be evaluated for
a first-lien modification even if they have already identified a
potential buyer for a short sale. Although Treasury has recently taken
action to address some of these concerns, the potential effects of its
changes remain unclear.
In addition, Treasury has not fully incorporated into its new programs
key lessons from its first-lien modification program. For example, it
has not obtained all required documentation to demonstrate that
servicers have the capacity to successfully implement the newer
programs. As a result, servicers’ ability to effectively offer
troubled homeowners second-lien modifications, foreclosure
alternatives, and principal reductions is unclear. Finally, Treasury
has not implemented GAO’s June 2010 recommendation that it establish
goals and effective performance measures for these programs. Without
performance measures and goals, Treasury will not be able to
effectively assess the outcomes of these programs.
Table: Activity Under the Second-lien, Foreclosure Alternative, and
Principal Reduction Programs as of December 31, 2010:
Program: Second-lien Modification;
Date announced: March 2009;
Implementation date: March 2010;
Funding allocation: Nearly $133 million;
Reported activity as of December 31, 2010: $2.9 million in incentives
paid.
Program: Home Affordable Foreclosure Alternatives;
Date announced: March 2009;
Implementation date: April 5, 2010;
Funding allocation: $4.1 billion;
Reported activity as of December 31, 2010: $9.5 million in incentives
paid.
Program: Principal Reduction Alternative;
Date announced: March 2010;
Implementation date: October 1, 2010;
Funding allocation: $2.0 billion;
Reported activity as of December 31, 2010: Activity not yet reported[A]
Source: Treasury.
[A] PRA incentives are paid on an annual basis contingent upon
successful performance of the modified mortgage during the preceding
12 months.
[End of table]
Treasury’s data provide important insights into the characteristics of
borrowers participating in the HAMP first-lien modification program,
but data were sometimes missing or questionable. As shown in the
figure, more homeowners have been denied or canceled from HAMP trial
loan modifications than have received permanent modifications. To
understand which borrowers HAMP has been able to help, GAO looked at
Treasury’s data on borrowers in HAMP trial and permanent
modifications. These data showed that HAMP borrowers had reduced
income and high debt, but the reliability and integrity of some of
Treasury’s information was questionable. For example, Treasury’s data
on borrowers’ loan-to-value ratios at the time of modification ranged
from 0 to 999, with 1 percent of TARP-funded active permanent
modifications reporting ratios over 400 percent. In addition, race and
ethnicity data were not available for a significant portion of
borrowers. Treasury said that it was refining and strengthening data
quality checks and that the data have improved and will continue to
improve over time. Treasury’s success in improving the quality and
completeness of HAMP data will be critical to its ability to evaluate
program results and achieve the goals of preserving homeownership and
protecting home values.
While it appears that most borrowers who were denied or canceled from
HAMP first-lien trial modifications have been able to avoid
foreclosure to date, weaknesses in how Treasury requires servicers to
report data make it difficult to understand what ultimately happens to
these borrowers. First, Treasury’s system for reporting outcomes
requires servicers to place borrowers in only one category, even when
borrowers are being evaluated for several possible outcomes, with
proprietary modifications reported first. As a result, the proportion
of borrowers reported receiving proprietary modifications is likely to
be overstated relative to other possible outcomes, such as foreclosure
starts. Further, Treasury does not require servicers to distinguish
between completed and pending actions, so that some reported outcomes
may not be clear. Without more accurate information on the outcomes of
borrowers who are denied HAMP modifications, have them canceled, or
redefault, Treasury’s ability to determine whether further action is
needed to assist struggling homeowners is diminished.
Figure: Number of Active and Canceled Trial and Permanent
Modifications through January 2011:
Active trial modifications: 145,260;
Active permanent modifications: 539,493;
Trial modifications canceled: 740,240;
Permanent modifications canceled: 68,114.
Source: Treasury.
[End of figure]
What GAO Recommends:
GAO recommends that Treasury require servicers to advise borrowers to
contact servicers about second-lien modifications and ensure that
servicers demonstrate the capacity to successfully implement
Treasury’s new programs. GAO also recommends that Treasury consider
methods to better capture outcomes for borrowers denied or canceled
from HAMP first-lien modifications. Treasury acknowledged challenges
faced by servicers in implementing the program, but felt that certain
criticisms of MHA were unwarranted. However, we continue to believe
that further action is needed to better ensure the effectiveness of
these programs.
View [hyperlink, http://www.gao.gov/products/GAO-11-288] or key
components. For more information, contact Mathew J. Scirè at (202) 512-
8678 or sciremj@gao.gov.
[End of section]
Contents:
Letter:
Background:
Implementation of Treasury's Newer Housing Programs Has Been Slow and
Capacity of Servicers to Carry Out These Programs Remains Unclear,
Raising Uncertainty About the Potential Impact of These Programs:
Treasury Has Some Data on the Characteristics of Borrowers in HAMP's
First-Lien Program, but Data Were Sometimes Missing or Questionable:
Most Borrowers Denied or Canceled from Trial Modifications Appear to
Have Avoided Foreclosure To Date, but Weaknesses in Treasury's Data
Collection Limit its Ability to Understand the Outcomes of These
Borrowers:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Description of GAO's Econometric Analysis of HAMP Trial
Loans Modifications Cancellations:
Appendix III: Comments from the Department of the Treasury:
Appendix IV: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: Selected Outcomes of Borrowers who Had a Canceled HAMP Trial
Modification by Servicer, through August 31, 2010:
Table 2: Terms of Selected Proprietary Modification Programs Compared
to HAMP:
Table 3: Summary Statistics of Variables Used in Regression:
Table 4: Probabilistic Estimates of HAMP Trial Loan Modification
Cancellation Rates:
Figures:
Figure 1: National Default and Foreclosure Trends from Calendar Years
1979-2010:
Figure 2: GSE and Non-GSE HAMP Trial and Permanent Modifications Made
and Canceled Each Month, through January 2011:
Figure 3: Timeline of 2MP, HAFA, and PRA Guidance:
Figure 4: Estimated Decrease/Increase in Likelihood of Cancellation of
HAMP Trial Modification by Borrower and Loan Characteristics:
Figure 5: Outcomes of Borrowers Denied a HAMP Trial Modification,
through August 31, 2010 (Six large MHA servicers):
Figure 6: Outcomes of Borrowers who Had a Canceled HAMP Trial
Modification, through August 31, 2010 (Six large MHA servicers):
Figure 7: Outcomes of Borrowers Who Redefaulted on a HAMP Permanent
Modification, through August 31, 2010 (Six large MHA servicers):
Figure 8: Number of Proprietary and HAMP Modifications Started Each
Month, January through December 2010:
Figure 9: Estimated Change in Likelihood of Cancellation of HAMP Trial
Loan Modification by Servicer, Delinquency Status Before Modification:
Figure 10: Estimated Change in Likelihood of Cancellation of HAMP
Trial Loan Modification by State:
Abbreviations:
2MP: Second-Lien Modification Program:
DTI: debt-to-income ratio:
FDIC: Federal Deposit Insurance Corporation:
FHA: Federal Housing Administration:
GSE: government-sponsored enterprise:
HAFA: Home Affordable Foreclosure Alternatives Program:
HAMP: Home Affordable Modification Program:
HPO: Homeownership Preservation Office:
HUD: Department of Housing and Urban Development:
IR/2: Investor Reporting/2:
LTV: loan-to-value:
LPS: Lender Processing Services:
MHA: Making Home Affordable:
MHA-C: Making Home Affordable-Compliance:
MLTV: mark-to-market loan-to-value:
NPV: net present value:
OCC: Office of the Comptroller of the Currency:
OFS: Office of Financial Stability:
OTS: Office of Thrift Supervision:
PRA: Principal Reduction Alternative:
SIGTARP: Office of the Special Inspector General for TARP:
SPA: Servicer Participation Agreement:
TARP: Troubled Asset Relief Program:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
March 17, 2011:
Congressional Committees:
Since the Department of the Treasury (Treasury) first announced the
framework for its Making Home Affordable (MHA) program over 2 years
ago, the number of homeowners facing potential foreclosure has
remained at historically high levels. The Emergency Economic
Stabilization Act of 2008, which authorized Treasury to establish the
$700 billion Troubled Asset Relief Program (TARP), was intended to,
among other things, preserve homeownership and protect home values.
[Footnote 1] In February 2009, Treasury announced that up to $50
billion in TARP funds was allocated to help struggling homeowners
avoid potential foreclosure. The key component under MHA, the Home
Affordable Modification Program (HAMP), offered modifications on first-
lien mortgages to reduce borrowers' monthly mortgage payments to
affordable levels, avoid foreclosure, and keep their homes. Since
HAMP's inception, concerns have been raised that the program was not
reaching the expected number of homeowners. In two prior reports, we
looked at the implementation of the HAMP first-lien modification
program and noted that Treasury faced challenges in implementing the
program and made several recommendations intended to address these
challenges.[Footnote 2] In addition, the Special Inspector General for
TARP (SIGTARP) and the Congressional Oversight Panel have issued
several reports containing various recommendations to Treasury
intended to improve the transparency, accountability, and
effectiveness of MHA.[Footnote 3]
Questions continue to be raised about the extent to which the first-
lien program has effectively reached struggling homeowners and reduced
avoidable foreclosures. For example, more homeowners have been denied
or canceled from HAMP first-lien trial loan modifications than have
received permanent modifications to date, raising questions about
which homeowners HAMP has been able to help and how best to meet the
needs of homeowners struggling to avoid foreclosure. Treasury has
begun implementing several other TARP-funded programs for struggling
homeowners under the MHA program, including the Second-Lien
Modification Program (2MP), the Principal Reduction Alternatives (PRA)
program for borrowers who owe more on their mortgages than the value
of their homes, and the Home Affordable Foreclosure Alternatives
(HAFA) program for those who are not successful in HAMP modifications.
[Footnote 4] All are funded by the $50 billion originally allocated
for MHA, which has since been reduced to $45.6 billion for all TARP-
funded housing programs, and further reduced to $29.9 billion for MHA
programs (with the remainder of the balance being allocated to the HFA
Hardest-Hit Fund and the FHA Short Refinance option). Because of
concerns about the effectiveness of these newer TARP-funded programs,
this report examines the extent to which these programs have been
successful at reaching struggling homeowners. To understand the extent
to which Treasury has been able to assess who has been reached by HAMP
and what additional actions may be needed to help struggling
homeowners, we also examined the characteristics of homeowners who
have been assisted by the HAMP first-lien modification program and the
outcomes of borrowers who did not complete HAMP trial or permanent
modifications. We also have ongoing work looking at the broader
federal response to the foreclosure crisis, which encompasses both
TARP and non-TARP funded efforts intended to mitigate the impact of
foreclosures on homeowners.
More specifically, this report examines (1) the status of Treasury's
second-lien modification, principal reduction, and foreclosure
alternatives programs; (2) the characteristics of homeowners who HAMP
has been able to help under the first-lien modification program; and
(3) the outcomes for borrowers who were denied or fell out of HAMP
trial or permanent first-lien modifications.
To address these questions, we obtained information from and spoke
with six large MHA servicers who collectively represented about 74
percent of the TARP funds allocated to servicers participating in the
program. In addition, we reviewed MHA program documentation that
Treasury issued, including supplemental directives for the second-lien
modification, principal reduction, and foreclosure alternatives
programs. In addition, we spoke with members of a trade association
who represented both residential mortgage loan investors and
servicers, and one who represents private mortgage loan insurers. We
also analyzed loan level data from Treasury's HAMP database, which
included data reported by servicers on borrowers evaluated for HAMP
participation through September 30, 2010, to analyze the
characteristics of borrowers who received HAMP, were canceled from
HAMP trial modifications, or redefaulted from permanent HAMP
modifications. To understand the outcomes of borrowers who were denied
or canceled from HAMP, we requested and obtained data from each of the
six servicers noted above. Finally, we conducted a Web-based survey of
housing counselors through NeighborWorks, which funds a national
network of housing counselors to obtain their perspectives of the HAMP
program.[Footnote 5] We coordinated our work with other oversight
entities that TARP created--the Congressional Oversight Panel, the
Office of the Special Inspector General for TARP, and the Financial
Oversight Stability Board.
We conducted this performance audit from July 2010 through March 2011
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on the audit objectives. For additional
information on our scope and methodology, see appendix I.
Background:
Although default rates (loans 90 days or more past due) fell from an
all-time high of 5.09 percent at the end of the fourth quarter of 2009
to 3.94 percent at the end of the fourth quarter of 2010 (a nearly 23
percent drop over the course of a year), the percentage of loans in
foreclosure rose to equal the highest level in recent history at 4.63
percent (figure 1).[Footnote 6] The increase in foreclosure inventory
during the latter part of 2010 may be due to issues surrounding
foreclosure processing and procedures that resulted in various
foreclosure moratorium initiatives. In addition, the percentage of
loans that newly entered the foreclosure process in the fourth quarter
of 2010 remained high at 1.27 percent, compared to 0.42 percent in the
first quarter of 2005.
Figure 1: National Default and Foreclosure Trends from Calendar Years
1979-2010:
[Refer to PDF for image: multiple line graph]
Date: Q1 1979;
Default: 0.47%;
Foreclosure Starts: 0.17%;
Foreclosure Inventory: 0.31%.
Date: Q2 1979;
Default: 0.43%;
Foreclosure Starts: 0.13%;
Foreclosure Inventory: 0.3%.
Date: Q3 1979;
Default: 0.49%;
Foreclosure Starts: 0.12%;
Foreclosure Inventory: 0.27%.
Date: Q4 1979;
Default: 0.54%;
Foreclosure Starts: 0.15%;
Foreclosure Inventory: 0.29%.
Date: Q1 1980;
Default: 0.54%;
Foreclosure Starts: 0.14%;
Foreclosure Inventory: 0.32%.
Date: Q2 1980;
Default: 0.5%;
Foreclosure Starts: 0.13%;
Foreclosure Inventory: 0.32%.
Date: Q3 1980;
Default: 0.6%;
Foreclosure Starts: 0.15%;
Foreclosure Inventory: 0.33%.
Date: Q4 1980;
Default: 0.66%;
Foreclosure Starts: 0.16%;
Foreclosure Inventory: 0.38%.
Date: Q1 1981;
Default: 0.66%;
Foreclosure Starts: 0.18%;
Foreclosure Inventory: 0.44%.
Date: Q2 1981;
Default: 0.58%;
Foreclosure Starts: 0.16%;
Foreclosure Inventory: 0.41%.
Date: Q3 1981;
Default: 0.65%;
Foreclosure Starts: 0.14%;
Foreclosure Inventory: 0.41%.
Date: Q4 1981;
Default: 0.68%;
Foreclosure Starts: 0.17%;
Foreclosure Inventory: 0.44%.
Date: Q1 1982;
Default: 0.72%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.53%.
Date: Q2 1982;
Default: 0.68%;
Foreclosure Starts: 0.19%;
Foreclosure Inventory: 0.55%.
Date: Q3 1982;
Default: 0.79%;
Foreclosure Starts: 0.2%;
Foreclosure Inventory: 0.62%.
Date: Q4 1982;
Default: 0.89%;
Foreclosure Starts: 0.23%;
Foreclosure Inventory: 0.67%.
Date: Q1 1983;
Default: 0.86%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.71%.
Date: Q2 1983;
Default: 0.75%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.66%.
Date: Q3 1983;
Default: 0.84%;
Foreclosure Starts: 0.2%;
Foreclosure Inventory: 0.66%.
Date: Q4 1983;
Default: 0.91%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.67%.
Date: Q1 1984;
Default: 0.89%;
Foreclosure Starts: 0.2%;
Foreclosure Inventory: 0.68%.
Date: Q2 1984;
Default: 0.79%;
Foreclosure Starts: 0.21%;
Foreclosure Inventory: 0.63%.
Date: Q3 1984;
Default: 0.9%;
Foreclosure Starts: 0.23%;
Foreclosure Inventory: 0.68%.
Date: Q4 1984;
Default: 0.98%;
Foreclosure Starts: 0.2%;
Foreclosure Inventory: 0.73%.
Date: Q1 1985;
Default: 0.98%;
Foreclosure Starts: 0.25%;
Foreclosure Inventory: 0.79%.
Date: Q2 1985;
Default: 0.82%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.76%.
Date: Q3 1985;
Default: 0.92%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.75%.
Date: Q4 1985;
Default: 1.03%;
Foreclosure Starts: 0.22%;
Foreclosure Inventory: 0.81%.
Date: Q1 1986;
Default: 1.01%;
Foreclosure Starts: 0.25%;
Foreclosure Inventory: 0.87%.
Date: Q2 1986;
Default: 0.96%;
Foreclosure Starts: 0.24%;
Foreclosure Inventory: 0.92%.
Date: Q3 1986;
Default: 0.99%;
Foreclosure Starts: 0.26%;
Foreclosure Inventory: 0.92%.
Date: Q4 1986;
Default: 1.06%;
Foreclosure Starts: 0.26%;
Foreclosure Inventory: 0.98%.
Date: Q1 1987;
Default: 1.04%;
Foreclosure Starts: 0.28%;
Foreclosure Inventory: 1.09%.
Date: Q2 1987;
Default: 0.88%;
Foreclosure Starts: 0.24%;
Foreclosure Inventory: 1.12%.
Date: Q3 1987;
Default: 0.83%;
Foreclosure Starts: 0.25%;
Foreclosure Inventory: 1.03%.
Date: Q4 1987;
Default: 0.96%;
Foreclosure Starts: 0.27%;
Foreclosure Inventory: 1.06%.
Date: Q1 1988;
Default: 0.89%;
Foreclosure Starts: 0.29%;
Foreclosure Inventory: 1.07%.
Date: Q2 1988;
Default: 0.82%;
Foreclosure Starts: 0.26%;
Foreclosure Inventory: 1.03%.
Date: Q3 1988;
Default: 0.81%;
Foreclosure Starts: 0.26%;
Foreclosure Inventory: 1%.
Date: Q4 1988;
Default: 0.9%;
Foreclosure Starts: 0.27%;
Foreclosure Inventory: 0.95%.
Date: Q1 1989;
Default: 0.83%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 0.95%.
Date: Q2 1989;
Default: 0.71%;
Foreclosure Starts: 0.35%;
Foreclosure Inventory: 1.06%.
Date: Q3 1989;
Default: 0.74%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.99%.
Date: Q4 1989;
Default: 0.81%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.98%.
Date: Q1 1990;
Default: 0.7%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.97%.
Date: Q2 1990;
Default: 0.65%;
Foreclosure Starts: 0.3%;
Foreclosure Inventory: 0.93%.
Date: Q3 1990;
Default: 0.71%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.93%.
Date: Q4 1990;
Default: 0.78%;
Foreclosure Starts: 0.29%;
Foreclosure Inventory: 0.94%.
Date: Q1 1991;
Default: 0.78%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.97%.
Date: Q2 1991;
Default: 0.73%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.96%.
Date: Q3 1991;
Default: 0.82%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 0.98%.
Date: Q4 1991;
Default: 0.86%;
Foreclosure Starts: 0.35%;
Foreclosure Inventory: 1.04%.
Date: Q1 1992;
Default: 0.8%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.04%.
Date: Q2 1992;
Default: 0.78%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 1.04%.
Date: Q3 1992;
Default: 0.84%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 1.04%.
Date: Q4 1992;
Default: 0.8%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.02%.
Date: Q1 1993;
Default: 0.77%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 1%.
Date: Q2 1993;
Default: 0.74%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 1.02%.
Date: Q3 1993;
Default: 0.79%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 1.01%.
Date: Q4 1993;
Default: 0.79%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 0.96%.
Date: Q1 1994;
Default: 0.75%;
Foreclosure Starts: 0.31%;
Foreclosure Inventory: 0.94%.
Date: Q2 1994;
Default: 0.77%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.03%.
Date: Q3 1994;
Default: 0.76%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 0.92%.
Date: Q4 1994;
Default: 0.76%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.86%.
Date: Q1 1995;
Default: 0.7%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.86%.
Date: Q2 1995;
Default: 0.73%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.88%.
Date: Q3 1995;
Default: 0.8%;
Foreclosure Starts: 0.32%;
Foreclosure Inventory: 0.91%.
Date: Q4 1995;
Default: 0.73%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 0.87%.
Date: Q1 1996;
Default: 0.68%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 0.95%.
Date: Q2 1996;
Default: 0.61%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 0.96%.
Date: Q3 1996;
Default: 0.61%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 1%.
Date: Q4 1996;
Default: 0.63%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 1.03%.
Date: Q1 1997;
Default: 0.55%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.08%.
Date: Q2 1997;
Default: 0.56%;
Foreclosure Starts: 0.35%;
Foreclosure Inventory: 1.08%.
Date: Q3 1997;
Default: 0.58%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.09%.
Date: Q4 1997;
Default: 0.65%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 1.11%.
Date: Q1 1998;
Default: 0.6%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 1.17%.
Date: Q2 1998;
Default: 0.6%;
Foreclosure Starts: 0.37%;
Foreclosure Inventory: 1.12%.
Date: Q3 1998;
Default: 0.63%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.17%.
Date: Q4 1998;
Default: 0.66%;
Foreclosure Starts: 0.39%;
Foreclosure Inventory: 1.17%.
Date: Q1 1999;
Default: 0.6%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.22%.
Date: Q2 1999;
Default: 0.56%;
Foreclosure Starts: 0.34%;
Foreclosure Inventory: 1.18%.
Date: Q3 1999;
Default: 0.6%;
Foreclosure Starts: 0.33%;
Foreclosure Inventory: 1.11%.
Date: Q4 1999;
Default: 0.62%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.17%.
Date: Q1 2000;
Default: 0.55%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.17%.
Date: Q2 2000;
Default: 0.54%;
Foreclosure Starts: 0.3%;
Foreclosure Inventory: 1.03%.
Date: Q3 2000;
Default: 0.59%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 1.09%.
Date: Q4 2000;
Default: 0.7%;
Foreclosure Starts: 0.43%;
Foreclosure Inventory: 1.16%.
Date: Q1 2001;
Default: 0.66%;
Foreclosure Starts: 0.4%;
Foreclosure Inventory: 1.24%.
Date: Q2 2001;
Default: 0.74%;
Foreclosure Starts: 0.47%;
Foreclosure Inventory: 1.29%.
Date: Q3 2001;
Default: 0.82%;
Foreclosure Starts: 0.46%;
Foreclosure Inventory: 1.34%.
Date: Q4 2001;
Default: 0.89%;
Foreclosure Starts: 0.47%;
Foreclosure Inventory: 1.46%.
Date: Q1 2002;
Default: 0.8%;
Foreclosure Starts: 0.45%;
Foreclosure Inventory: 1.51%.
Date: Q2 2002;
Default: 0.85%;
Foreclosure Starts: 0.49%;
Foreclosure Inventory: 1.46%.
Date: Q3 2002;
Default: 0.94%;
Foreclosure Starts: 0.44%;
Foreclosure Inventory: 1.49%.
Date: Q4 2002;
Default: 0.94%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 1.46%.
Date: Q1 2003;
Default: 0.83%;
Foreclosure Starts: 0.41%;
Foreclosure Inventory: 1.43%.
Date: Q2 2003;
Default: 0.92%;
Foreclosure Starts: 0.36%;
Foreclosure Inventory: 1.35%.
Date: Q3 2003;
Default: 0.9%;
Foreclosure Starts: 0.43%;
Foreclosure Inventory: 1.24%.
Date: Q4 2003;
Default: 0.89%;
Foreclosure Starts: 0.46%;
Foreclosure Inventory: 1.29%.
Date: Q1 2004;
Default: 0.85%;
Foreclosure Starts: 0.46%;
Foreclosure Inventory: 1.29%.
Date: Q2 2004;
Default: 0.85%;
Foreclosure Starts: 0.39%;
Foreclosure Inventory: 1.18%.
Date: Q3 2004;
Default: 0.86%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 1.16%.
Date: Q4 2004;
Default: 0.92%;
Foreclosure Starts: 0.46%;
Foreclosure Inventory: 1.15%.
Date: Q1 2005;
Default: 0.81%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 1.08%.
Date: Q2 2005;
Default: 0.83%;
Foreclosure Starts: 0.38%;
Foreclosure Inventory: 1%.
Date: Q3 2005;
Default: 0.85%;
Foreclosure Starts: 0.41%;
Foreclosure Inventory: 0.97%.
Date: Q4 2005;
Default: 1.09%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.99%.
Date: Q1 2006;
Default: 0.95%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.98%.
Date: Q2 2006;
Default: 0.9%;
Foreclosure Starts: 0.4%;
Foreclosure Inventory: 0.99%.
Date: Q3 2006;
Default: 0.95%;
Foreclosure Starts: 0.47%;
Foreclosure Inventory: 1.05%.
Date: Q4 2006;
Default: 1.02%;
Foreclosure Starts: 0.57%;
Foreclosure Inventory: 1.19%.
Date: Q1 2007;
Default: 0.95%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.28%.
Date: Q2 2007;
Default: 1.07%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.4%.
Date: Q3 2007;
Default: 1.26%;
Foreclosure Starts: 0.78%;
Foreclosure Inventory: 1.69%.
Date: Q4 2007;
Default: 1.58%;
Foreclosure Starts: 0.88%;
Foreclosure Inventory: 2.04%.
Date: Q1 2008;
Default: 1.56%;
Foreclosure Starts: 1.01%;
Foreclosure Inventory: 2.47%.
Date: Q2 2008;
Default: 1.75%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 2.75%.
Date: Q3 2008;
Default: 2.2%;
Foreclosure Starts: 1.07%;
Foreclosure Inventory: 2.97%.
Date: Q4 2008;
Default: 3%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 3.3%.
HAMP Program began:
Date: Q1 2009;
Default: 3.39%;
Foreclosure Starts: 1.37%;
Foreclosure Inventory: 3.85%.
Date: Q2 2009;
Default: 3.67%;
Foreclosure Starts: 1.36%;
Foreclosure Inventory: 4.3%.
Date: Q3 2009;
Default: 4.38%;
Foreclosure Starts: 1.42%;
Foreclosure Inventory: 4.47%.
Date: Q4 2009;
Default: 5.09%;
Foreclosure Starts: 1.2%;
Foreclosure Inventory: 4.58%.
Date: Q1 2010;
Default: 4.91%;
Foreclosure Starts: 1.23%;
Foreclosure Inventory: 4.63%.
Date: Q2 2010;
Default: 4.54%;
Foreclosure Starts: 1.11%;
Foreclosure Inventory: 4.57%.
Date: Q3 2010;
Default: 4.31%;
Foreclosure Starts: 1.34%;
Foreclosure Inventory: 4.39%.
Date: Q4 2010;
Default: 3.94%;
Foreclosure Starts: 1.27%;
Foreclosure Inventory: 4.63%.
Source: GAO analysis of MBA data.
[End of figure]
As we reported in December 2008, Treasury has established an Office of
Homeownership Preservation within the Office of Financial Stability
(OFS), which administers TARP, to address the issues of preserving
homeownership and protecting home values.[Footnote 7] On February 18,
2009, Treasury announced the broad outline of the MHA program. The
largest component of MHA was the HAMP first-lien modification program,
which was intended to help eligible homeowners stay in their homes and
avoid potential foreclosure. Treasury intended that up to $75 billion
would be committed to MHA ($50 billion under TARP and $25 billion from
Fannie Mae and Freddie Mac) to prevent avoidable foreclosures for up
to 3 to 4 million borrowers who were struggling to pay their
mortgages. According to Treasury officials, up to $50 billion in TARP
funds were to be used to encourage the modification of mortgages that
financial institutions owned and held in their portfolios (whole
loans) and mortgages held in private-label securitization trusts.
[Footnote 8] Fannie Mae and Freddie Mac together were expected to
provide up to an additional $25 billion from their own balance sheets
to encourage servicers and borrowers to modify or refinance loans that
those two Government Sponsored Enterprises (GSE) guaranteed.[Footnote
9] Only financial institutions that voluntarily signed a Commitment to
Purchase Financial Instrument and Servicer Participation Agreement
(SPA) with respect to their non-GSE loans are eligible to receive TARP
financial incentives under the MHA program.
HAMP first-lien modifications are available to qualified borrowers who
occupied their properties as their primary residence, who had taken
out their loans on or before January 1, 2009, and whose first-lien
mortgage payment was more than 31 percent of their gross monthly
income (calculated using the front-end debt-to-income ratio (DTI)).
[Footnote 10] Only single-family properties (one-four units) with
mortgages no greater than $729,750 for a one-unit property were
eligible.[Footnote 11]
The HAMP first-lien modification program has four main features:
1. Cost sharing. Mortgage holders/investors are required to take the
first loss in reducing the borrower's monthly payments to no more than
38 percent of the borrower's income. For non-GSE loans, Treasury then
uses TARP funds to match further reductions on a dollar-for-dollar
basis, down to the target of 31 percent of the borrower's gross
monthly income. The modified monthly payment is fixed for 5 years or
until the loan is paid off, whichever is earlier, as long as the
borrower remains in good standing with the program. After 5 years,
investors no longer receive payments for cost sharing, and the
borrower's interest rate may increase by 1 percent a year to a cap
that equals the Freddie Mac rate for 30-year fixed rate loans as of
the date that the modification agreement was prepared. The borrower's
payment would increase to accommodate the increase in the interest
rate, but the interest rate and monthly payments would then be fixed
for the remainder of the loan.
2. Standardized net present value (NPV) model. The NPV model compares
expected cash flows from a modified loan to the same loan with no
modification, using certain assumptions. If the expected investor cash
flow with a modification is greater than the expected cash flow
without a modification, the loan servicer is required to modify the
loan. According to Treasury, the NPV model increases mortgage
investors' confidence that modifications under HAMP are in their best
financial interests and helps ensure that borrowers are treated
consistently under the program by providing an externally derived
objective standard for all loan servicers to follow.
3. Standardized waterfall. Servicers must follow a sequential
modification process to reduce payments to as close to 31 percent of
gross monthly income as possible. Servicers must first capitalize
accrued interest and certain expenses paid to third parties and add
this amount to the loan balance (principal) amount. Next, the interest
rate must be reduced in increments of one-eighth of 1 percent until
the 31 percent DTI target is reached, but servicers may not reduce
interest rates below 2 percent. If the interest rate reduction does
not result in a DTI ratio of 31 percent, servicers must then extend
the maturity and/or amortization period of the loan in 1-month
increments up to 40 years. Finally, if the target DTI ratio is still
not reached, the servicer must forbear, or defer, principal until the
payment is reduced to the 31 percent target. Servicers may also
forgive mortgage principal at any step of the process to achieve the
target monthly payment ratio of 31 percent, provided that the investor
allows principal reduction.[Footnote 12]
4. Incentive payment structure. Treasury uses TARP funds to provide
both one-time and ongoing incentives ("pay-for-success") for up to 5
years to non-GSE loan servicers, mortgage investors, and borrowers.
These incentives are designed to increase the likelihood that the
program will produce successful modifications over the long term and
help cover the servicers' and investors' costs for making the
modifications.
Borrowers must also demonstrate their ability to pay the modified
amount by successfully completing a trial period of at least 90 days
before a loan is permanently modified and any government payments are
made under HAMP. Treasury has entered into agreements with Fannie Mae
and Freddie Mac to act as its financial agents for MHA. With respect
to Freddie Mac, these responsibilities are carried out by a separate
division of that entity. Fannie Mae serves as the MHA program
administrator and is responsible for developing and administering
program operations including registering servicers and executing
participation agreements with and collecting data from them, as well
as providing ongoing servicer training and support. Within Freddie
Mac, the MHA-Compliance (MHA-C) team is the MHA compliance agent and
is responsible for assessing servicers' compliance with non-GSE
program guidelines, including conducting on-site and remote servicer
loan file reviews and audits.
Initially, only servicers who signed a SPA prior to December 31, 2009,
were eligible to participate in MHA. Subsequently, the Secretary of
the Treasury exercised the authority granted under the Emergency
Economic Stabilization Act of 2008 to extend TARP's obligation
authority to October 3, 2010, which allowed servicers to continue to
sign SPAs to participate in MHA until that time. As of December 31,
2010, there were a total of 143 active servicers.[Footnote 13] Through
January 2011, $29.9 billion in TARP funds had been committed to these
servicers for modification of non-GSE loans.[Footnote 14] Based on the
MHA Servicer Performance Report through January 2011, nearly 1.8
million HAMP trial modifications had been offered to borrowers of GSE
and non-GSE loans as of the end of January 2011, and nearly 1.5
million of these had begun HAMP trial modifications.[Footnote 15] Of
the trial modifications begun, approximately 145,000 were in active
trial modifications, roughly 539,000 were in active permanent
modifications, roughly 740,000 trial modifications had been canceled,
and roughly 68,000 permanent modifications had been canceled.
Recently, the number of new trial and permanent modifications started
each month has declined (figure 2). As of December 31, 2010, $1
billion in TARP funds had been disbursed for TARP-funded housing
programs, of which $840 million was disbursed for HAMP-related
activity.
Figure 2: GSE and Non-GSE HAMP Trial and Permanent Modifications Made
and Canceled Each Month, through January 2011:
[Refer to PDF for image: multiple line graph]
Year: 2009:
Date: May and prior;
Trials started: 55,478.
Date: June;
Trials started: 109,399.
Date: July;
Trials started: 119,815.
Treasury announces goal of 500,000 trials by November 1,2009.
Date: August;
Trials started: 144,35.
Date: September;
Trials started: 134,456;
Permanents started: 4,742.
Date: October;
Trials started: 159,129;
Permanents started: 10,907.
Start of Treasury's Conversion Campaign.
Date: November;
Trials started: 115,061;
Permanents started: 15,775.
Date: December;
Trials started: 118,332;
Permanents started: 35,514.
Year: 2010:
Date: January;
Trials started: 94,400;
Permanents started: 50,364;
Trials canceled: 60,476;
Permanents canceled: 1,005.
Date: February;
Trials started: 87,668;
Permanents started: 52,905;
Trials canceled: 28,187;
Permanents canceled: 494.
Date: March;
Trials started: 70,489;
Permanents started: 60,594;
Trials canceled: 66,51;
Permanents canceled: 1,380.
Date: April;
Trials started: 48,112;
Permanents started: 68,291;
Trials canceled: 122,467;
Permanents canceled: 865.
Date: May;
Trials started: 26,086;
Permanents started: 47,724;
Trials canceled: 152,056;
Permanents canceled: 2,613.
Date: June;
Trials started: 21,759;
Permanents started: 51,205;
Trials canceled: 91,118;
Permanents canceled: 2,466.
Date: July;
Trials started: 24,318;
Permanents started: 36,695;
Trials canceled: 96,025;
Permanents canceled: 4,089.
Date: August;
Trials started: 22,835;
Permanents started: 33,342;
Trials canceled: 46,699;
Permanents canceled: 6,209.
Date: September;
Trials started: 30,586;
Permanents started: 27,84;
Trials canceled: 36,386;
Permanents canceled: 10,069.
Date: October;
Trials started: 29,569;
Permanents started: 23,75;
Trials canceled: 19,563;
Permanents canceled: 7,116.
Date: November;
Trials started: 29,346;
Permanents started: 29,972;
Trials canceled: 9,622;
Permanents canceled: 8,666.
Date: December;
Trials started: 31,160;
Permanents started: 30,030;
Trials canceled: 5,400;
Permanents canceled: 13,048.
Year: 2011:
Date: January;
Trials started: 20,759;
Permanents started: 27,957;
Trials canceled: 5,731;
Permanents canceled: 10,094.
Source: GAO analysis of Treasury data.
[End of figure]
Implementation of Treasury's Newer Housing Programs Has Been Slow and
Capacity of Servicers to Carry Out These Programs Remains Unclear,
Raising Uncertainty About the Potential Impact of These Programs:
Treasury has recently implemented programs to reduce or eliminate
payments on second-lien mortgages, provide incentives for the use of
short sales or deeds-in-lieu as alternatives to foreclosure, and
provide incentives for the forgiveness of principal for borrowers
whose homes are worth significantly less than their mortgage balances.
However, as of December 2010, reported activity under these three
programs had been limited.[Footnote 16]
* 2MP was announced in March 2009, and had disbursed $2.9 million out
of nearly $133 million allocated to the program by the end of December
2010. In part, the limited activity appears to be the result of
problems that servicers have experienced using the database that
Treasury required to identify second-lien mortgages eligible for
modification. Treasury has taken some steps to address these
challenges, but could take further action to ensure that borrowers are
aware of their potential eligibility for the program.
* HAFA was announced in March 2009 and had disbursed $9.5 million out
of $4.1 billion allocated to the program by the end of December 2010.
Restrictive program requirements--for example, that borrowers be
evaluated for a HAMP first-lien modification before being evaluated
for HAFA, appear to have limited program activity to date. Treasury
has taken steps to revise program guidelines, but it remains to be
seen the extent to which these actions will result in increased
program activity.
* PRA was announced in March 2010 and Treasury had not reported
activity as of December 2010 for this $2 billion program. Mortgage
investors and others have cited concerns that the voluntary nature of
the program and transparency issues, including concerns about the
extent of reporting on PRA activity, may limit the extent to which
servicers implement PRA. Treasury has not yet implemented our June
2010 recommendation that it report activity under PRA, including the
extent to which servicers determined that principal reduction was
beneficial to investors but did not offer it, to ensure transparency
in the implementation of this program feature across servicers.
Further, Treasury has not incorporated key lessons learned from
implementation challenges it faced with the first-lien program.
[Footnote 17] Similar to the first-lien modification program, Treasury
has not established effective performance measures for these three
programs, including goals for the number of borrowers it expects to
help. As a result, determining the progress and success of these
programs in preserving homeownership and protecting home values will
be difficult.
Challenges in Matching First-and Second-Lien Mortgage Data and
Potential Lack of Awareness of the Program Have Slowed Implementation
of the Second-Lien Modification Program:
Under 2MP, Treasury provides incentives for second-lien holders to
modify or extinguish a second-lien mortgage when a HAMP modification
has been initiated on the first-lien mortgage for the same property.
Treasury requires servicers who agree to participate in the 2MP
program to offer to modify the borrower's second lien according to a
defined protocol when the borrower's first lien is modified under
HAMP. That protocol provides for a lump-sum payment from Treasury in
exchange for full extinguishment of the second lien or a reduced lump-
sum payment for a partial extinguishment and modification of the
borrower's remaining second lien. The modification steps for 2MP are
similar to those for HAMP first-lien modifications, with the interest
rate generally reduced to 1 percent and the loan term generally
extended to match the term of the HAMP-modified first lien. In
addition, if the HAMP modification on the first lien included
principal forgiveness, the 2MP modification must forgive principal in
the same proportion. Servicers were required to sign specific
agreements to participate in 2MP. As of November 2010, 17 servicers
were participating in the program, covering nearly two-thirds of the
second-lien mortgage market.
According to Treasury, 2MP is needed to create a comprehensive
solution for borrowers struggling to make their mortgage payments, but
Treasury officials we interviewed told us that the pace of 2MP
modifications had been slow. Of the six servicers we contacted, five
had signed 2MP participation agreements and represented the majority
of potential second liens covered by servicers participating in the
program.[Footnote 18] Only one of these five servicers had begun 2MP
modifications as of the date we collected information from these
servicers--over 18 months after the program was first announced by
Treasury. This servicer reported that it had started 1,334 second-lien
modifications. As of January 2011, Treasury had not yet begun
reporting activity under 2MP. According to servicers and Treasury
officials, the primary reason for the slow implementation of 2MP has
been challenges in obtaining accurate matches of first and second
liens from the data vendor required by Treasury. Treasury's 2MP
guidelines specify that in order for a second lien to be modified
under 2MP, the corresponding first lien must first have been modified
under the HAMP first-lien modification program. Fannie Mae, as the MHA
program administrator, has contracted with a mortgage loan data
vendor--Lender Processing Services (LPS)--to develop a database that
would inform second-lien servicers when the corresponding first lien
had been modified under HAMP. LPS was also the data vendor used by
Fannie Mae to process the loan level data reported by servicers for
the HAMP first-lien program. Under 2MP, participating servicers agree
to provide LPS with information regarding all eligible second liens
they serviced. LPS, in turn, provides participating 2MP servicers with
data on second liens that have had the borrowers' corresponding first-
lien mortgages modified under the HAMP program. However, the five
participating 2MP servicers we spoke with all expressed concerns about
the completeness or accuracy of LPS' data. In particular, they noted
that differences in the spelling of addresses--for example, in
abbreviations or spacing--could prevent LPS from finding matches
between first and second liens. Additionally, another servicer
reported that first-lien data could be incorrectly reported in LPS--
for example, in one case, a borrower was incorrectly reported as not
in good standing and, subsequently, was reported as canceled from
HAMP. This mistake prevented the borrower's first and second liens
from being matched, even though the borrower was in good standing and
eligible for 2MP. Treasury has also acknowledged that an inability to
identify first-and second-lien matches poses a potential risk to the
successful implementation of 2MP.
Initial 2MP guidelines stated that servicers could not offer a second-
lien modification without a confirmation of a match from LPS, even if
they serviced both first and second liens on the same property and,
thus, would know if the first lien had been modified under HAMP. In
November 2010 Treasury provided updated program guidance that revised
the match requirement if servicers serviced both the first and second
lien on a property. According to these updated guidelines, servicers
can offer a 2MP modification when they identify a first-and second-
lien match within their own portfolio or if they have evidence of the
existence of a corresponding first lien, even if the LPS database has
not identified it. While this change may enable more 2MP
modifications, Treasury did not release this guidance until after
participating servicers had already begun implementing 2MP, more than
a year after the program's guidelines were first announced in August
2009.
If they do not service both liens, second-lien servicers must rely on
LPS for matching data or obtain sufficient documentation of the HAMP
first-lien modification to identify the match. If the matching data
provided by LPS is not accurate, it is possible that eligible
borrowers will not receive second-lien modifications. Treasury noted
that there are no standard data definitions in the servicing industry,
making it difficult to match these data across servicers. To address
some of the concerns about inaccurate and incomplete matches, Treasury
officials told us they worked with LPS to change the matching
protocols. Now LPS provides 2MP servicers with a list of confirmed
address matches and a separate list of probable matches based only on
loan number and zip code. Treasury told us that it would issue
additional guidance for handling probable matches, but added that
servicers would be responsible for confirming probable matches with
LPS.
Treasury does not require first-lien servicers to check credit reports
to determine if borrowers whose first liens they modified also had
second liens, and if so, the identity of the second-lien servicer. One
servicer noted that credit reports did not always have complete and
reliable information. In addition, Treasury does not require first-
lien servicers to inform borrowers about their potential eligibility
for the second-lien program. Therefore, borrowers may be unaware that
their second lien could be modified and unlikely to inquire with their
second-lien servicers about a second-lien modification. Any gaps in
the awareness of 2MP could contribute to delays in modifying eligible
second-lien mortgages or missed opportunities altogether.
Additionally, any delays or omissions increase the likelihood that the
borrower with an eligible second lien may not be able to maintain the
required monthly reduced payments on the modified first-and unmodified
second-lien mortgages and ultimately redefault on their HAMP first-
lien modification.
Treasury Has Taken Some Recent Steps to Address Requirements That May
Have Been Affecting Participation in the Foreclosure Alternatives
Program:
Under HAFA, Treasury provides incentives for short sales and deeds-in-
lieu of foreclosure as alternatives to foreclosure for borrowers who
are unable or unwilling to complete the HAMP first-lien modification
process.[Footnote 19] Borrowers are eligible for relocation assistance
of $3,000 and servicers receive a $1,500 incentive for completing a
short sale or deed-in-lieu of foreclosure. In addition, investors are
paid up to $2,000 for allowing short-sale proceeds to be distributed
to subordinate lien holders. Servicers who participate in the HAMP
first-lien modification program are required to evaluate certain
borrowers for HAFA--those whom they cannot approve for HAMP because,
for example, they do not pass the NPV test or have investors that
prohibit modifications; those who do not accept a HAMP trial
modification; and those who default on a HAMP modification.
All six of the large MHA servicers we spoke with identified extensive
program requirements as reasons for the slow implementation of the
program, including the requirement in the initial guidance that
borrowers first be evaluated for a HAMP first-lien modification.
Restrictive short-sale requirements, and a requirement that mortgage
insurers waive certain rights may have also contributed to the limited
activity under HAFA. As a result, they said they did not expect HAFA
to increase their overall number of short sales and deeds-in-lieu.
Some of the program requirements identified by servicers as a reason
for the slow implementation of the program were recently addressed by
Treasury's December 28, 2010, revisions to its HAFA guidelines.
* Borrowers had to first be evaluated for HAMP. According to
Treasury's initial guidelines, borrowers were to be evaluated for a
HAMP first-lien modification before being considered for HAFA, even
borrowers who specifically requested a short sale or deed-in-lieu
rather than a modification. As such, borrowers interested in HAFA had
to submit all income and other documentation required for a HAMP first-
lien modification. According to servicers we interviewed, this
requirement was more stringent than most proprietary short-sale
requirements, and borrowers may have had difficulty providing all of
the documentation required. For example, one servicer told us that it
evaluated borrowers for proprietary short sales on the basis of the
value of the property and the borrower's hardship and that income
documentation was not required. Additionally, a HAMP evaluation may
add extra time to the short-sale process. In cases where a borrower
had already identified a potential buyer before executing a short-sale
agreement with the servicer, the additional time required for a HAMP
first-lien evaluation may have dissuaded the buyer from purchasing the
property.
In response to this concern, Treasury released updated HAFA guidance
on December 28, 2010, to no longer require servicers to document and
verify a borrower's financial information to be eligible for HAFA. The
updated guidance requires servicers to notify borrowers who request a
short sale before they have been evaluated for HAMP about the
availability of HAMP, but no longer requires the servicer to complete
a HAMP evaluation before considering the borrower for HAFA, especially
in circumstances where the borrower already has a purchaser for the
property. As a result, borrowers who specifically request a short sale
or deed-in-lieu can be considered for HAFA at the start of the HAMP
evaluation process, rather than having to wait until the completion of
the HAMP evaluation process.[Footnote 20]
* Restrictive short-sale requirements. According to servicers we spoke
with, some HAFA short-sale requirements, such as occupancy
requirements, may have been too restrictive. Specifically, one
servicer cited as too restrictive the requirement in the initial
guidelines that a property not be vacant for more than 90 days prior
to the date of the short-sale agreement, and that if it is vacant, it
is because the borrower relocated at least 100 miles away to accept
new employment. To address this concern, Treasury issued updated
guidance in December 2010 which extended the allowed vacancy period
from 90 days to 12 months and eliminated the requirement that the
borrower moved to accept employment, but added a requirement that the
borrower had not purchased other residential property within the prior
12 months. Owner-occupancy restrictions may also limit the number of
HAFA short sales and deeds-in-lieu. One servicer noted that many of
the short sales it completed outside of HAFA were for nonowner-
occupied properties, which may include second homes or commercial
properties. However, HAFA offers alternatives to foreclosure only for
eligible loans under HAMP, which is intended for a property serving as
a borrower's principal residence.
* Waiving of rights by mortgage insurers to collect additional sums.
According to Treasury guidelines, "a mortgage loan does not qualify
for HAFA unless the mortgage insurer waives any right to collect
additional sums (cash contribution or a promissory note) from the
borrower."[Footnote 21] Some servicers noted that this requirement had
prevented some HAFA short sales from being completed due to
difficulties in obtaining approval for HAFA short sales from mortgage
insurers. Lenders frequently require mortgage insurance for loans that
exceed 80 percent of the appraised value of the property at the time
of origination. Under a short-sale scenario, the mortgage insurance
company could be responsible for paying the mortgage holder or
investor for all or part of the losses incurred under the short sale
depending upon the coverage agreement and proceeds from the sale.
Mortgage insurance representatives we spoke with indicated that while
they supported HAFA participation, they felt that mortgage insurers
should not have to waive their rights to collect additional sums if
borrowers had some ability to pay them. These representatives told us
that they had not seen many requests for approvals of HAFA foreclosure
alternatives, so they did not believe this requirement was a key
impediment for HAFA. However, they agreed that because servicers did
not know whether mortgage insurers would agree to waive their rights,
the requirement could make it more difficult to solicit borrowers for
HAFA. To minimize the impact of this requirement, one mortgage
insurance representative noted that his company commits to responding
to servicers within 48 hours with a decision about whether the
mortgage insurance company agrees to forego a contribution from the
borrower.
We plan to continue to monitor the progress of the HAFA program,
including the impact of Treasury's December 2010 revisions to its HAFA
guidelines as well as the other program requirements identified by
servicers as contributing to the slow implementation of the program,
as part of our ongoing oversight of the performance of TARP.
Large MHA Servicers Generally Have Agreed to Offer Principal
Reductions, but Mortgage Investors Had Concerns about Program Design
and Transparency:
PRA provides financial incentives to investors who agree to forgive
principal for borrowers whose homes are worth significantly less than
the remaining amounts owed under their first-lien mortgage loans.
Treasury's PRA guidelines require servicers to consider principal
forgiveness for any HAMP-eligible borrowers with MLTV greater than 115
percent, using both the standard waterfall and an
alternative.[Footnote 22] While servicers must consider borrowers for
principal forgiveness, they are not required to offer it, even if the
NPV value to modify the loan is higher when principal is forgiven. If
they choose to offer forgiveness, servicers must reduce the balance
borrowers owe on their mortgages in increments over 3 years, but only
if the borrowers remain current on their payments. Servicers must
establish written policies to Treasury detailing when principal
forgiveness will be offered. According to Treasury, a survey of the 20
largest servicers indicates that 13 servicers are planning to offer
principal reduction to some extent.
Of the six servicers we spoke with, three said that they planned to
offer principal reduction under the program in all cases in which the
NPV was higher with PRA, unless investor restrictions prevented it.
[Footnote 23] As of October 2010, one of these three servicers had
begun HAMP trial modifications with PRA, another had begun
implementation of PRA but had not yet made trial modification offers
with PRA, and the third servicer had not yet completed implementation
of the program. The three remaining servicers we spoke with said they
would limit the conditions under which they would offer principal
forgiveness under the program. One servicer offered PRA only for
adjustable-rate mortgage loans, subprime loans, and 2-year hybrid
loans, and the other had developed a "second look" process for
reviewing loans that had a higher NPV result with principal
forgiveness. This servicer reevaluated these loans using its internal
estimates of default rates and did not forgive principal unless its
own estimates indicated a higher NPV with forgiveness. As a result,
only 15 to 25 percent of those who otherwise would have received
principal forgiveness will receive it after this "second look"
process, according to this servicer. The third servicer said it would
not offer PRA for loans that had mortgage insurance, noting that
mortgage insurers typically took the first loss on a loan and the PRA
would alter that equation with the investor absorbing the full amount
of loss associated with the principal reduction.
Four of the six servicers we contacted told us that investor
restrictions against principal forgiveness would not limit their
ability to offer principal reduction. However, one servicer noted that
about half the loans it serviced had investor restrictions against
principal forgiveness. Another servicer noted that a material number
of its servicing agreements with investors prohibited principal
forgiveness.
Mortgage investors we spoke with expressed concern about PRA's design
and transparency. In particular, they expressed concern that because
the HAMP NPV model did not use an LTV that reflected both the first
and second liens (combined LTV), the model might not reflect an
accurate NPV result. That is, the NPV model might understate the
likelihood of redefault if it did not use the combined LTV. As a
result, investors face the prospect of forgiving principal without
knowing the true redefault risk. Further, although the purpose of PRA
is to address negative equity, not taking the combined LTV into
account would underestimate the population of underwater borrowers
since it would not account for any associated second liens. In
addition, under PRA, servicers must forgive principal on the second
lien in the same proportion as the principal forgiven on the first
lien. However, mortgage investors expressed concern about limited
transparency into whether servicers were forgiving principal on the
second lien. Additionally, SIGTARP recommended in July 2010 that
Treasury reevaluate the voluntary nature of the program and consider
changes to ensure the consistent treatment of similarly situated
borrowers.[Footnote 24] According to Treasury, servicers began
reporting PRA activity in January 2011 for trial and permanent
modifications through December 31, but it is still unclear what level
of program detail Treasury will publicly report. We recommended in
June 2010 that Treasury report activity under PRA, including the
extent to which servicers determined that principal reduction was
beneficial to mortgage investors but did not offer it, to ensure
transparency in the implementation of this program. Treasury officials
told us they would report PRA activity at the servicer level once the
data were available. We plan to continue to monitor Treasury's
reporting of PRA and other TARP-funded housing programs.
Treasury Could Do More to Incorporate Lessons Learned from the First-
Lien Modification Program in Implementing Newer Programs:
In our June 2010 report, we pointed out that it was important that
Treasury incorporate lessons learned from the challenges experienced
with the HAMP first-lien modification program into the design and
implementation of the newer MHA-funded programs.[Footnote 25] In
particular, we noted that it would be important for Treasury to
expeditiously develop and implement these new programs (including 2MP,
HAFA, and PRA) while also developing sufficient program planning and
implementation capacity, including providing program policies and
guidance, hiring needed staff, and ensuring that servicers are able to
meet program requirements. Treasury officials said they solicited
input from servicers and investors when designing 2MP, PRA, and HAFA,
and have begun to perform readiness reviews for these servicers.
However, servicers have cited challenges with changing guidance under
these programs. We also noted that Treasury needed to implement
appropriate risk assessments and meaningful performance measures in
accordance with standards for effective program management. However,
Treasury has not completed program-specific risk assessments, nor has
it developed performance measures to hold itself and servicers
accountable for these TARP-funded housing programs or finalized
specific actions it could take in the event servicers fail to meet
program requirements.
* Program planning and implementation capacity. Treasury has provided
servicers with some guidance on the new programs, but some servicers
said that ongoing changes to the guidelines have presented challenges.
In June 2010, we noted that effective program planning included having
complete policies, guidelines, and procedures in place prior to
program implementation.[Footnote 26] Treasury published initial
guidance for 2MP, HAFA, and PRA prior to the dates these programs were
effective, and some servicers indicated that implementation of these
newer programs was smoother than it was with the first-lien
modification program (see figure 3). However, other servicers
indicated that initial program guidance was unclear and that
additional guidance was issued late in the implementation process. For
example, while Treasury first announced the 2MP program in March 2009,
it did not publish specific 2MP guidelines until August 2009 and then
issued revisions to the guidelines in March 2010, the first month of
official implementation, with revisions in June 2010 and again in
November 2010. According to the servicers we contacted, ongoing
program revisions presented challenges such as needing to retrain
staff and, in some cases, delayed program implementation. Treasury
officials noted that issuing additional guidance improves the program
and is often necessary as circumstances change. Servicers also
reported that while initial guidance for PRA was issued before the
effective date of the program, Treasury did not issue guidance
specific to the NPV 4.0 model until October 1, 2010, the date PRA
became effective. As a result, servicers told us that there was
insufficient time to update internal servicing systems in time to
implement PRA as of its effective date.
Figure 3: Timeline of 2MP, HAFA, and PRA Guidance:
[Refer to PDF for image: time line]
03/4/2009:
Treasury first announces incentives to extinguish junior liens on
homes with first-lien loans that are modified under HAMP, as well as
compensation for completing short sales or deeds-in-lieu.
4/28/2009:
Treasury announces additional details related to the second-lien
modification program.
8/13/2009:
2MP implementation guidance issued—requirement to use LPS to match
first and second liens, but servicers servicing both first and second
liens do not need to wait on LPS’ matching service to offer 2MP
modification.
11/30/2009:
HAFA implementation guidance issued, with effective date of April 5,
2010.
3/26/2010:
2MP revised—servicers are now required to use LPS to identify all
eligible lien matches for 2MP to offer a 2MP modification, even in
cases where the servicer services both the first and second liens.
HAFA revised to include increased incentives for borrowers, servicers,
and investors. Treasury announces several new housing programs,
including PRA.
6/3/2010:
Principal Reduction Alternative implementation guidance issued, with
effective date of October 1, 2010. 2MP guidance on principal
forgiveness and forbearance revised.
10/1/2010:
Net Present Value model for PRA ready for servicers to use.
10/15/2010:
Revised PRA guidance on consideration of loans that were modified
under HAMP prior to October 1, 2010.
11/23/2010:
Revised 2MP guidance allows servicers servicing both first and second
liens to offer a 2MP modification when they identify a match, even if
LPS has not identified it.
12/2/2010:
Updated version of the MHA Handbook consolidates previously released
guidance and includes guidance for 2MP and HAFA.
12/28/2010:
Revised HAFA guidance on changes in vacancy requirements and timing
for issuing short sale agreements, with effective date of February 1,
2011.
Source: GAO.
[End of figure]
Treasury has also not completed a needed workforce assessment to
determine whether it has enough staff to successfully implement the
new program. In July 2009, we recommended that Treasury place a high
priority on fully staffing vacancies in its Homeownership Preservation
Office (HPO), the office within Treasury responsible for MHA
governance, and fill all necessary positions. According to Treasury
officials, each director within HPO conducts ongoing informal
assessments of staffing needs, and Treasury has recently added two
positions in marketing and communications, as well as two additional
staff to address policies regarding the borrower complaint process. In
addition, two additional staff positions to support the borrower
complaint resolution process have recently been approved by the
staffing board. HPO has also named a Deputy Chief. In addition,
Treasury officials told us that Fannie Mae and Freddie Mac, Treasury's
financial agents for MHA, had doubled the number of staff devoted to
these functions as the complexity of MHA has increased. However, as of
December 2010, Treasury had not conducted a formal workforce
assessment of HPO, despite the addition of the new MHA programs, 2MP,
HAFA, and PRA. As we noted in July 2009, given the importance of HPO's
role in monitoring the financial agents, servicers, and other entities
involved in the $45.6 billion TARP-funded housing programs, having
enough staff with appropriate skills is essential to governing the
program effectively.
Servicers have not demonstrated full capacity to effectively carry out
these programs. Treasury has previously stated that the implementation
of the HAMP first-lien program was hindered by the lack of capacity of
servicers to implement all of the requirements of the program.
According to Treasury, Fannie Mae has conducted program-specific
readiness reviews for the top 20 large servicers for HAFA and PRA,
including all 17 servicers participating in 2MP. These reviews assess
servicers' operational readiness, including developing key controls to
support new programs, technology readiness, training readiness, as
well as staffing resources and program processes and documentation.
According to Treasury officials, 5 servicers have completed readiness
reviews for 2MP, and 5 additional servicers were scheduled to be
surveyed in January 2011; 19 servicers have completed these reviews
for HAFA; and 18 servicers have completed these reviews for PRA.
According to Treasury's summary of these reviews, a large majority of
servicers completing these readiness reviews did not provide all
documentation required to demonstrate that the key tasks needed to
support these programs were in place at the time of the review. Of
those that had complete reviews, 4 had provided all required documents
for HAFA and 3 had provided all required documents for PRA. None of
the servicers provided all required documents for 2MP. Treasury notes
that it relies on Fannie Mae to monitor program readiness and that MHA-
C reviews all programs as part of its on-site reviews. Nonetheless, it
is unclear what actions Treasury has taken to ensure that the
servicers who did not submit the required documentation have the
capacity to effectively implement the programs, making less certain
the ability of these servicers to fully participate in offering
troubled homeowners second-lien modifications, principal reduction,
and foreclosure alternatives.
* Meaningful performance measures and remedies. As we also reported in
June 2010, Treasury must establish specific and relevant performance
measures that will enable it to evaluate the program's success against
stated goals in order to hold itself and servicers accountable for
these TARP-funded programs. While Treasury has established program
estimates of the expected funding levels for 2MP, HAFA, and PRA
programs, it has not fully developed specific and quantifiable
servicer-based performance measures or benchmarks to determine the
success of 2MP, HAFA, and PRA, including goals for the number of
homeowners these programs are expected to help. Treasury officials
told us that they were using the amounts of TARP funds allocated to
MHA servicers to determine estimated participation rates, but this
estimate is adjusted on a quarterly basis and according to Treasury,
is not the best measure for holding servicers accountable. Treasury
officials stated that when data became available they would assess
certain aspects of program performance--for example, they noted that
Treasury planned to assess the redefault rates of modifications that
received PRA or 2MP, compared with those that did not. However,
Treasury has not set benchmarks, or goals, for these performance
measures, as we recommended in June 2010. In addition, Treasury has
not stated how it will use these assessments to hold servicers
accountable for their performance or what remedial actions it will
take in cases where individual servicers are not performing as
expected in these programs. We continue to believe that Treasury
should take steps to establish benchmarks that can be used to hold
servicers accountable for their performance.
* Appropriate risk assessment. We previously reported that agencies
must identify the risks that could impede the success of new programs
and determine appropriate methods of mitigating these risks. In
particular, we highlighted the need for Treasury to develop
appropriate controls to mitigate those risks before the programs'
implementation dates. Although Treasury has not systematically
assessed risks at the program level, Treasury officials told us they
had identified several risks associated with 2MP, HAFA, and PRA and
specified ways to mitigate these risks, and added they were planning
to begin new risk assessments in January 2011 that would be completed
by June 2011. According to Treasury officials, this new round of risk
assessments will include 2MP, HAFA, and PRA, but the programs will not
be evaluated individually.
In addition, Treasury has not yet fully addressed all program-specific
risks. As we have seen, Treasury has acknowledged the risk that the
matching database for 2MP may not identify all first liens modified
under HAMP. While Treasury began addressing this issue in updated
guidance released in November 2010, it cannot yet determine whether
all borrowers eligible for 2MP are being identified and considered for
second-lien modifications. Treasury has also acknowledged several
potential risks with all types of short-sale transactions, including
HAFA transactions. According to Treasury officials, these risks
include those arising from sales to allied parties, side agreements,
and rapid resales. For example, Treasury officials noted a short-sale
purchaser could be inappropriately related to the servicer, allowing
the short sale to be inappropriately engineered to generate extra
compensation for one or both parties. Treasury states that HAFA
includes requirements to mitigate these risks, such as requiring arms-
length transactions. According to Treasury officials, MHA-C, the group
within Freddie Mac that acts as Treasury's financial agent for MHA
compliance activity, is also in the process of developing compliance
procedures to address these risks. Further, Treasury has identified
several potential risks with PRA, including servicer noncompliance
with PRA requirements, moral hazard (the risk that borrowers would
default on their mortgages to receive principal reduction when they
otherwise would not have), and low program participation. According to
Treasury officials, these risks will be mitigated through regular
compliance reviews, servicer reporting of NPV results both with and
without PRA, and other program requirements. For example, to guard
against moral hazard, Treasury requires that borrowers be experiencing
hardship and that servicers forgive the principal over 3 years only if
the borrower remains current on the modified payments. However, low
program participation may continue to be a risk for PRA, despite the
initial participation plans of several of the large servicers. While
Treasury officials told us they plan to monitor the reasonableness of
the extent of principal forgiveness on a servicer-specific basis, we
continue to believe that due to the voluntary nature of the program,
Treasury will need to ensure full and accurate servicer-specific
reporting of program activity for future assessments of the extent to
which servicers are offering PRA when the NPV is higher with principal
forgiveness, as we recommended in June 2010. We plan to continue to
monitor and report on Treasury's risk assessment and control
activities for MHA programs as part of our ongoing oversight of
Treasury's use of TARP funds to preserve homeownership and protect
property values.
Treasury Has Some Data on the Characteristics of Borrowers in HAMP's
First-Lien Program, but Data Were Sometimes Missing or Questionable:
Our analysis of Treasury's HAMP data through September 30, 2010,
indicated that borrowers who entered into trial modifications or
received permanent modifications continued to have elevated levels of
debt, as evidenced by the median back-end DTI for these two groups (55
and 57 percent, respectively).[Footnote 27] Borrowers who received a
trial modification based on stated (unverified) income--a practice
that Treasury no longer permits--were the most likely to have their
trial modifications canceled, and borrowers who were the most
delinquent on their mortgage payments at the time of applying for a
loan modification were the most likely to redefault on their
modifications. While the data Treasury collected from the servicers
provided these and other insights into the characteristics of
borrowers helped under the program, some data were missing and some
information was inaccurate, preventing certain types of analyses of
HAMP borrowers. For example, race and ethnicity information was not
available for a significant portion of borrowers. In addition,
Treasury's data on borrowers' LTV ratios at the time of modification
ranged from 0 to 999, with 1 percent of non-GSE borrowers in active
permanent modifications reporting ratios over 400 percent, implying
that some borrowers who received HAMP modifications did not have a
mortgage, and others had loan amounts more than 4 times the value of
their homes. Treasury said that it and Fannie Mae were continuing to
refine and strengthen data quality checks and that the data would
improve over time.
Certain Factors Increase the Likelihood of Trial Modification
Cancellation and Early Data Indicate that Borrowers Who Redefaulted
from Permanent Modifications Were Further Into Delinquency:
According to Treasury's HAMP data, 88,903 non-GSE borrowers were in
active HAMP trial modifications and 205,449 borrowers were in
permanent modifications as of the end of September 2010. These
borrowers generally cited a reduction in income as their primary
reason for hardship when applying for HAMP modifications.
* Over half of borrowers cited a "curtailment of income," such as a
change to a lower-paying job, as the primary reason they were
experiencing financial hardship (56 percent and 53 percent of those in
active trial and permanent modifications, respectively). However, only
5 percent of borrowers in each of these groups cited unemployment as
their primary reason for hardship.
* Borrowers in trial and permanent modifications through September
2010 also had high levels of debt prior to modification--median front-
end DTI ratios of 45 and 46 percent, and back-end DTI ratios of 72 and
76 percent, respectively. Even after modification, these borrowers
continued to have high debt levels (median back-end DTI ratios of 55
and 57 percent for those in trial and permanent modifications,
respectively). Treasury has defined a high back-end DTI to be 55
percent, and has required borrowers with total postmodification debt
at this level to obtain counseling.
* In addition, borrowers in trial and permanent modifications tended
to be "underwater," with median mark-to-market LTV ratios of 123
percent and 128 percent, respectively.
Borrowers who were unsuccessful in HAMP modifications, either because
they were canceled from a trial modification or because they
redefaulted from permanent modifications, shared several of these
characteristics, including having high levels of debt and being
"underwater" on their mortgages. However, some characteristics
appeared to increase the likelihood that a borrower would be canceled
from a trial modification. Holding other potential factors constant,
the following factors increased the likelihood that a borrower would
be canceled from a trial modification:
* Use of Stated Income. Borrowers who received a trial modification
based on stated income were 52 percent more likely to be canceled from
trial modifications than those who started a trial modification based
on documented income. In some cases, borrowers who received trial
modifications based on stated income were not able to or failed to
provide proof of their income or other information for conversion to
permanent modification.[Footnote 28] In other cases, borrowers may
have submitted the required documentation but the servicer lost the
documents. Over one-third of the 396 housing counselors who responded
to our survey identified servicers losing documentation as the most
common challenge that borrowers have faced in providing the required
documentation for a permanent modification. In December 2010, the
Congressional Oversight Panel also reported that Treasury has failed
to hold loan servicers accountable when they have repeatedly lost
borrowers' paperwork.[Footnote 29]
* Length of Trial Period. Borrowers who were in trial modification
periods for fewer than 4 months were about 58 percent more likely to
have their trial modifications canceled than borrowers in longer trial
periods. This finding may indicate that borrowers who default on their
trial modifications will do so earlier in the process rather than
later.
* Delinquency Level at Time of Modification. Borrowers who were 60 or
90 days or more delinquent at the time of their trial modifications
were 6 and 9 percent more likely to have trial modifications canceled,
respectively, compared with borrowers who were not yet delinquent at
the time of their trial modifications. Treasury has acknowledged the
importance of reaching borrowers before they are seriously delinquent
by requiring servicers to evaluate borrowers still current on their
mortgages for imminent default, but as we noted in June 2010, this
group of borrowers may be defined differently by different
servicers.[Footnote 30] In addition, most borrowers who received HAMP
were delinquent on their mortgages at the time of modification--as of
September 30, 2010, 83 percent of those who had begun trial or
permanent modifications were at least 60 days delinquent on their
mortgages.
According to our analysis, there were also several factors that
lowered the likelihood of trial cancellations, although the effect was
generally smaller than the factors that increased the likelihood of
being canceled.
* High MLTV Ratio. Borrowers who had high MLTV ratios (above 120
percent) were less likely to be canceled from a trial modification
compared to those with MLTV ratios at or below 80 percent. That is,
loans with a MLTV between 120 and 140 percent were 7 percent less
likely to be canceled, while loans with an MLTV of more than 140
percent were 8 percent less likely to be canceled.
* Amount of Principal or Payment Reduction: While only about 2 percent
of borrowers had received principal forgiveness as of September 30,
2010, borrowers who received principal forgiveness of at least 1
percent of their total loan balance were less likely to be canceled
from trial modifications, compared with those who did not receive
principal forgiveness. In addition, larger monthly payment reductions
lowered the likelihood that a trial modification would be canceled.
For example, our analysis showed that borrowers who received a
principal and interest payment reduction of least 10 percent were less
likely to be canceled from their trial modifications than borrowers
who received a payment reduction of less than 10 percent or who had an
increase in payments.
Figure 4 illustrates the extent to which certain factors increase or
decrease likelihood of borrowers being canceled from HAMP trial
modification. See appendix II for further details on our analysis of
factors affecting the likelihood of trial modification cancellation.
Figure 4: Estimated Decrease/Increase in Likelihood of Cancellation of
HAMP Trial Modification by Borrower and Loan Characteristics:
[Refer to PDF for image: illustrated table]
Characteristics: Loan had loan-to-value ratio greater than 140
percent, compared to 80 percent or less;
Change in likelihood of trial modification cancellation: -8%.
Characteristics: Loan had loan-to-value ratio between 120 and 140
percent, compared to 80 percent or less;
Change in likelihood of trial modification cancellation: -7%.
Characteristics: Borrower received principal forgiveness of between 1
and 50 percent of total loan balance;
Change in likelihood of trial modification cancellation: -6%.
Characteristics: Borrower's principal and interest payment on loan
reduced by more than 20 percent, compared to a decrease of 10 percent
or less or an increase;
Change in likelihood of trial modification cancellation: -5%.
Characteristics: Borrower's principal and interest payment on loan
reduced by between 10 and 20 percent, compared to a decrease of 10
percent or less or an increase;
Change in likelihood of trial modification cancellation: -5%.
Characteristics: Borrower was 60 to 89 days delinquent prior to trial
modification, compared to being current on mortgage payments;
Change in likelihood of trial modification cancellation: 6%.
Characteristics: Borrower was 90 or more days delinquent prior to trial
modification, compared to being current on mortgage payments;
Change in likelihood of trial modification cancellation: 9%.
Characteristics: Borrower was evaluated for trial modification based on
stated income prior to June 1, 2010);
Change in likelihood of trial modification cancellation: 52%.
Characteristics: Borrower was in trial modification period for 4
months or less;
Change in likelihood of trial modification cancellation: 58%.
Source: GAO analysis of Treasury data.
[End of figure]
In addition, our initial observations of over 15,000 non-GSE borrowers
who had redefaulted from permanent HAMP modifications through:
September 2010 indicated that these borrowers differed from those in
active permanent modifications in several respects. Specifically, non-
GSE borrowers who redefaulted on their HAMP permanent modifications
tended to have the following characteristics:
* higher levels of delinquency at the time of trial modification
evaluation (median delinquency of 8 months compared to 5 months for
those still in active permanent modifications);
* lower credit scores, although borrowers current on their HAMP-
modified payments also had low median credit scores (525 and 552,
respectively);
* lower median percentage of payment reduction compared with those who
were still current in their permanent modifications (24 percent
compared with 33 percent for those who were still current in their
permanent modifications); and:
* lower levels of debt before modification than borrowers who did not
redefault (median front-end DTI ratio of 41 percent prior to
modification compared to 46 percent front-end DTI ratio for those
still current in their permanent modifications)--these borrowers
likely did not receive as much of a payment reduction from the
modification due to lower levels of debt to begin with.
These results were largely consistent with information that the
Federal Deposit Insurance Corporation (FDIC) released on the
performance of its IndyMac loan modifications. For example, FDIC found
that borrowers' delinquency status prior to loan modification
correlated directly with redefault rates after modification, with a 1-
year redefault rate of roughly 25 percent for borrowers who were 2
months delinquent at the time of modification compared to a nearly 50
percent redefault rate for those who were more than 6 months
delinquent at the time of modification.[Footnote 31] FDIC also
reported that the redefault rates for its IndyMac modifications
declined markedly with larger reductions in monthly payments.
Some Key Information on HAMP Borrowers and Applicants Was Missing or
Inaccurate in Treasury's Database:
Treasury's data on HAMP provide important information and insights on
characteristics of borrowers who are in trial and permanent
modification, who have been canceled from trial modifications, and who
have redefaulted from permanent modifications. However, Treasury's
database contained information that was inaccurate or inconsistent,
and Treasury does not collect information on all borrowers who are
denied HAMP modifications. For example, Treasury's data on borrowers'
LTV ratios at the time of modification ranged from 0 to 999, with 1
percent of non-GSE borrowers in active permanent modifications
reporting ratios over 400 percent, implying that some borrowers who
received HAMP modifications did not have a mortgage, and others had
loan amounts more than 4 times the value of their homes. Some data
elements also included internal inconsistencies. For example, a
borrower's back-end DTI (the ratio of total monthly debt-to-gross
monthly income) includes the front-end DTI (the ratio of monthly
housing debt-to-gross monthly income) and, therefore, should always at
least be equal to the front-end DTI. However, according to Treasury's
database, 29 percent of those in trial modifications and 40 percent of
those who had trial modifications canceled had back-end DTIs that were
less than their front-end DTIs. The quality of these data improved for
those who received permanent modifications, with only 3 percent of
these borrowers showing back-end DTIs that were less than the front-
end DTIs.
Treasury acknowledged that its HAMP database contained some
inconsistencies, despite edit checks conducted by Fannie Mae as the
HAMP administrator. According to Treasury, the inconsistencies
continue because of servicers' data-entry errors, data formatting
mistakes such as entering percentages as decimals rather than whole
numbers, and data mapping problems. Treasury said it was continuing to
work with Fannie Mae to refine and strengthen data quality checks and
that the data has and will continue to improve over time. For example,
Treasury noted that since September 2010, it has worked to improve the
quality of borrower and loan attributes such as back-end DTI and
modification terms. Treasury officials said that the error rate on
these data elements has dropped from 16 percent and 12 percent for
trial and permanent modifications, respectively, to 2 percent and 10
percent.
Treasury's HAMP database also was missing a significant amount of
information on borrowers' race and ethnicity, resulting in an
inability to date to assess whether HAMP is being fairly implemented
across servicers. For example, as of September 30, 2010, race and
ethnicity information was not available for 65 percent of non-GSE
borrowers in active trial modifications. A significant portion of
borrowers declined to report this information--that is, for 45 percent
of non-GSE borrowers in active trial modifications the category was
marked as "not provided by borrower." However, for another 20 percent,
some data are simply missing, with no category marked. Some of this
information may be missing because servicers were not required to
report borrowers' race and ethnicity until after December 1, 2009. As
a result, Treasury lacks complete information needed to be able to
determine whether the first-lien modification program has been
implemented fairly across all borrowers.
In addition, Treasury acknowledged data-mapping problems with race and
ethnicity data that resulted in some data being included in the system
of record, but inadvertently excluded from the database. Combined,
these factors resulted in a large proportion of borrowers without race
and ethnicity information, as of September 30, 2010. According to
Treasury officials, Fannie Mae was making improvements to the data
mapping, which should allow Treasury to better evaluate whether HAMP
is being implemented fairly across all borrowers. Treasury officials
told us they anticipated that the more complete data would be ready to
use in early 2011. On January 31, 2011, Treasury announced the
availability of loan-level HAMP data to the public for the first time.
The data files were as of November 30, 2010, and included information
on borrowers' race and ethnicity. According to Treasury, these data
indicated that roughly 31 percent of borrowers who started trial
modifications after December 1, 2009, did not report race and
ethnicity data. Treasury also reported approximately 6 percent of data
as not applicable or not reported by the servicer. In addition,
roughly 57 percent of those who were denied or did not accept trial
modifications did not report or were missing this information.
Finally, Treasury's HAMP database did not contain information on all
borrowers who were denied HAMP, as some borrowers were denied before
income information was collected for a net present value test.
Treasury currently requires servicers to report identifying
information, such as borrowers' names and Social Security numbers, as
well as the reason for denial for all borrowers denied modification,
but other data elements--including income information, level of
delinquency, LTV, and GSE or non-GSE status--is not required to be
collected by servicers if borrowers are denied because they do not
meet basic eligibility requirements such as the property being owner-
occupied. According to data we received from Treasury, through
September 30, 2010, some information was lacking on 85 percent of
borrowers who were denied HAMP trial modifications, including monthly
gross income amounts and the number of months in delinquency. Treasury
noted that these data are incomplete because they are unobtainable by
the servicers and not a good use of servicer resources to obtain.
While we recognize that servicers may be unable to collect information
from borrowers who were previously denied trial modifications, going
forward it will be important for Treasury to collect sufficient
information from servicers to assess program gaps. According to
Treasury, it has requested servicers to report on borrowers who were
denied HAMP when low volumes of these data were received.
Most Borrowers Denied or Canceled from Trial Modifications Appear to
Have Avoided Foreclosure To Date, but Weaknesses in Treasury's Data
Collection Limit its Ability to Understand the Outcomes of These
Borrowers:
Because there have been more HAMP trial modification cancellations
than conversions to permanent modifications, we evaluated Treasury's
reporting of the disposition paths, or outcomes, of borrowers who were
denied or canceled from HAMP trial modifications and obtained
additional information from six large MHA servicers to understand the
extent to which these borrowers have been able to avoid foreclosure to
date. While it appears that the majority of these borrowers had been
able to avoid foreclosure as of the time of our data collection and
Treasury's survey, if borrowers are being evaluated for a loss
mitigation option such as a proprietary modification and the servicer
has also started foreclosure proceedings, Treasury's data reporting
template will result in a loan being reported only as a proprietary
modification or the other applicable loss mitigation category,
understating the number of borrowers who have had foreclosure
proceedings started. In addition, Treasury's reporting of outcomes for
these borrowers does not differentiate between borrowers who received
proprietary modifications and those who were still being evaluated for
these modifications, some of whom will not ultimately receive them.
For example, for six large servicers, Treasury reported that 43
percent of borrowers who had their trial modification canceled
received proprietary modifications.[Footnote 32] However, the reported
43 percent includes both borrowers who had received proprietary
modifications and those who were being evaluated for proprietary
modifications. Data we collected from the same servicers indicate that
only 18 percent of borrowers with canceled trial modifications
received permanent proprietary modifications, while another 23 percent
had pending but not yet approved permanent modifications. Without a
complete picture of the outcomes of those borrowers who were denied or
canceled from HAMP, Treasury cannot accurately evaluate the outcomes
for these borrowers and determine whether further action may be needed
to assist this group of borrowers.
Treasury's Reporting Does Not Fully Reflect the Current Disposition
Actions for Borrowers Denied or Canceled from HAMP:
According to HAMP guidelines, servicers must consider all potentially
HAMP-eligible borrowers for other loss mitigation options, such as
proprietary modifications, payment plans, and short sales, prior to a
foreclosure sale. To report the current outcomes of borrowers who
applied for but did not receive a HAMP trial modification or had a
HAMP trial modification canceled, Treasury surveys the eight largest
HAMP servicers each month and publishes these data in the monthly
servicer performance reports. However, Treasury's requirements for
reporting these data produce results that do not fully reflect all
outcomes for borrowers who were denied or canceled from HAMP and
overstate the proportion of some outcomes. First, in order to prevent
double counting of transactions, the survey does not allow servicers
to place a borrower in more than one outcome category. Additionally,
servicers must follow the order in which Treasury lists the outcomes
on the survey. However, this does not allow for the accurate reporting
of borrowers being considered for multiple potential outcomes. For
example, a servicer could be evaluating a borrower who had been denied
a HAMP modification for a proprietary modification at the same time
that the servicer started foreclosure proceedings. But the Treasury
survey would capture only the proprietary modification, because that
category is the first in the list of possible outcomes. Because
servicers are allowed to evaluate borrowers for loss mitigation
options while simultaneously starting foreclosure, Treasury's
requirement that borrowers be included in only one category, starting
with proprietary modifications, likely overstates the proportion of
borrowers with proprietary modifications while also understating the
number of borrowers who have started foreclosure.
Furthermore, a comparison of Treasury's data to data we received from
six large MHA servicers on the outcomes of borrowers denied a HAMP
trial modification showed that Treasury's requirement that servicers
place borrowers according to a specific order of outcomes may result
in an understatement of the number of borrowers becoming current. For
example, according to the data we received, almost 40 percent of
borrowers who were denied a HAMP trial modification became current
without any additional assistance from the servicer as of August 31,
2010. In comparison, Treasury reported only 24 percent of borrowers
became current after applying for but not receiving a HAMP trial
modification through these same servicers. While differences may exist
between the populations of these data, a servicer we spoke with noted
one reason that the percentage of current borrowers in the Treasury
survey was lower than the percentage reported in our data was
Treasury's requirement that servicers report outcomes in a certain
order, with "borrower current" being in last place.[Footnote 33] As a
result, borrowers are reviewed for all other outcomes before being
reflected in this category. Placing borrowers only in one category
according to a specific order may not reflect all of the outcomes
experienced by these borrowers and may understate outcomes further
down the list, such as starting foreclosure or becoming current.
Second, while Treasury's survey includes an "action pending" category,
all six of the servicers we spoke with told us that Treasury had
instructed them to include borrowers who were being evaluated for an
outcome in their respective outcome categories, such as proprietary
modification, rather than the "action pending" category. Treasury
recently instructed servicers to use the action pending category only
if a borrower had recently been denied a HAMP trial modification, had
a HAMP trial modification canceled, or fallen out of another
disposition path such as a proprietary modification, and the servicer
has not yet determined the next step for the borrower. Because the
proprietary modification category includes borrowers who are still
being evaluated for modifications as well as those who have received
them, the number of borrowers who actually received a proprietary
modification cannot be determined from Treasury's data. For example,
for the outcomes of borrowers who had a canceled HAMP trial
modification, we asked six large MHA servicers to separate borrowers
who were being evaluated for permanent proprietary modifications from
those who had actually received them. For these same six servicers,
while Treasury reported that 43 percent of borrowers who canceled from
a HAMP trial modification through August 2010 were in the process of
obtaining a proprietary modification, the data we received indicated
that 18 percent of these borrowers had received permanent proprietary
modifications, and 23 percent were in the process for being approved
for one.[Footnote 34] By including borrowers who received permanent
proprietary modifications alongside borrowers who were still in the
process for getting one, Treasury may not fully understand the extent
to which servicers are providing permanent assistance to borrowers
being denied or canceled from HAMP trial modifications.
While Treasury has taken steps to collect data on the outcomes of
borrowers who do not receive a HAMP trial or permanent modification--
data that could be used to assess the extent to which these borrowers
are receiving other loss mitigation programs--the way in which
Treasury has asked servicers to report these data overstates the
proportion of certain outcomes and understates others, such as
starting foreclosure proceedings. In addition, Treasury's reporting
does not differentiate between those who have received a proprietary
modification and those who are being evaluated for one. If the
information presented in the monthly servicer performance reports does
not fully reflect the outcomes of these borrowers, Treasury and the
public will not have a complete picture of their outcomes. Further,
Treasury cannot determine the extent to which servicers provided
alternative loss mitigation programs to borrowers denied or canceled
from HAMP or evaluate the need for further action to assist this group
of borrowers.
Outcomes of Borrowers Vary by Whether Borrowers were Denied, Canceled,
or Redefaulted, and by Servicer:
We requested data from six servicers on the outcomes of borrowers who
(1) were denied a HAMP trial modification, (2) had a canceled HAMP
trial modification, or (3) redefaulted from a HAMP permanent
modification. According to the data we received, of the about 1.9
million GSE and non-GSE borrowers who were evaluated for a HAMP
modification by these servicers as of August 31, 2010, 38 percent
(713,038) had been denied a HAMP trial modification; 27 percent
(505,606) had seen their HAMP trial modifications canceled; and 1
percent (20,561) had redefaulted from a HAMP permanent modification.
[Footnote 35] We requested that the servicers report all of the
outcomes borrowers had received and they separate those who were being
evaluated for an outcome from those who had received them.[Footnote
36] According to the data we received, borrowers experienced different
outcomes, depending on whether they were denied a HAMP trial
modification, received but were canceled from a trial modification, or
redefaulted from a permanent modification.
According to these servicers' data through August 31, 2010, borrowers
who were denied HAMP trial modifications were more likely to become
current on their mortgages without any additional help from the
servicer (39 percent) than to have any other outcome (see figure 5).
[Footnote 37] According to one servicer, borrowers who were denied a
HAMP trial modification were often current when they applied for a
HAMP modification and, once denied, were likely to remain current. In
addition, 9 percent of these borrowers paid off their loans. Twenty-
eight percent of borrowers who had been denied trial modifications
received or were in the process for receiving a permanent proprietary
modification or a payment plan.[Footnote 38] Servicers initiated
foreclosure proceedings on 17 percent at some point after being
denied, while only 3 percent of borrowers completed
foreclosure.[Footnote 39] Several servicers explained that loss
mitigation efforts can often work in tandem, so a borrower could be
referred for foreclosure and evaluated for another outcome at the same
time, and borrowers who were referred for foreclosure may not
necessarily complete it.
Figure 5: Outcomes of Borrowers Denied a HAMP Trial Modification,
through August 31, 2010 (Six large MHA servicers):
[Refer to PDF for image: vertical bar graph]
Borrower current: 38.62%.
Loan Payoff: 8.7%.
Proprietary modification: 10.18%; (pending action: 11.49%).
Payment plan: 6.51%; (pending action: 0.12%).
Foreclosure alternative[A]: 1.4%; (pending action: 1.76%).
Foreclosure start: 16.91%.
Foreclosure completion: 2.83%.
Other categories[B]: 12.45%.
Source: GAO analysis of data received from six large MHA servicers.
Note: Borrowers may be included in more than one category.
[A] The percentage of borrowers who received a foreclosure alternative
may include borrowers who have a short-sale agreement signed but have
not closed on the short sale.
[B] Other categories include borrowers who had a bankruptcy in process
and no other loss mitigation effort was allowed at some point after
being denied, canceled, or redefaulting; borrowers who had action
pending outside of a proprietary modification, payment plan, or
foreclosure alternative; and borrowers not able to be reflected in any
of the other outcomes, such as borrowers who currently have no workout
plan in process.
[End of figure]
Of those borrowers who were canceled from a HAMP trial modification,
servicers often initiated actions that could result in the borrower
retaining the home. Specifically, 41 percent of these borrowers
received or were in the process for receiving a permanent proprietary
modification, and 16 percent received or were in the process for
receiving a payment plan (see figure 6). However, servicers started
foreclosure proceedings on 27 percent of borrowers at some point after
the HAMP trial modification being canceled, but, similar to borrowers
who were denied a HAMP trial modification during this time period, a
small percentage completed foreclosure (4 percent). Compared with
borrowers who were denied, borrowers who had a HAMP trial modification
canceled were less likely to become current on their mortgages (15
percent) or to pay off their loan (4 percent).
Figure 6: Outcomes of Borrowers who Had a Canceled HAMP Trial
Modification, through August 31, 2010 (Six large MHA servicers):
[Refer to PDF for image: vertical bar graph]
Borrower current: 14.95%.
Loan Payoff: 3.64%.
Proprietary modification: 18.49%; (pending action: 22.8%).
Payment plan: 14.45%; (pending action: 2.04%).
Foreclosure alternative[A]: 1.08%; (pending action: 6.96%).
Foreclosure start: 26.62%.
Foreclosure completion: 3.57%.
Other categories[B]: 18.31%.
Source: GAO analysis of data received from six large MHA servicers.
Note: Borrowers may be included in more than one category.
[A] The percentage of borrowers who received a foreclosure alternative
may include borrowers who have a short-sale agreement signed but have
not closed on the short sale.
[B] Other categories include borrowers who had a bankruptcy in process
and no other loss mitigation effort was allowed at some point after
being denied, canceled, or redefaulting; borrowers who had action
pending outside of a proprietary modification, payment plan, or
foreclosure alternative; and borrowers not able to be reflected in any
of the other outcomes, such as borrowers who currently have no workout
plan in process.
[End of figure]
There were wide ranges in the outcomes among servicers we contacted
for borrowers who were canceled from HAMP trial modifications (see
table 1). For example, of those borrowers who had a canceled HAMP
trial modification, one servicer reported that 26 percent had obtained
a proprietary modification through August 31, 2010, compared with 14
percent for another servicer. In addition, for borrowers who had a
canceled HAMP trial modification, one servicer reported foreclosure
completion rates of almost 7 percent, while another servicer reported
foreclosure completion rates of roughly 1 percent. Servicers reported
a wide range of outcomes, which depend on factors such as the
composition of loan portfolios and proprietary loss mitigation
programs, including modifications, payment plans, and short sales.
These programs can differ in design and may have, among other things,
different eligibility requirements for borrowers.
Table 1: Selected Outcomes of Borrowers who Had a Canceled HAMP Trial
Modification by Servicer, through August 31, 2010:
Servicer 1;
Proprietary modification: 24%;
Payment plan: 4%;
Current: 12%;
Foreclosure alternative[A]: 1%;
Foreclosure completion: 5%;
Action pending: Proprietary modification: 26%;
Action pending: Payment plan: N/A[B];
Action pending: Foreclosure alternative: 4%.
Servicer 2;
Proprietary modification: 22%;
Payment plan: 76%;
Current: 35%;
Foreclosure alternative[A]: 2%;
Foreclosure completion: 2%;
Action pending: Proprietary modification: 6%;
Action pending: Payment plan: N/A;
Action pending: Foreclosure alternative: 2%.
Servicer 3;
Proprietary modification: 26%;
Payment plan: 1%;
Current: 3%;
Foreclosure alternative[A]: 1%;
Foreclosure completion: 7%;
Action pending: Proprietary modification: 24%;
Action pending: Payment plan: N/A;
Action pending: Foreclosure alternative: 2%.
Servicer 4;
Proprietary modification: 14%;
Payment plan: 1%;
Current: 15%;
Foreclosure alternative[A]: 2%;
Foreclosure completion: 1%;
Action pending: Proprietary modification: 16%;
Action pending: Payment plan: 6%;
Action pending: Foreclosure alternative: 14%.
Servicer 5;
Proprietary modification: 20%;
Payment plan: 1%;
Current: 1%;
Foreclosure alternative[A]: 2%;
Foreclosure completion: 3%;
Action pending: Proprietary modification: 39%;
Action pending: Payment plan: <1%;
Action pending: Foreclosure alternative: 6%.
Servicer 6;
Proprietary modification: 16%;
Payment plan: 0;
Current: 5%;
Foreclosure alternative[A]: 0;
Foreclosure completion: 6%;
Action pending: Proprietary modification: 42%;
Action pending: Payment plan: <1%;
Action pending: Foreclosure alternative: 4%.
Average (all servicers);
Proprietary modification: 18%;
Payment plan: 14%;
Current: 15%;
Foreclosure alternative[A]: 1%;
Foreclosure completion: 4%;
Action pending: Proprietary modification: 23%;
Action pending: Payment plan: 3%;
Action pending: Foreclosure alternative: 7%.
Source: GAO analysis of data received from six large MHA servicers.
Note: This table does not reflect all outcomes that borrowers may have
received, such as being referred for foreclosure or currently being
reviewed for loss mitigation options. Borrowers may be included in
more than one category.
[A] The percentage of borrowers who received a foreclosure alternative
may include borrowers who have a short-sale agreement signed but have
not closed on the short sale.
[B] N/A indicates servicer was unable to report this data.
[End of table]
Finally, of the borrowers who redefaulted from a HAMP permanent
modification, almost half were reflected in categories other than
proprietary modification, payment plan, becoming current, foreclosure
alternative, foreclosure, or loan payoff (see figure 7). Twenty-eight
percent of borrowers who redefaulted from permanent modifications were
referred for foreclosure at some point after redefaulting, but, like
borrowers denied or canceled from a HAMP trial modification, the
percentage of borrowers who completed foreclosure remained low
relative to other outcomes (less than 1 percent). Unlike borrowers who
were denied or canceled, borrowers who redefaulted were less likely to
receive or be in the process for receiving a permanent proprietary
modification or payment plan after redefaulting, with 27 percent of
borrowers receiving or in the process for receiving one of the
outcomes. In addition, less than 1 percent of borrowers who
redefaulted became current as of August 31, 2010.[Footnote 40]
Figure 7: Outcomes of Borrowers Who Redefaulted on a HAMP Permanent
Modification, through August 31, 2010 (Six large MHA servicers):
[Refer to PDF for image: vertical bar graph]
Borrower current: 0.83%.
Loan Payoff: 0.51%.
Proprietary modification: 2.5%; (pending action: 19.84%).
Payment plan: 4.28%; (pending action: 0.76%).
Foreclosure alternative[A]: 0.48%; (pending action: 3.36%).
Foreclosure start: 27.91%.
Foreclosure completion: 0.44%.
Other categories[B]: 49.36%.
Source: GAO analysis of data received from six large MHA servicers.
Note: Borrowers may be included in more than one category.
[A] The percentage of borrowers who received a foreclosure alternative
may include borrowers who have a short-sale agreement signed but have
not closed on the short sale.
[B] Other categories include borrowers who had a bankruptcy in process
and no other loss mitigation effort was allowed at some point after
being denied, canceled, or redefaulting; borrowers who had action
pending outside of a proprietary modification, payment plan, or
foreclosure alternative; and borrowers not able to be reflected in any
of the other outcomes, such as borrowers who currently have no workout
plan in process.
[End of figure]
Proprietary Modifications Offer Additional Flexibility and More
Borrowers Have Received Them than HAMP Permanent Modifications:
As noted above, servicers have reported that many borrowers who were
denied, canceled, or redefaulted from HAMP have received or were being
evaluated for proprietary modifications. According to HOPE NOW,
servicers completed over 1.2 million proprietary modifications from
January 2010 through December 2010, compared with roughly 513,000
permanent HAMP modifications (see figure 8).[Footnote 41]
Figure 8: Number of Proprietary and HAMP Modifications Started Each
Month, January through December 2010:
[Refer to PDF for image: multiple line graph]
Month: January;
HAMP permanent modifications: 50,364;
Permanent proprietary modifications: 97,075.
Month: February;
HAMP permanent modifications: 52,905;
Permanent proprietary modifications: 93,542.
Month: March;
HAMP permanent modifications: 60,594;
Permanent proprietary modifications: 114,901.
Month: April;
HAMP permanent modifications: 68,291;
Permanent proprietary modifications: 101,161.
Month: May;
HAMP permanent modifications: 47,724;
Permanent proprietary modifications: 109,911.
Month: June;
HAMP permanent modifications: 51,205;
Permanent proprietary modifications: 120,811.
Month: July;
HAMP permanent modifications: 36,695;
Permanent proprietary modifications: 120,351.
Month: August;
HAMP permanent modifications: 33,342;
Permanent proprietary modifications: 115,756.
Month: September;
HAMP permanent modifications: 27,840;
Permanent proprietary modifications: 119,585.
Month: October;
HAMP permanent modifications: 23,750;
Permanent proprietary modifications: 100,850.
Month: November;
HAMP permanent modifications: 29,972;
Permanent proprietary modifications: 82,050.
Month: December;
HAMP permanent modifications: 30,030;
Permanent proprietary modifications: 75,733.
Sources: HOPE NOW for proprietary modifications and Treasury for HAMP
modifications.
[End of figure]
In designing the HAMP program, Treasury stated that it had to balance
the needs of taxpayers, investors, and borrowers and develop a program
that would ensure consistent and equitable treatment of borrowers by
multiple servicers. In contrast, servicers told us they had greater
flexibility with respect to the types of borrowers and conditions
under which they could offer proprietary modifications. First, several
servicers told us their proprietary modification programs had fewer
documentation requirements. According to HAMP guidelines, borrowers
must submit all required documentation in order to be evaluated for
and offered a HAMP modification, including a Request for Modification
and Affidavit, a tax form, documentation to support income, and a Dodd-
Frank Certification form.[Footnote 42] While Treasury has taken steps
to streamline documentation requirements in the past, both Treasury
and servicers acknowledge that borrowers' failure to submit required
documentation was one of the primary reasons for being denied or
canceled from a HAMP trial modification. However, a servicer can offer
a proprietary modification even if the borrower lacked all of the
required documentation. For example, one servicer told us that if a
borrower who was required to submit 10 documents for a proprietary
modification submitted only 6, the servicer could still offer a
modification if the 6 documents provided sufficient information.
Second, several servicers told us they were able to offer more
proprietary modifications than HAMP modifications or help borrowers
whom HAMP cannot, because their proprietary modifications had fewer
eligibility requirements, such as restrictions on occupancy type.
Treasury announced early on that the HAMP program was not designed to
help all borrowers, such as those with investment properties and
second homes. For a borrower to be eligible for a modification under
HAMP, the property must be owner occupied, and according to Treasury's
HAMP data, through September 2010, servicers have denied roughly
63,000 HAMP applicants (7 percent) who they said failed to meet this
requirement.[Footnote 43] But all six servicers who provided us with
information offered proprietary modification programs without this
restriction, allowing them to reach borrowers who were ineligible for
HAMP. One servicer we spoke with noted that it had a large portfolio
of investment properties that do not meet the eligibility requirements
for a HAMP modification.
In addition, while HAMP guidelines require borrowers to have a front-
end DTI above 31 percent, all of the servicers we spoke with indicated
their proprietary modification programs also served borrowers who had
front-end DTIs below 31 percent. The servicers explained that even
with low DTIs many of these borrowers were still unable to make their
mortgage payments because they had high levels of back-end debt, such
as credit card balances and car loans. We previously reported that
HAMP requires borrowers with high total household debt levels
(postmodification DTI ratios greater than 55 percent) to agree to
obtain counseling, but it does not require documentation that they
actually received this counseling.[Footnote 44] We continue to believe
that it is important that Treasury determine whether borrowers are
receiving this counseling and whether the counseling requirement is
having its intended effect of limiting redefaults, as we recommended.
When asked about the differences between effective proprietary
modifications and HAMP modifications, roughly 63 percent of housing
counselors who responded to this question on our Web-based survey
ranked the ability of proprietary modifications to reach borrowers
with DTIs less than 31 percent as one of the main differences.
According to Treasury's HAMP data, through September 2010, roughly
215,000 borrowers (24 percent) who were denied HAMP were denied
because they had a front-end DTI of less than 31 percent. Almost all
of the servicers we received information from indicated that the
eligibility requirements for their proprietary modification programs
allowed mortgage balances that exceeded HAMP limits.[Footnote 45] One
servicer noted that the majority of its portfolio comprised super-
jumbo loans, many of which fell outside the HAMP mortgage balance
limits. Roughly 106,000 borrowers (12 percent) who were denied HAMP
trial modifications through September 2010 were denied because of
ineligible mortgages. Fifty-two percent of housing counselors also
identified higher mortgage balance limits as another key difference
between proprietary modifications and HAMP modifications.
Lastly, the servicers we received information from offered proprietary
modifications with more flexible terms than HAMP modifications and
could more easily be adapted to the circumstances of individual
borrowers. HAMP guidelines require servicers to modify the terms of a
mortgage through interest-rate reductions, term extensions, and other
steps to bring the borrower's front-end DTI ratio down to 31 percent
(see table 2). Several of the proprietary modification programs we
reviewed had variable target housing ratios--with one going down to 24
percent--allowing servicers to bring a borrower's payment down to a
more affordable level for some borrowers. In addition, for a servicer
to be required to offer a borrower a HAMP modification, HAMP requires
the borrower to pass the NPV test with a front-end DTI ratio of 31
percent. However, some borrowers may fail the test at this level but
would be able to pass with a higher DTI ratio--for example, at 38
percent. These borrowers may not be able to receive a HAMP
modification, even though a DTI ratio of 38 percent may have been more
affordable than their current mortgage payment. Some borrowers who are
denied a HAMP modification due to a negative NPV result but have a
positive NPV result with a higher front-end DTI may be offered a
proprietary modification. For example, one servicer plans to use
variable front-end DTI thresholds to bring borrowers' DTI ratios into
more affordable ranges. The servicer will calculate borrowers with
front-end DTI ratios greater than 31 percent based on 31 percent, 35
percent, and 38 percent thresholds, and borrowers with front-end DTI
ratios less than 31 percent could be brought down to a DTI as low as
24 percent if they pass the NPV test at this level. The servicer
estimates that of 3,370 borrowers who were denied a HAMP trial
modification because their front-end DTI was already below 31 percent
or as a result of a negative NPV, 2,415 would pass the NPV test using
the flexible front-end DTI ratio thresholds and could receive a
proprietary modification.
Table 2: Terms of Selected Proprietary Modification Programs Compared
to HAMP:
Target DTI ratio;
HAMP: 31%;
Proprietary Modification Program 1: None;
Proprietary Modification Program 2: 31-42%;
Proprietary Modification Program 3: 31-38%;
Proprietary Modification Program 4: 24-38%.
Interest rate floor;
HAMP: 2%;
Proprietary Modification Program 1: 2%;
Proprietary Modification Program 2: 2%;
Proprietary Modification Program 3: 1%;
Proprietary Modification Program 4: 2%.
Term extension;
HAMP: Up to 40 years;
Proprietary Modification Program 1: Up to 50 years;
Proprietary Modification Program 2: Up to 40 years;
Proprietary Modification Program 3: Up to 40 years;
Proprietary Modification Program 4: Up to 40 years.
Principal forbearance;
HAMP: Yes;
Proprietary Modification Program 1: Yes;
Proprietary Modification Program 2: Yes;
Proprietary Modification Program 3: Yes;
Proprietary Modification Program 4: Yes.
Principal forgiveness allowed;
HAMP: Yes;
Proprietary Modification Program 1: No;
Proprietary Modification Program 2: No;
Proprietary Modification Program 3: Yes;
Proprietary Modification Program 4: No.
Duration of reduced interest rate until raised to cap[A];
HAMP: 5 years;
Proprietary Modification Program 1: Up to 5 years;
Proprietary Modification Program 2: 3 years;
Proprietary Modification Program 3: Up to 5 years;
Proprietary Modification Program 4: 5 years.
Trial period;
HAMP: 3 months;
Proprietary Modification Program 1: None;
Proprietary Modification Program 2: 3 months;
Proprietary Modification Program 3: 3 payments;
Proprietary Modification Program 4: 3 months.
Net spendable income per month limit;
HAMP: None;
Proprietary Modification Program 1: 10%, or minimum of $250, maximum
of $1,000;
Proprietary Modification Program 2: None;
Proprietary Modification Program 3: At least $900 and $200/dependent;
Proprietary Modification Program 4: None.
Source: GAO analysis of documentation received from servicers.
[A] After this length of time, the reduced interest rate under HAMP
and each of these proprietary modification programs may step up, or
incrementally increase, to a maximum interest rate.
[End of table]
In addition, having the flexibility to bring borrowers' front-end DTI
ratios to below 31 percent allows servicers to account for borrowers'
back-end DTI ratios when offering proprietary modifications. Several
of the servicers we spoke with had proprietary modification programs
that considered borrowers' overall affordability, or ability to pay,
when modifying a mortgage, and the servicers calculated affordability
differently. For example, one servicer addressed overall affordability
by using a net spendable income calculation to determine a borrower's
monthly mortgage payment. According to the servicer, its net spendable
income calculation factors in all of the borrower's income and deducts
all expenses, including credit cards and utility bills. This
proprietary modification program was designed to leave the borrower
with approximately 10 percent of net spendable income, with a minimum
of $250 and a maximum of $1,000. Another servicer reported using
family size to determine affordability. The servicer indicated that it
calculated borrowers' monthly payments based on the nature of the
borrowers' hardship, their current financial situation, and their
change in circumstances, as well as a postmodification monthly net
disposable income of $600 and an additional $100 per dependent. By
incorporating family size, this proprietary modification program may
be able to help some borrowers who may otherwise not qualify for HAMP.
Because servicers had a variety of proprietary modification programs
that calculated affordability in a number of ways, and because their
loan portfolios differed, the changes in mortgage terms as a result of
proprietary modifications varied across servicers. According to data
we received from six servicers, roughly 655,000 borrowers had
permanent proprietary modifications as of August 31, 2010. These
borrowers had their interest rate reduced by an average of 2.35 to
3.87 percentage points, depending on the servicer. In addition, the
amount of term extension varied by each servicer. Specifically,
servicers extended mortgage terms by an average of 87 to 178 months
for borrowers who had permanent proprietary modifications. Lastly,
servicers forbore varying amounts of principal, ranging from an
average of $33,971 to $116,488, or 16 percent to 60 percent of the
unpaid principal balance prior to modification.[Footnote 46]
The Sustainability of Both HAMP and Proprietary Modifications Remain
Unclear:
While the number of proprietary modifications has outpaced the number
of HAMP modifications, the sustainability of both types of
modifications is still unclear. HAMP redefault rates have been
relatively low to date, but it is likely too soon to draw conclusions
about HAMP redefaults. While data on the redefault rates of HAMP and
proprietary modifications are limited, the Office of the Comptroller
of the Currency (OCC) and Office of Thrift Supervision (OTS) reported
that 11 percent of HAMP modifications and 22 percent of proprietary
modifications that started in the fourth quarter of 2009 were 60 or
more days delinquent after 6 months.[Footnote 47] In addition, one
servicer reported the redefault rates for its proprietary
modifications were 26 percent at 6 months and roughly 40 percent at 12
months after the loan was modified, while another servicer reported
redefault rates of 32 percent at 6 months and 51 percent at 12 months.
Proprietary modifications may not reduce monthly mortgage payments as
much as HAMP modifications, potentially affecting the ability of
borrowers to maintain their modified payments. According to OCC and
OTS, during the third quarter of 2010, proprietary modifications
reduced monthly mortgage payments by an average of $332 per month,
while HAMP modifications reduced them by an average of $585 per month.
According to our analysis of Treasury's HAMP data, borrowers who had a
GSE or non-GSE HAMP permanent modification as of September 30, 2010,
had their payments reduced by an average of $632, or 33 percent of the
average payment before modification. According to the data we received
from six servicers, for GSE and non-GSE loans, borrowers with a
permanent proprietary modification as of August 31, 2010, had their
monthly mortgage payments reduced from an average of $100 to $691 per
month, or 7 to 30 percent of the average monthly payment before
modification. In response to our survey, housing counselors provided
several examples of borrowers who had received proprietary
modifications that did not substantially reduce monthly mortgage
payments and that, in some cases, increased payments.
As we have seen, the extent to which modifications reduce monthly
mortgage payments may correlate with the ability of borrowers to
maintain modified payments. Specifically, OCC and OTS reported that
modifications made in 2010 that reduced monthly mortgage payments by
20 percent or more resulted in a redefault rate of 12 percent 6 months
after modification compared with 28 percent for modifications that
reduced payments by 10 percent or less. However, servicers have told
us their proprietary modification programs can serve borrowers with
front-end DTIs below 31 percent--borrowers who would be ineligible for
a HAMP modification. As a result, the average percentage monthly
reduction for these borrowers may not be as high as it would be for
those with a HAMP modification, because their premodification front-
end DTI ratios were lower than those of borrowers who received a HAMP
modification. Going forward, it will be important for Treasury to
monitor redefault rates and understand how they differ across
servicers and modification terms. We will also be looking at the
redefault rates of HAMP and non-HAMP modifications, as well as the
effectiveness of other foreclosure mitigation efforts, as part of our
ongoing work looking at the broader federal response to the
foreclosure crisis.
Conclusions:
HAMP and the newer MHA programs were part of an unprecedented response
to a particularly difficult time for our nation's mortgage markets.
However, 2 years after Treasury first announced that it would use $50
billion in TARP funds for various programs intended to preserve
homeownership and protect home values, foreclosure rates remain at
historically high levels. While Treasury originally estimated that 3
to 4 million people would be helped by these programs, only 550,000
borrowers had received permanent HAMP first-lien modifications as of
November 30, 2010, and the number of borrowers starting trial
modifications has been rapidly declining since October 2009. Moreover,
Treasury has experienced challenges in implementing its other TARP-
funded housing initiatives. In particular, the 2MP program, which
Treasury has stated is needed to create a comprehensive solution for
borrowers struggling to make their mortgage payments, has had a slow
start. According to six large MHA servicers, they have faced
difficulties--matching errors and omissions--in using the database
required for identifying second liens eligible for modification under
the program. As a result, servicers told us that relatively few second
liens had been modified as of August 2010, a year after program
guidelines were first issued. Treasury has taken some steps to address
the issues that have slowed down implementation of the program, but
more could be done to inform potentially eligible borrowers about 2MP.
Specifically, borrowers whose second liens may be eligible for
modification under 2MP may not be aware of the program or of any
errors in the matching process, as servicers are not required to
inform borrowers receiving HAMP first-lien modifications that they
could also be eligible for 2MP. Consequently, missed matches of first
and second liens could go undetected, and some borrowers who were
eligible for but not helped by the program are less able to keep up
the payments on their first-lien HAMP modifications.
HAFA and PRA, two other key components of Treasury's TARP-funded
homeownership preservation effort, have also had slow starts. In fact,
servicers we spoke with did not expect HAFA to increase the overall
number of short sales performed, primarily due to extensive program
requirements that lengthen the time frames associated with a short
sale under the program. While Treasury has recently revised its HAFA
program requirements to allow servicers to bypass the HAMP first-lien
program eligibility review for borrowers interested solely in
participating in HAFA and relaxed other HAFA program requirements, it
remains unclear the extent to which these changes will result in
greater program participation. Additionally, because of the voluntary
nature of the PRA program and concerns over the lack of program
transparency, including the level of public reporting that will be
available at the servicer level, it remains unclear how many borrowers
will receive principal reductions under PRA. Treasury has stated that
it will report on PRA activity when data are available, and we
continue to believe that it will be important that this reporting
includes the extent to which servicers determined that principal
reduction was beneficial to investors but did not offer it, as we
recommended in June 2010. If HAFA and PRA do not result in increased
program participation, Treasury's efforts to combat the negative
effects associated with avoidable foreclosures will be compromised,
potentially limiting the ability of Treasury efforts to preserve
homeownership and protect home values.
Further, Treasury could do more to apply lessons learned from its
experience in implementing early HAMP programs to its more recent
initiatives. We reported in June 2010 that the implementation of other
TARP-funded homeownership preservation programs could benefit from
lessons learned in the initial stages of HAMP implementation.
Specifically, we noted that it would be important for Treasury to
expeditiously develop and implement new programs while also developing
sufficient program planning and implementation capacity, meaningful
performance measures and remedies, and appropriate risk assessments in
accordance with standards for effective program management. Already,
2MP, HAFA, and PRA have undergone several revisions, and servicers
cited changing guidelines and short implementation periods as
significant challenges in fully implementing the programs. In July
2009, we recommended that Treasury place a high priority on fully
staffing vacancies in the Homeownership Preservation Office (HPO) and
evaluating staffing levels and competencies. As of January 2011,
Treasury has filled key positions in HPO, but has not conducted a
formal assessment of its staffing levels despite the implementation of
the newer programs. We continue to believe that it is essential that
Treasury ensure that it has enough staff with the appropriate skills
to govern TARP-funded housing programs effectively. While Treasury has
conducted reviews of the readiness of servicers participating in 2MP,
HAFA, and PRA to successfully implement the programs, a large majority
of servicers did not provide all documentation required to demonstrate
that the key tasks needed to support these programs were in place. It
is imperative that Treasury take swift action to ensure that servicers
have the ability to implement these programs since, as we have seen
with the slow progress of the HAMP first-lien modification program,
the success of these TARP-funded initiatives will be largely driven by
the capacity and willingness of servicers to implement these programs
in an expeditious and effective manner. In addition, Treasury has not
developed program-specific performance measures against which to
measure these programs' success and has not specified the remedies it
will take if servicers are not meeting performance standards. Without
specific program measures and remedies, Treasury will not be able to
effectively assess the outcomes of these programs and hold servicers
accountable for performance goals. We continue to believe that it is
important for Treasury to develop such performance measures and clear
goals for them, as we have recommended.
Treasury requires servicers to submit data on borrowers who have been
evaluated for HAMP, and these data provide important information and
insights on the characteristics of borrowers who are in trial and
permanent HAMP modifications, who have been canceled from trial
modifications, and who have redefaulted from permanent modifications.
However, Treasury's HAMP database also contains inaccurate or missing
information on certain key variables, including LTV ratios and
borrowers' race and ethnicity. Treasury has stated that it is working
to improve the quality of its data, and it will be important that the
agency do so expeditiously. Complete and accurate information is
important for Treasury to fully understand the characteristics of
borrowers who HAMP has been unable to help or determine program
compliance. Moreover, this information is important to identify what
additional steps or adjustments that could be made to existing TARP-
funded programs to better achieve the mandated goals of preserving
homeownership and protecting property values.
Finally, while Treasury has begun publicly reporting the outcomes for
borrowers who have been denied or canceled from HAMP trial
modifications, its reporting practices make it difficult to determine
the extent to which these borrowers are helped by non-HAMP
(proprietary) loan modifications. For example, data we collected from
six large MHA servicers showed that only 18 percent of borrowers
canceled from a HAMP trial modification had received a proprietary
modification and an additional 23 percent had a proprietary
modification pending. However, Treasury reported that 43 percent of
these borrowers were in the process of receiving a proprietary
modification with those same six servicers. Furthermore, Treasury's
system for reporting outcomes requires servicers to place borrowers in
only one category even when borrowers are being evaluated for several
possible outcomes, with proprietary modifications reported first. As a
result, the proportion of borrowers with proprietary modifications is
likely overstated relative to other possible outcomes, such as
foreclosure starts. Without accurate reporting of borrower outcomes,
Treasury cannot know the actual extent to which borrowers who are
denied, canceled, or redefaulted from HAMP are helped by other
programs or evaluate the need for further action to assist this group
of homeowners.
Recommendations for Executive Action:
As part of its efforts to continue improving the transparency and
accountability of MHA, we recommend that the Secretary of the Treasury
take actions to:
* require servicers to advise borrowers to notify their second-lien
servicers once a first lien has been modified under HAMP to reduce the
risk that borrowers with modified first liens are not captured in the
LPS matching database and, therefore, are not offered second-lien
modifications;
* ensure that servicers demonstrate they have the operational capacity
and infrastructure in place to successfully implement the requirements
of the 2MP, HAFA, and PRA programs; and:
* consider methods for better capturing outcomes for borrowers who are
denied, canceled, or redefaulted from HAMP, including more accurately
reflecting what actions are completed or pending and allowing for the
reporting of multiple concurrent outcomes, in order to determine
whether borrowers are receiving effective assistance outside of HAMP
and whether additional actions may be needed to assist them.
Agency Comments and Our Evaluation:
We provided a draft of this report to Treasury for its review and
comment, and we received written comments from the Acting Assistant
Secretary for Financial Stability that are reprinted in appendix III.
We also received technical comments from Treasury that we incorporated
into the report as appropriate. In its written comments, Treasury
stated that it appreciated our efforts in assessing the housing
programs initiated under its TARP program and acknowledged the draft
report's description of the operational capacity and infrastructure
challenges faced by servicers in implementing Treasury's housing
programs. In addition, Treasury noted that our research in proprietary
modifications made by servicers outside of MHA was useful. However,
Treasury stated that it believed that the draft report raised certain
criticisms regarding the design and implementation of MHA that were
unwarranted.
First, Treasury stated that the draft report criticized Treasury for
the number of changes made to its housing programs following their
implementation, and its alleged failure to incorporate the lessons it
learned from the first-lien HAMP program into the roll out and design
of other MHA programs, such as HAFA. Treasury stated that the report
should acknowledge the circumstances under which the programs were
first implemented. In response, we added some additional language
recognizing that HAMP and the newer MHA programs were part of an
unprecedented response to a particularly difficult time for our
nation's mortgage markets. However, servicers we spoke with noted that
ongoing changes to guidelines have presented challenges such as
needing to update internal servicing systems and retrain staff which,
in some cases, delayed program implementation. In addition, as noted
in the draft report, Treasury has repeated some of the practices that
were the focus of previous recommendations we had made for the first-
lien program in its implementation of its newer MHA programs. For
example, in our July 2009 report, we found that Treasury had not
developed a means of systematically assessing servicers' capacity to
meet program requirements during program admission, and we recommended
further action in this area to increase the likelihood of success of
the program. In our review of the newer MHA programs, we also found
that Treasury had not fully ensured that servicers had the capacity to
successfully implement these programs. We continue to believe that
such action is needed to better ensure the likelihood of success of
these newer MHA programs.
Second, Treasury raised concerns about the draft report's comparison
of HAMP modifications to proprietary modifications. Treasury noted
that it did not believe that it was constructive to assess HAMP's
performance based on the goals of proprietary programs that are not
government supported. We have added some additional language to the
report to provide additional context to the report's discussion of
proprietary modifications. The purpose of this report was not to
assess the performance of HAMP modifications based on the goals of
proprietary modifications. Instead, the draft report provided a
description of proprietary modifications and some of the ways that
they differ from HAMP modifications. It does not suggest that the
objective of HAMP modifications and proprietary modifications are or
should be the same, particularly given Treasury's responsibility to
safeguard taxpayer dollars under HAMP. As noted by Treasury in its
comment letter, there is little available information about these
proprietary modifications, and the more that is known about their
terms and outcomes, the easier is will be for policymakers and
regulators to craft appropriate changes to MHA and other housing
programs aimed at preventing avoidable foreclosures.
Third, Treasury noted that the draft report criticized the
completeness and quality of the data collected by Treasury related to
HAMP modifications, and that it disagreed with the conclusion that
missing or inaccurate information limits Treasury's ability to
identify program gaps. Treasury noted that it relies on data provided
by the borrowers to the servicers and it has improved significantly
over the past 6 months, especially as the program moved to verified
income. Treasury stated that the data on permanent modifications is
robust, allowing Treasury to determine gaps in programs and how to
make improvements. In the draft report, we acknowledged that Treasury
is working with Fannie Mae to improve the data and, particularly with
borrower race and ethnicity information, the data has improved over
time. However, it is equally important that Treasury obtain complete
and accurate information on those who are denied or canceled from a
HAMP trial modification. Without such information, Treasury cannot
determine if servicers are implementing the program fairly or whether
additional actions may be necessary to address the needs of borrowers
who are denied or canceled from HAMP trial modification. Going
forward, it will be important for Treasury to continue to improve the
quality of its HAMP data as this information is important to identify
what additional steps or adjustments could be made to existing TARP-
funded housing programs to better achieve the mandated goals of
preserving homeownership and protecting property values.
We are sending copies of this report to interested congressional
committees and members of the Congressional Oversight Panel, Financial
Stability Oversight Board, Special Inspector General for TARP,
Treasury, the federal banking regulators, and others. This report is
also available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-8678 or sciremj@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix IV.
Signed by:
Mathew J. Scirè:
Director:
Financial Markets and Community Investment:
List of Congressional Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Tim Johnson:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Jeff Sessions:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Orrin G. Hatch:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Harold Rogers:
Chairman:
The Honorable Norman D. Dicks:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable Paul Ryan:
Chairman:
The Honorable Chris Van Hollen:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Spencer Bachus:
Chairman:
The Honorable Barney Frank:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Dave Camp:
Chairman:
The Honorable Sander Levin:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
To examine the status of the Department of Treasury's (Treasury)
second-lien modification, principal reduction, and foreclosure
alternatives programs and the design and implementation challenges
Treasury and servicers have faced with these programs to date, we
spoke with and obtained information from six large Making Homes
Affordable (MHA) servicers, including the four largest servicers
participating in the Second-Lien Modification Program (2MP) at the
start of our review. These six servicers were: American Home Mortgage
Servicing, Inc.; Bank of America; CitiMortgage; JP Morgan Chase Bank;
OneWest Bank; and Wells Fargo Bank. We determined these as six large
MHA servicers based on the amount of Troubled Asset Relief Program
(TARP) funds they were allocated for loan modification programs. These
six servicers collectively represented 72 percent of the TARP funds
allocated to participating servicers. For each of these six servicers,
we reviewed their 2MP, Home Affordable Foreclosure Alternatives
(HAFA), and the Principal Reduction Alternatives (PRA) guidance,
policies, procedures, process flows, training materials, and risk
assessments, as applicable; and interviewed management staff. We also
reviewed 2MP, HAFA, and PRA documentation issued by Treasury,
including the supplemental directives related to 2MP, HAFA, and PRA,
readiness assessments of servicers, and reporting process flows. We
also spoke with officials at Treasury to understand the challenges
faced in implementing these programs and the steps taken by Treasury
to assess the capacity needs and risks of these programs, as well as
steps taken to measure the programs' success. We spoke with trade
associations representing investors, mortgage insurers, servicers, and
an organization representing homeowners and community advocates.
Finally, we reviewed the Standards for Internal Control in the Federal
Government to determine the key elements needed to ensure program
stability and adequate program management.
To examine the characteristics of homeowners who the Home Affordable
Modification Program (HAMP) has been able to help, we obtained and
analyzed Treasury's HAMP data in its system of record, Investor
Reporting/2 (IR/2), through September 30, 2010. We reviewed Treasury
guidelines on reporting requirements for HAMP, including the
information servicers are required to report for borrowers who were
denied trial modifications, and spoke with Treasury and Fannie Mae
officials to understand potential inconsistencies and gaps in the
data. We determined that the data was sufficiently reliable for our
purposes. We also used the data to perform an econometric analysis of
factors that contribute to borrowers' likelihood of seeing their trial
modifications canceled (see appendix II for more details). We received
and incorporated feedback on our model from Treasury and others. To
obtain housing counselors' views of borrowers' experiences with HAMP,
we conducted a Web-based survey of housing counselors who received
funding from NeighborWorks America, a national nonprofit organization
created by Congress to provide foreclosure prevention and other
community revitalization assistance to the more than 230 community-
based organizations in its network. We received complete responses
from 396 counselors. This report does not contain all the results from
the survey. The survey and a more complete tabulation of the results
will be part of an upcoming report.
Finally, to examine the outcomes for borrowers who were denied or fell
out of HAMP trial or permanent modifications, we reviewed HAMP program
documentation on policies for evaluating these borrowers for other
loss mitigation programs. We reviewed the outcomes of borrowers who
applied for but did not receive a HAMP trial modification or who had a
canceled HAMP trial modification as reported by Treasury in the
monthly MHA servicer performance reports. We obtained documentation
from Treasury and interviewed servicers to understand how Treasury
collects data on the outcomes of these borrowers. In addition, we
obtained data from the six large MHA servicers noted earlier in this
appendix. Specifically, we obtained and analyzed data on the outcomes
of all borrowers who were denied a HAMP trial modification, had a
canceled HAMP trial modification, or redefaulted on a HAMP permanent
modification; the number of proprietary modifications completed; and
the characteristics of the terms of these proprietary modifications.
The servicers provided the data between when they began participating
in the HAMP program and August 31, 2010, or the date in which they
submitted their August 2010 reporting to Treasury (e.g., September 6,
2010).[Footnote 48] According to the data we received, the number of
trial modifications offered by these six servicers represented 72
percent of the total number of trial modifications offered by all
servicers as reported by Treasury through September 2, 2010. We
determined that these data were reliable for the purposes of our
report. To understand why servicers may offer more proprietary
modifications than HAMP modifications, we reviewed data on the number
of completed proprietary modifications published by HOPE NOW, an
alliance between counselors, mortgage companies, investors, and other
mortgage market participants. In addition, we reviewed documentation
on the terms and eligibility requirements of the proprietary
modification programs offered by the six servicers participating in
our review. In addition, we interviewed these servicers about the
features of their proprietary modification programs. Also, through our
Web-based survey of housing counselors, we received responses on the
differences between effective proprietary modifications and HAMP
modifications, as well as examples of effective and ineffective
proprietary modifications. Finally, to understand the sustainability
of HAMP and proprietary modifications, we reviewed data published by
the Office of the Comptroller of the Currency and the Office of Thrift
Supervision on the redefault rates and monthly payment reduction of
HAMP modifications, as well as data we collected from servicers on the
redefault rates, terms, and monthly payment reductions of their GSE
and non-GSE proprietary modifications.
We conducted this performance audit from July 2010 through March 2011
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on the audit objectives.
[End of section]
Appendix II: Description of GAO's Econometric Analysis of HAMP Trial
Loans Modifications Cancellations:
Data and Model Specification:
To describe the characteristics of the borrowers and mortgages that
have been canceled from the trial modification, we used an econometric
analysis rather than present descriptive statistics since it allowed
us to control for the impacts of potential confounding factors,
including differences across servicers as well as default-risk
differences among the borrowers that are not observable (unobserved
borrower heterogeneity).[Footnote 49] Servicers who participate in the
Home Affordable Modification Program (HAMP) are required to provide
periodic loan level data to Fannie Mae in its capacity as the
administrator for the HAMP program. Specifically, servicers are
required to report data at the start of the trial modification period
and during the modification trial period, for loan set up of the
approved modification, and monthly after the modification is set up on
Fannie Mae's system. The data used in our econometric analysis are for
HAMP loans as of September 30, 2010.[Footnote 50] The data have one
record per loan, with information on the loan status--whether the loan
is denied for trial modification, has entered the trial plan, and its
outcome (i.e., converted to the permanent modification, or still
active in the trial plan, or has fallen out). We excluded loans that
entered the trial plan from July 2010 through September 2010 (which is
the end of the current data set) because not enough time had likely
elapsed for loans in this pool to have defaulted or been canceled.
Through September 30, 2010, several servicers have signed up for HAMP.
Seventeen of them, we categorized as "large" based on the Treasury
reported data on "estimated eligible loans 60 days or more
delinquent," have over 90 percent of the loans--the remainder of the
servicers were grouped into the "other" category.[Footnote 51] For the
universe of 1,361,832 loans that had entered the trial period plan as
of September 30, 2010, the average cancellation rate was 50 percent.
The sample we used for the regression analysis, based on data
availability, consists of 727,095 loans (53 percent of the universe),
with an average cancellation rate of 50 percent. The sample data
exclude servicers whose share of loans or fallout rates for the sample
differed a lot from that of the universe; there are 13 "large" and
"other" servicers.
Following the literature, we used a reduced-form probability model to
help determine the effects of the characteristics of the borrower and
mortgage on HAMP trial loan cancellations. Accordingly, based on
economic reasoning, data availability, the HAMP guidelines, and
previous studies on loan performance, we use probabilistic models to
estimate the likelihood that a loan modified under the trial period
plan does not convert to a permanent modification. The dependent
variable for the cancellations is binary, which equals 1 if a loan
that entered the trial-period plan did not convert to permanent
modification and 0 otherwise. The explanatory variables that we
include in the model are conditioned by the available data (see table
3 for the list of the variables).
Table 3: Summary Statistics of Variables Used in Regression:
If trial modification canceled: Months since loan origination[A];
Mean: 0.1246;
Median: 0;
Standard Deviation: 0.5000;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If credit score >=620;
Mean: 0.1205;
Median: 29;
Standard Deviation: 20;
Minimum: 0;
Maximum: 396.
If trial modification canceled: If back-end DTI>=55;
Mean: 0.2263;
Median: 0;
Standard Deviation: 0.4586;
Minimum: 0;
Maximum: 1.
If trial modification canceled: Back-end DTI flag[B];
Mean: 0.2352;
Median: 1;
Standard Deviation: 0.4776;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If mark-to-market LTV (MLTV) <= 80%;
Mean: 0.1439;
Median: 0;
Standard Deviation: 0.3302;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If MLTV between 80 & 100%;
Mean: 0.2741;
Median: 0;
Standard Deviation: 0.3255;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If MLTV between 100 & 120%;
Mean: 0.0144;
Median: 0;
Standard Deviation: 0.4184;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If MLTV between 120 & 140%;
Mean: 0.1627;
Median: 0;
Standard Deviation: 0.4241;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If MLTV >140%;
Mean: 0.0988;
Median: 0;
Standard Deviation: 0.3510;
Minimum: 0;
Maximum: 1.
If trial modification canceled: MLTV flag[C];
Mean: 0.1056;
Median: 0;
Standard Deviation: 0.4461;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If borrower's payments are current;
Mean: 0.6298;
Median: 0;
Standard Deviation: 0.1190;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If 30 days delinquent;
Mean: 0.8567;
Median: 0;
Standard Deviation: 0.3691;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If 60 days delinquent;
Mean: 0.2107;
Median: 0;
Standard Deviation: 0.2984;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If 90 days or more delinquent;
Mean: 0.6196;
Median: 0;
Standard Deviation: 0.3073;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If trial length <= 4 months;
Mean: 0.0004;
Median: 1;
Standard Deviation: 0.4829;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If original loan had private mortgage
insurance;
Mean: 0.1021;
Median: 1;
Standard Deviation: 0.3504;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If fixed rate at origination vs
nonfixed;
Mean: 0.1280;
Median: 0;
Standard Deviation: 0.4078;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If no decrease in principal and
interest (P&I) payment;
Mean: 0.7694;
Median: 1;
Standard Deviation: 0.4855;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If no decrease in principal and
interest (P&I) payment;
Mean: 0.0155;
Median: 0;
Standard Deviation: 0.0210;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If P&I decreased between 0 & 10%;
Mean: 0.2131;
Median: 0;
Standard Deviation: 0.3029;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If P&I decreased between 10 & 20%;
Mean: 0.3353;
Median: 0;
Standard Deviation: 0.3341;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If P&I decreased more than 20%;
Mean: 0.1160;
Median: 1;
Standard Deviation: 0.4212;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If principal reduction between 1 & 50%;
Mean: 0.8851;
Median: 0;
Standard Deviation: 0.1235;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If principal forbearance between 1 &
50%;
Mean: [Empty];
Median: 0;
Standard Deviation: 0.4095;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If private loan vs. GSE loan;
Mean: [Empty];
Median: 0;
Standard Deviation: 0.4721;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If portfolio loan vs GSE loan;
Mean: [Empty];
Median: 0;
Standard Deviation: 0.3202;
Minimum: 0;
Maximum: 1.
If trial modification canceled: If stated income vs. verified
income[D];
Mean: [Empty];
Median: [Empty];
Standard Deviation: 1;
Minimum: [Empty];
Maximum: [Empty].
Source: GAO Analysis of Treasury data.
Note: The total number of observations used for regression analysis is
727,095 loans.
[A] The months since origination is the difference between origination
date and January 1, 2009. A condition for loan-modification
eligibility is that the loan was originated between January 1, 1959
and January 1, 2009.
[B] The back-end debt-to-income (DTI) ratio after modification was
replaced with the back-end DTI before modification if the former was
missing; this affected about 12% of the data (back-end DTI flag). The
regression estimates were similar when the flag was excluded.
[C] The MLTV ratio was replaced with the loan-to-value (LTV) at
origination if the former was missing--this affected about 1% of the
data (MLTV flag). The regression estimates were similar when the flag
was excluded.
[D] For servicers who allowed borrowers to submit applications with
stated incomes prior to June 1, 2010.
[End of table]
We estimated cancellation rates using binomial logistic probability
(logit) models, an approach commonly used in economics to examine
choices and evaluate various events or outcomes.[Footnote 52] The
models included fixed effects for the servicers, which allowed us to
account for both the observed and unobserved characteristics of the
servicers.[Footnote 53] We also included state-level fixed effects to
control for factors that vary across the states but are the same
within a state, such as the type of foreclosure laws and other state
policies on mortgages.
Econometric Results:
The basic regression results from using the probability model,
described above and the data in table 3, are presented in table 4.
Most of the variables were statistically significant at the 5 percent
level or better, and typically consistent with our expectations as to
the direction of their impacts. We discuss below the key findings,
based on statistically (and economically[Footnote 54]) significant
changes in the likelihood of cancellation, using the estimated
marginal effects of the explanatory variables.[Footnote 55]
Table 4: Probabilistic Estimates of HAMP Trial Loan Modification
Cancellation Rates:
Variable: Intercept;
Marg. effect: -1.2516;
Estimate: -8.0280;
Standard error: 0.1383;
Pr >ChiSq: <.0001;
Odds ratio: 0.000.
Variable: Months since origination;
Marg. effect: 0.0006;
Estimate: 0.00375;
Standard error: 0.000171;
Pr >ChiSq: <.0001;
Odds ratio: 1.004.
Variable: If credit score >= 620;
Marg. effect: 0.0066;
Estimate: 0.0426;
Standard error: 0.00717;
Pr >ChiSq: <.0001;
Odds ratio: 1.044.
Variable: If back-end DTI >= 55%;
Marg. effect: -0.0229;
Estimate: -0.1468;
Standard error: 0.00711;
Pr >ChiSq: <.0001;
Odds ratio: 0.863.
Variable: Back-end DTI flag;
Marg. effect: 0.5749;
Estimate: 3.6875;
Standard error: 0.0176;
Pr >ChiSq: <.0001;
Odds ratio: 39.946.
Variable: If MLTV between 80 & 100% vs. MLTV <= 80%;
Marg. effect: 0.0071;
Estimate: 0.0458;
Standard error: 0.0114;
Pr >ChiSq: <.0001;
Odds ratio: 1.047.
Variable: If MLTV between 100 & 120% vs. MLTV <= 80%;
Marg. effect: -0.0261;
Estimate: -0.1675;
Standard error: 0.0118;
Pr >ChiSq: <.0001;
Odds ratio: 0.846.
Variable: If MLTV between 120 and 140% vs.MLTV <= 80%;
Marg. effect: -0.0673;
Estimate: -0.4318;
Standard error: 0.0131;
Pr >ChiSq: <.0001;
Odds ratio: 0.649.
Variable: If MLTV >140 vs. MLTV <= 80%;
Marg. effect: -0.0765;
Estimate: -0.4906;
Standard error: 0.0126;
Pr >ChiSq: <.0001;
Odds ratio: 0.612.
Variable: MLTV flag;
Marg. effect: -0.1129;
Estimate: -0.7242;
Standard error: 0.0319;
Pr >ChiSq: <.0001;
Odds ratio: 0.485.
Variable: If 30 days delinquent vs. current;
Marg. effect: 0.0043;
Estimate: 0.0274;
Standard error: 0.0129;
Pr >ChiSq: 0.0339;
Odds ratio: 1.028.
Variable: If 60 days delinquent vs. current;
Marg. effect: 0.0626;
Estimate: 0.4017;
Standard error: 0.0120;
Pr >ChiSq: <.0001;
Odds ratio: 1.494.
Variable: If 90 days or more delinquent vs. current;
Marg. effect: 0.0921;
Estimate: 0.5909;
Standard error: 0.00914;
Pr >ChiSq: <.0001;
Odds ratio: 1.806.
Variable: If trial length <= 4 months;
Marg. effect: 0.5803;
Estimate: 3.7218;
Standard error: 0.0166;
Pr >ChiSq: <.0001;
Odds ratio: 41.340.
Variable: If original loan had PMI;
Marg. effect: 0.0100;
Estimate: 0.0640;
Standard error: 0.00804;
Pr >ChiSq: <.0001;
Odds ratio: 1.066.
Variable: If original loan had fixed rate;
Marg. effect: 0.0046;
Estimate: 0.0294;
Standard error: 0.00715;
Pr >ChiSq: <.0001;
Odds ratio: 1.030.
Variable: If payment decrease between 10 & 20% vs. <= 10%;
Marg. effect: -0.0539;
Estimate: -0.3460;
Standard error: 0.0126;
Pr >ChiSq: <.0001;
Odds ratio: 0.708.
Variable: If payment decrease > 20% vs. <= 10%;
Marg. effect: -0.0543;
Estimate: -0.3481;
Standard error: 0.0104;
Pr >ChiSq: <.0001;
Odds ratio: 0.706.
Variable: If principal reduction between 1 & 50%;
Marg. effect: -0.0564;
Estimate: -0.3617;
Standard error: 0.0416;
Pr >ChiSq: <.0001;
Odds ratio: 0.696.
Variable: If principal forbearance between 1% & 50%;
Marg. effect: -0.0298;
Estimate: -0.1912;
Standard error: 0.00766;
Pr >ChiSq: <.0001;
Odds ratio: 0.826.
Variable: If private loan vs. GSE loan;
Marg. effect: 0.0406;
Estimate: 0.2607;
Standard error: 0.00850;
Pr >ChiSq: <.0001;
Odds ratio: 1.298.
Variable: If portfolio loan vs. GSE loan;
Marg. effect: -0.0546;
Estimate: -0.3501;
Standard error: 0.0115;
Pr >ChiSq: <.0001;
Odds ratio: 0.705.
Variable: If stated income vs verified income;
Marg. effect: 0.5189;
Estimate: 3.3285;
Standard error: 0.0619;
Pr >ChiSq: <.0001;
Odds ratio: 27.896.
Variable: Servicer 1 vs. other servicers;
Marg. effect: -0.1772;
Estimate: -1.1363;
Standard error: 0.0746;
Pr >ChiSq: <.0001;
Odds ratio: 0.321.
Variable: Servicer 2 vs. other servicers;
Marg. effect: 0.1979;
Estimate: 1.2691;
Standard error: 0.0206;
Pr >ChiSq: <.0001;
Odds ratio: 3.558.
Variable: Servicer 3 vs. other servicers;
Marg. effect: 0.2263;
Estimate: 1.4516;
Standard error: 0.0121;
Pr >ChiSq: <.0001;
Odds ratio: 4.270.
Variable: Servicer 4 vs. other servicers;
Marg. effect: 0.0350;
Estimate: 0.2242;
Standard error: 0.0152;
Pr >ChiSq: <.0001;
Odds ratio: 1.251.
Variable: Servicer 5 vs. other servicers;
Marg. effect: 0.4284;
Estimate: 2.7479;
Standard error: 0.0653;
Pr >ChiSq: <.0001;
Odds ratio: 15.609.
Variable: Servicer 6 vs. other servicers;
Marg. effect: 0.3010;
Estimate: 1.9305;
Standard error: 0.0196;
Pr >ChiSq: <.0001;
Odds ratio: 6.893.
Variable: Servicer 7 vs. other servicers;
Marg. effect: 0.4173;
Estimate: 2.6766;
Standard error: 0.0654;
Pr >ChiSq: <.0001;
Odds ratio: 14.535.
Variable: Servicer 8 vs. other servicers;
Marg. effect: 0.1130;
Estimate: 0.7245;
Standard error: 0.0188;
Pr >ChiSq: <.0001;
Odds ratio: 2.064.
Variable: Servicer 9 vs. other servicers;
Marg. effect: 0.3404;
Estimate: 2.1834;
Standard error: 0.0202;
Pr >ChiSq: <.0001;
Odds ratio: 8.876.
Variable: Servicer 10 vs. other servicers;
Marg. effect: 0.0835;
Estimate: 0.5358;
Standard error: 0.0194;
Pr >ChiSq: <.0001;
Odds ratio: 1.709.
Variable: Servicer 11 vs. other servicers;
Marg. effect: 0.4570;
Estimate: 2.9311;
Standard error: 0.0712;
Pr >ChiSq: <.0001;
Odds ratio: 18.748.
Variable: Servicer 12 vs. other servicers;
Marg. effect: 0.0900;
Estimate: 0.5770;
Standard error: 0.0873;
Pr >ChiSq: <.0001;
Odds ratio: 1.781.
Variable: Servicer 13 vs. other servicers;
Marg. effect: 0.2669;
Estimate: 1.7121;
Standard error: 0.0136;
Pr >ChiSq: <.0001;
Odds ratio: 5.540.
Source: GAO Analysis of Treasury data.
Note: Likelihood Ratio Test: Chi-square = 326594, df = 81, Prob Chi-
Square < 0.0001. Area under Receiver Operating Characteristic (ROC)
curve, c-statistics = 0.854. Pseudo R-square = 0.3618, Max-rescaled R-
square = 0.4825. The estimates for the states are not reported.
[End of table]
* Stated income. Loans that entered the trial plan using stated income
documentation were 52 percent more likely to be canceled, compared to
verified income.[Footnote 56] This effect was consistent with
expectations since these borrowers are likely not to able to provide
verified documentation when requested.
* Trial length. Trial periods that last for 4 months or less were
about 58 percent more likely to be canceled compared to those that
stay in the trial plan for a longer term. A longer stay in the trial
plan implies the borrower's payments are current and, therefore, less
likely to be canceled. This result is generally consistent with the
hazard models of mortgage performance that indicate that loans that
are likely to default do so much earlier than later.
* Delinquency status. Borrowers who were 60 days or 90 days or more
past due on their mortgages before the trial-period plan, compared to
borrowers who were current, were 6 and 9 percent more likely to have
their loans canceled, respectively; thus, the longer the delinquency
status the more likely the cancellation. This effect is consistent
with expectations.
* Payment Reduction. The reduction in payment generally results from
interest rate reduction and extension of the loan term. Loans that
receive reductions in payments (of principal and interest) of more
than 10 percent, compared to reductions that are less than 10 percent
or less (which include no reductions and increases in payments), were
5 percent less likely to be canceled. This result is expected since
the payment reductions increase the affordability of the mortgage, a
key objective of HAMP.
* MLTV ratios. Loans with an LTV between 120 and 140 percent were 7
percent less likely to be canceled, while loans with an LTV of more
than 140 percent were 8 percent less likely to be canceled, compared
to those with MLTV 80 percent or less. This effect is contrary to
expectation. The reason for this outcome is while borrowers with high
MLTV were more likely to have their trial modifications canceled due
to not making their payments, they were disproportionately less likely
to have their trial modifications canceled because of insufficient
documentation, compared to those with MLTV at or below 80 percent.
* Principal reductions. Loans that received principal reductions in
the form of principal forgiveness of between 1 and 50 percent of their
total loan balance were 6 percent less likely to be canceled compared
with those that did not receive principal forgiveness. We note that
only about 2 percent of the loans have received principal forgiveness.
[Footnote 57]
* Servicer effects. We estimated the changes in the likelihood of
cancellation for the servicers using the marginal effects in table 4.
To examine the extent to which there is variation in the likelihood of
cancellation across servicers, we defined three distinct borrower
profiles and calculated the likelihood of cancellation for each of
these borrower profiles for each servicer. The "typical" borrower
profile used mean values for the borrower population; the "current"
borrower profile used mean values for all characteristics except that
the borrower was assumed to be current (less than 30 days delinquent);
and the "delinquent" profile used mean values for all characteristics
except that the borrower was assumed to be delinquent by 90 days or
more. Because delinquency status predicts higher likelihood of
cancellations for borrowers who are seriously delinquent (90 days or
more delinquent) compared to being current (less than 30 days
delinquent), the likelihood of cancellation increases with increased
delinquency for each servicer.
The results presented in figure 9 show significant variation across
the servicers for cancellations of trial modifications. In particular,
for the large servicers, the likelihood of cancellation increased for
about one-half of them (ranging from 1 to 24 percent) but decreased
for the other half (ranging from -2 to -39 percent) for the "typical"
borrower. Although the major reasons for the cancellations vary across
the servicers, they were primarily due to incomplete documentation,
trial plan default, and ineligible mortgage.
Figure 9: Estimated Change in Likelihood of Cancellation of HAMP Trial
Loan Modification by Servicer, Delinquency Status Before Modification:
[Refer to PDF for image: plotted point graph]
For all servicers, the following are plotted, in percentage:
Current borrowers:
Typical borrowers:
90 days delinquent borrowers:
Source: GAO.
Note: "OTH" means the group of non-large servicers; the numbered
servicers refer to "large" servicers, and "AVG" is the average values
for all the servicers in the sample. The "typical" borrower profile is
based on the mean values for the borrower population; the "current"
borrower profile used mean values for all characteristics except that
the borrower was assumed to be less than 30 days delinquent; and the
"90DQ" profile used mean values for all characteristics except that
the borrower was assumed to be delinquent by 90 days or more, and the
property is assumed to be in California. Assuming other states will
change the probabilities but not the pattern of the likelihoods across
the servicers. The changes in likelihoods of cancellation of trial
modifications for each large servicer are compared to the "OTH"
servicers.
[End of figure]
* State-level effects. For the state-level effects we estimated the
change in the likelihood of trial cancellations across the states
using the marginal effects in table 4, similar to the analysis of the
servicer effects. The results presented in figure10 show that the
changes in the likelihoods of cancellations are higher in most of the
states, including high mortgage foreclosure states such as Arizona,
California, Florida, Michigan, and Nevada--which have over 40 percent
of the trial loans.
Figure 10: Estimated Change in Likelihood of Cancellation of HAMP
Trial Loan Modification by State:
[Refer to PDF for image: vertical bar graph]
Maine: -3.19%;
Ohio: -2.14%;
New Hampshire: -2.12%;
Massachusetts: -1.58%;
Wisconsin: -1.54%;
Delaware: -1.51%;
Connecticut: -1.28%;
Colorado: -1.08%;
Minnesota: -1.03%;
Rhode Island: -0.93%;
Utah: -0.68%;
Wyoming: -0.62%;
Hawaii: -0.48%;
Illinois: -0.47%;
Pennsylvania: -0.44%;
Indiana: -0.38%;
Nebraska: -0.35%;
Washington: -0.17%;
New Jersey: -0.12%;
Kentucky: 0%;
Idaho: 0.04%;
Maryland: 0.12%;
Mississippi: 0.25%;
New York: 0.25%;
Vermont: 0.28%;
Oregon: 0.44%;
South Carolina: 0.47%;
Tennessee: 0.66%;
Montana: 0.73%;
Alabama: 0.76%;
Virginia: 0.8%;
Michigan: 0.84%;
Louisiana: 0.87%;
West Virginia: 0.97%;
North Dakota: 1.11%;
California: 1.28%;
Missouri: 1.32%;
North Carolina: 1.44%;
Arizona: 1.48%;
New Mexico: 1.86%;
South Dakota: 1.91%;
Nevada: 1.94%;
Iowa: 2.08%;
Oklahoma: 2.15%;
Kansas: 2.26%;
Georgia: 2.6%;
Arkansas: 3.09%;
Texas: 3.31%;
Florida: 3.53%;
District of Columbia: 3.71%;
Alaska: 3.75%.
Source: GAO.
Note: The changes in likelihoods of cancellation of trial
modifications for each state are compared to the state of Wyoming, the
base state used to obtain the regression estimates.
[End of figure]
Several checks were conducted to ensure that our results are reliable--
including the sample used, model specification, and estimation
techniques.[Footnote 58] In all cases, our key results were generally
unchanged. Specifically, we excluded the servicer effects and state-
level effects, and included the start time of the trial to account for
the housing and economic conditions at the time of the
modification.[Footnote 59] We also estimated robust standard errors to
ensure that the tests of significance are reliable. Furthermore,
although we could not use the fixed-effects technique to control for
unobserved heterogeneity across the borrowers because we do not have
repeat observations on the borrowers, we attempted to incorporate
unobserved heterogeneity among the borrowers using mixed multinomial
logit estimation. This is intended to help capture the differential in
risk preferences and idiosyncratic differences among the borrowers
that are not captured by the explanatory variables in the models we
estimated.[Footnote 60] However, we could not estimate the mass point
locations with any precision. Finally, we noted that since loans enter
and exit HAMP over time, these results may not necessary pertain in
the future.
[End of section]
Appendix III: Comments from the Department of the Treasury:
Note: GAO comments supplementing those in the report text appear at
the end of this appendix.
Department Of The Treasury:
Assistant Secretary:
Washington, D.C. 20220:
February 23, 2011:
Thomas J. McCool:
Director, Center for Economics:
Applied Research and Methods:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. McCool:
Thank you for providing the Department of the Treasury ("Treasury") an
opportunity to review and comment on your draft report on Treasury's
Making Home Affordable ("MHA") program, Treasury Continues to Face
Implementation Challenges and Data Weaknesses in Its Making Home
Affordable Program ("Draft Report"). Thank you as well for meeting
with my staff on Friday, February 18, 2911.
We appreciate GAO's efforts in assessing the housing programs
initiated under Treasury's Troubled Asset Relief Program As forth in
the Draft Report, these include ("TARP"). As set forth in the Draft
Report, these include GAO's analysis of homeowners helped by
Treasury's Home Affordable Modification Program ("RAMP"), the first-
lien program, and its survey of servicers and counselors regarding
borrowers who did not receive permanent modifications under this
program. We also acknowledge the Draft Report's description of the
operational capacity and infrastructure challenges faced by servicers
in implementing Treasury's housing programs.
In addition, GAO's research into proprietary modifications made by
servicers outside the MHA program is useful. There is little available
data concerning these proprietary modifications, and the more that we
understand their terms and outcomes, the easier it will be for
policymakers and regulators to craft appropriate changes to MHA and
other housing programs aimed at preventing avoidable foreclosures.
As we described during our February 18 meeting, however, we believe
that the Draft Report raises certain criticisms regarding the design
and implementation of MHA that are unwarranted. First, GAO criticizes
Treasury for the number of changes made to its housing programs
following their implementation, and Treasury's alleged failure to
incorporate the lessons it learned from the first-lien HAMP program
into the roll out and design of other MHA programs, such as the Home
Affordable Foreclosures Alternatives ("HAFA") Program.
Though we acknowledge that subsequent programs have not been
implemented as quickly as initially expected, GAO's criticism seems to
ignore the context in which these decisions were made and the
tradeoffs Treasury was forced to make. In the spring of 2009, when MHA
was initiated, we faced the worst housing crisis since the Great
Depression. It was imperative that Treasury launch a program to
address this need and set aggressive implementation schedules to push
servicers, investors and homeowners to work together. Mortgage
modifications had never been done on this scale; servicer
participation was voluntary; and the housing market was constantly
changing. Over time, changes had to be made to the programs to respond
to lessons learned from the implementation process. In addition, MHA
considered and incorporated many suggestions from the GAO and other
oversight agencies. We believe any critique of our implementation
efforts should acknowledge the need to launch the programs quickly,
within the constraints of existing investor contracts and regulatory
guidelines, and refine them over time.
Second, GAO's comparison of HAMP modifications to proprietary
modifications based on its survey of borrowers' experience with
privately-offered proprietary programs also does not tell the entire
story. While it is certainly appropriate for GAO to assess Treasury's
performance based on the goals of the HAMP program, we do not believe
it is constructive to assess HAMP's performance based on the goals of
proprietary programs that are not government supported. This is
particularly true because Treasury has no authority over proprietary
modifications and servicers are not required to report on their
modifications. Because servicers are required to consider homeowners
for HAMP modification before they are considered for proprietary
modification, much of the initial underwriting is completed during the
HAMP evaluation, enabling a more streamlined approach to any
subsequent proprietary modification.
Third, GAO criticizes the completeness and quality of the data
collected by Treasury related to HAMP modifications, and concludes
that "missing or inaccurate information limits Treasury's ability to
identify program gaps." We disagree with this conclusion. The
information contained in the MHA Data File is collected from
homeowners applying to HAMP by their mortgage servicers. This data is
not verified by Treasury, and is occasionally incomplete; for example,
because a homeowner learns he is ineligible for HAMP before all his
information is collected.
In suggesting that this "missing or inaccurate" information is
critical to Treasury's ability to identify gaps in HAMP, the Draft
Report appears to ignore that the quality of existing data on
permanent HAMP modifications is far superior to that collected for
trial modifications based on stated income, and that the quality of
data regarding trial modifications has greatly improved since Treasury
began requiring verified income.
We have attached more detailed comments in the appendix. In closing, I
want to reiterate my appreciation for GAO's ongoing assessment of the
TARP housing programs, and suggest that a balanced analysis or
critique of these programs must recognize how these unprecedented
circumstances have shaped our actions. We look forward to continuing
to work with you and your team in our ongoing efforts to stabilize the
financial system.
Sincerely,
Signed by:
Timothy G. Massad:
Acting Assistant Secretary for Financial Stability:
Attachment:
[End of letter]
Appendix:
The following are more detailed comments and responses to findings and
criticisms in the Draft Report and should be read together with the
attached Comment Letter.
Criticism of Treasury for not applying lessons learned from first lien
program to subsequent programs (pages 18-26): In 2009 and 2010, the
housing crisis continued to present challenges, moving from a crisis
involving certain kinds of loans to widespread foreclosures from
unprecedented rates of unemployment. It was precisely because of
lessons learned from the first lien program that we were able to
create guidelines and aggressive implementation schedules for other
MBA programs in a relatively short period of time. Treasury conducted
a thorough analysis and engaged in extensive discussion with our
agents and servicers about operational challenges and the most
efficient mechanisms before launching each program. [See comment 1]
Time is of the essence for delinquent borrowers or those at risk of
delinquency. While the Draft Report discusses complaints of servicers
about the programs, it fails to acknowledge that the servicers
discussed and agreed to these timelines and implementation schedules.
Also absent from the Draft Report is the fact that if servicers do not
agree with or cannot support the changes, they have the option of
filing fora waiver or opting out of the program. When circumstances
demonstrate the need for changes to make sure the programs help as
many eligible homeowners as possible, Treasury does not hesitate to
make those changes as promptly as practicable.
Criticism of the database for second liens (pages 13, 25): The Draft
Report criticizes Treasury for a lack of a database that includes
second liens matched to HAMP modified first liens. Treasury created a
system in which LPS enters into a contract with servicers to match
HAMP modified first to second liens. Prior to Treasury establishing
the Second Lien Modification Program, there was no national system to
match liens. Challenges in this type of system are inevitable as data
is collected differently depending on the servicer or lien holder's
approach and the large number of liens involved. [See comment 2]
Criticism of "extensive program requirements" (pages 15, 51): The
Draft Report suggests that Treasury's extensive program requirements
are an obstacle to success. This criticism fails to recognize that
most of these requirements were created because 1) it is a government
program that is tasked with spending and accounting for taxpayer
dollars in a responsible and efficient manner and 2) some of the
reasons behind the housing crisis had to do with a lack of
requirements and supporting documentation. [See comment 3]
In addition to servicer complaints about extensive program
requirements mentioned in the Draft Report, the servicers apparently
complained about "unclear guidance" (see p. 21) with regard to the
programs. As stated above, the servicers were involved in discussions
about the program guidelines, their operational needs, and agreed to
aggressive timelines and implementation schedules. Additionally, each
servicer has a designated MHA representative from Treasury's Program
Administrator, whose purpose is to work through issues, answer
questions, and provide clarifications on program guidance when needed.
Criticism for failure to set goals (pages 11, 24, 53): The Draft
Report faults Treasury for failing to set numerical goals, especially
with regard to the new programs. These programs are launched under
challenging and unprecedented circumstances, making it extremely
difficult to predict how many homeowners will respond to servicer
solicitation, provide requisition documentation or accept the
modification when offered. We focus on goals over which we have some
control. For example, we require servicers to contact every eligible
borrower to assess for a modification or alternative loss mitigation
program. And, because we only pay for success, one can still evaluate
whether the programs are well constructed, are a prudent use of
taxpayer funds, and balance the needs of the interested parties, e.g.,
borrowers, investors and taxpayers. In addition, if we focused only on
numbers of borrowers in programs, there may be a misdirected incentive
to get borrowers into programs at the expense of ensuring sustainable
results for those borrowers. [See comment 4]
HAMP modifications compared with Proprietary Modifications (pages 44-
49): The Draft Report suggests two general criticisms or findings with
regard to HAMP modifications in the context of proprietary
modifications:
1. Treasury does not collect data on proprietary modifications: The
Draft Report leaves the impression that Treasury does not choose to
collect data on proprietary modifications. Treasury does collect data
on proprietary modifications and post-HAMP dispositions that are
provided via a survey of a certain representative sample of servicers
that is submitted to Treasury on a voluntary basis. But because
proprietary modifications are by definition not implemented pursuant
to HAMP, servicers are not required under the HAMP contract to
disclose terms of their proprietary modifications. In order to obtain
additional information, Treasury works closely with the Hope Now
Alliance and has encouraged HOPE Now to provide more detail on
proprietary modifications, including percentages of payment reductions
and percentages with terms exceeding five years. [See comment 5]
2. Proprietary modifications are more flexible and easier to secure
than HAMP modifications: Treasury operates a national, publicly
financed government program and must balance the interests of
taxpayers, investors and borrowers in designing and implementing the
programs. Eligibility standards and documentation requirements are a
necessary part of balancing those interests and complying with our
Congressional mandate of developing a program designed to prevent
avoidable foreclosures while protecting the taxpayer. To relax
eligibility standards or documentation requirements would
unnecessarily put taxpayers' interests and the goal of sustainable
results for borrowers at risk. Private entities operating proprietary
programs are not under such constraints. [See comment 6]
In addition, in the absence of MHA, there is little reason to believe
that servicers would be offering the type of proprietary modifications
now offered. Prior to the crisis and the implementation of MHA
programs, servicers had little to offer in terms of modifications.
Criticisms on data collection (pages 26-44: We believe the overall
conclusion reached in the Draft Report — that the gaps in the data
limit our ability to identify program gaps — is inaccurate and
misleading. Some of the examples of missing or inaccurate data are
outliers (see p. 26, 32) and not representative of the quality of the
data Treasury collects. Data on permanent modifications is robust,
allowing Treasury to determine gaps in programs and how to make
improvements. Treasury relies on data provided by the borrowers to the
servicers and it has improved significantly over the past six months,
especially as the program moved to verified income. [See comment 7]
Post-RAMP disposition paths: The data for the Disposition Path tables
in the Public Report are provided by the top eight servicers through
monthly survey responses with specific instructions to ensure that the
sum of all disposition categories equals the total population of
borrowers being reported. This is done to provide a clear view of the
current path the population is following through the progression of
potential loss mitigation outcomes. This approach avoids double
counting a borrower who may be in process of consideration for a
proprietary modification while requesting consideration for a short
sale, and also clarifies that the borrower is on a path for a solution
rather than abandoned to a foreclosure end. [See comment 8]
Criticism for failure to fully implement 2MP HAFA and FHA Refinance
housing programs (page 51): The programs have been fully implemented
though reporting on the programs is still underway. There is always a
lag time between implementation and reporting, for a variety of
reasons, including the need to verify the data. Therefore, we disagree
with GAO's conclusion that we have failed to fully implement these
programs. [See comment 9]
Absent from the report is any recognition of some of the difficulties
Treasury encountered in getting these programs established. Some of
these difficulties included lack of GSE participation in the FHA
Refinance program, a different set of guidance for HAFA and varying
bank policies on pursuing deficiency judgments under HAFA. Without
these impediments, and others, Treasury's ability to efficiently
implement and gain participation in these programs would be
significantly improved.
The following are GAO's comments to the Department of the Treasury's
letter dated February 23, 2011.
GAO Comments:
1. We acknowledge that Treasury's HAMP program is part of an
unprecedented response to a particularly difficult time in our
nation's mortgage markets. As noted in the report, we also acknowledge
that Treasury took steps to consult with servicers on the design and
implementation of 2MP, HAFA, and PRA. However, Treasury has repeated
some of the practices that were the focus of previous recommendations
we had made for the first-lien program in its implementation of its
newer MHA programs. For example, in July 2009, we recommended that
Treasury develop a means of systematically assessing servicers'
capacity to meet program requirements during program admission. While
Treasury has begun assessing servicers' capacity to implement 2MP,
HAFA, and PRA, it has not ensured that servicers have sufficiently
demonstrated they have the capacity to successfully and expeditiously
implement these programs. In addition, we recommended in June 2010
that Treasury finalize and implement benchmarks for performance
measures under the first-lien modification program, as well as develop
such measures for the newly announced programs. Treasury has not
developed these benchmarks, either for the first-lien or the
subsequent programs, making it difficult to hold servicers accountable
for performance and assess the extent to which they have been
successful. The pages referenced in this comment are now pages 20 to
24.
2. Treasury indicated that the draft report criticized it for a lack
of a database that includes second liens matched to HAMP-modified
first liens. The draft report does not criticize Treasury for the lack
of a database. Rather, the report notes that Treasury worked with LPS
to develop a database and has taken steps to improve the quality of
the data. We also note that servicers reported difficulties with the
matching of first and second liens, including concerns about the
accuracy and completeness of the data, which contributed to the slow
initial implementation of 2MP. As a result of these challenges,
servicers had been modified relatively few second liens a year after
program guidelines were issued. The pages referenced in this comment
are now pages 13 and 24.
3. Treasury noted that the draft report suggested that extensive
program requirements and unclear guidance were obstacles to the
program's success. The section of the draft report that discussed
concerns about extensive program requirements was associated with the
implementation challenges with the HAFA program only. The draft report
noted that Treasury itself has acknowledged these obstacles and has
since revised many of the HAFA program requirements that were
identified as contributing to the slow implementation of the program.
With regard to Treasury's comments about program guidance, we
clarified the language in the report to focus on the programs'
changing guidance. Servicers told us that ongoing program revisions
presented challenges such as needing to retrain staff and in some
cases delayed program implementation. The pages referenced in this
comment are now pages 15 and 48.
4. Treasury noted that the draft report faulted Treasury for failing
to set numerical goals, especially with regard to the new programs.
Treasury stated the programs were launched under challenging and
unprecedented circumstances, making it extremely difficult to predict
how many homeowners will respond to servicer solicitations, provide
requisition documentation, or accept the modification when offered. As
we, the Congressional Oversight Panel, and SIGTARP have previously
noted, establishing key performance metrics and reporting on
individual servicers' performance with respect to those metrics are
critical to transparency and accountability. As such, we continue to
believe that it is important that Treasury implement our June 2010
recommendation that it develop measures and benchmarks for its newer
MHA program. Without pre-established performance measures and goals,
Treasury will not be able to effectively assess the outcomes of its
MHA programs or hold servicers accountable for their performance. The
pages referenced in this comment are now pages 12, 23, and 49.
5. Treasury stated that the draft report left the impression that
Treasury chose not to collect data on proprietary modifications. In
fact, the report notes that Treasury does collect data on the post-
HAMP disposition paths. We believe the information that Treasury
collects through its eight largest HAMP servicers provides important
and useful information to policymakers on the disposition of borrowers
denied or canceled from HAMP trial and permanent modifications.
However, as noted in the draft report, we believe the way in which the
information is collected makes it difficult to understand the outcomes
of these borrowers. Without accurate reporting of borrower outcomes,
Treasury cannot know the actual extent to which borrowers who are
denied, canceled, or redefaulted from HAMP are helped by other
programs or evaluate the need for further action to assist this group
of homeowners. The pages referenced in this comment are now pages 41
to 45.
6. Treasury commented that the draft report suggested a criticism of
HAMP modifications because it notes that proprietary modifications are
more flexible and easier to secure than a HAMP modification. Treasury
notes that it manages a national, publicly financed program and must
balance the interest of taxpayers, investors, and borrowers in
designing and implementing the program. We agree. Our observation is
not intended to suggest that HAMP adopt the flexibility of proprietary
modifications. We are simply describing what is known about
proprietary modifications. Moreover, the report notes that the long-
term sustainability of both types of modifications is unclear,
particularly for proprietary modifications because these modifications
may not reduce the monthly payments of borrowers as much as HAMP
modifications have. The pages referenced in this comment are now pages
41 to 45.
7. Treasury stated that it believed that the overall conclusion
reached in the draft report that the gaps in data limit Treasury's
ability to identify program gaps is inaccurate and misleading.
Treasury noted that some of the examples of missing or inaccurate data
are outliers. It also noted that the data on permanent modifications
is robust and that data provided by servicers has improved
significantly over the past 6 months. We have added text in the report
to acknowledge that Treasury's data, particularly on the race and
ethnicity of borrowers, has improved over time, and that the reporting
in the most recent public file represents an improvement over the data
we received as of September 30, 2010. We also note that Treasury has
worked with Fannie Mae to make improvements to the data. While we
acknowledge that progress has been made in the quality and accuracy of
the data reported by servicers, we believe that it is critical that
Treasury continue to work toward improving the data so that it and
policymakers can understand the characteristics of both borrowers who
have been helped by HAMP as well as those who could not be helped by
HAMP. This information will be essential to identifying what
additional steps or adjustments could be made to existing TARP-funded
programs or other government programs to prevent avoidable
foreclosures to better achieve the goals of preserving homeownership
and protecting property values. The pages referenced in this comment
are now pages 25 to 40.
8. Treasury stated that it instructed servicers to report borrowers in
a single disposition path to avoid double counting of borrowers and,
thereby, provide a clear view of the current path the population is
following through the progression of potential loss mitigation
outcomes. However, the current method of data collection can distort
the current disposition status of borrowers because borrowers are
often "dual-tracked" (e.g., being evaluated for a proprietary
modification while also starting the foreclosure process). Reflecting
the full range of possible outcomes these borrowers face would improve
Treasury's understanding of the extent to which borrowers are helped
by other programs and assist any evaluation of the need for further
action to assist this group of homeowners.
9. Treasury stated that it disagreed with the draft report's
conclusion that its programs had not been fully implemented. We
revised the language in the report to more clearly state that the
implementation of Treasury's MHA programs had gotten off to a slow
start and reiterated that actions needed to be taken by Treasury to
better ensure the success of its programs. The page referenced in this
comment is now page 47.
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Mathew J. Scirè (202) 512-8678 or sciremj@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above, Lynda Downing, Harry Medina,
John Karikari (Lead Assistant Directors); Tania Calhoun; Emily
Chalmers; William Chatlos; Grace Cho; Rachel DeMarcus; Marc Molino;
Mary Osorno; Jared Sippel; Winnie Tsen; Jim Vitarello; and Heneng Yu
made important contributions to this report.
[End of section]
Footnotes:
[1] Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C.
§§ 5201 et seq. The Helping Families Save Their Homes Act of 2009,
Pub. L. No. 111-22, Div. A, 123 Stat. 1632 (2009), amended the act to
reduce the maximum allowable amount of outstanding troubled assets
under the act by almost $1.3 billion, from $700 billion to $698.741
billion. The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (1) reduced Treasury's
authority to purchase or insure troubled assets to a maximum of $475
billion and (2) prohibited Treasury, under the Emergency Economic
Stabilization Act of 2008, from incurring any additional obligations
for a program or initiative, unless the program or initiative had
already been introduced prior to June 25, 2010.
[2] GAO is required to report at least every 60 days on findings
resulting from, among other things, oversight of TARP's performance in
meeting the purposes of the act, the financial condition and internal
controls of TARP, the characteristics of both asset purchases and the
disposition of assets acquired, the efficiency of TARP's operations in
using appropriated funds, and TARP's compliance with applicable laws
and regulations 12 U.S.C. § 5226(a). Under this statutory mandate, we
have reported on Treasury's use of TARP funds to preserve
homeownership and protect home values. See GAO, Troubled Asset Relief
Program: Treasury Actions Needed to Make the Home Affordable
Modification Program More Transparent and Accountable, [hyperlink,
http://www.gao.gov/products/GAO-09-837] (Washington, D.C: July 23,
2009) and GAO, Troubled Asset Relief Program: Further Actions Needed
to Fully and Equitably Implement Foreclosure Mitigation Programs,
[hyperlink, http://www.gao.gov/products/GAO-10-634] (Washington, D.C:
June 24, 2010).
[3] For example, see Congressional Oversight Panel, April Oversight
Report: Evaluating Progress on TARP Foreclosure Mitigation Programs
(Washington, D.C., Apr. 14, 2010) and Office of the Special Inspector
General for the Troubled Asset Relief Program, Factors Affecting
Implementation of the Home Affordable Modification Program, SIGTARP-10-
005 (Washington, D.C., Mar. 25, 2010).
[4] Treasury has also put in place the Federal Housing Administration
(FHA)-HAMP, Rural Development-HAMP, the FHA Short Refinance Option,
the Housing Finance Agency Innovation Fund for the Hardest-Hit
Markets, and the Home Affordable Unemployment Program. Information on
the progress made by these TARP-funded programs in stemming avoidable
foreclosures will be discussed in a future report.
[5] This report does not contain all the results from our survey of
housing counselors. The survey and a more complete tabulation of the
results will be discussed in more detail in an upcoming report.
[6] The primary source of information on the status of mortgage loans
was the Mortgage Bankers Association's (MBA) quarterly National
Delinquency Survey, which was estimated to represent about 88 percent
of the mortgage market in the fourth quarter of 2010.
[7] GAO, Troubled Asset Relief Program: Additional Actions Needed to
Better Ensure Integrity, Accountability, and Transparency, [hyperlink,
http://www.gao.gov/products/GAO-09-161] (Washington, D.C.: Dec. 2,
2008).
[8] Loans held in private-label securitization trusts include loans
not securitized by Fannie Mae or Freddie Mac, and not insured or
guaranteed by the Department of Housing and Urban Development's (HUD)
FHA, the Department of Veterans Affairs (VA), or the U.S. Department
of Agriculture's (USDA) Rural Housing Loan Program. Loans guaranteed
by HUD's Federal Housing Administration (FHA) and the USDA Rural
Housing Service are eligible for TARP incentives when modified under
requirements issued by those agencies. The $50 billion was intended to
be used for loan modifications and other foreclosure prevention
activities.
[9] Any funds that Treasury provides to the GSEs Fannie Mae and
Freddie Mac under the preferred stock purchase agreements will, like
TARP programs, be funded through the issuance of public debt. Treasury
will also issue public debt to cover any losses that the GSEs incur
because of the additional $25 billion they provide, as long as the
GSEs have liabilities that exceed assets.
[10] The front-end DTI ratio used for the HAMP program is the
percentage of a borrower's gross monthly income required to pay the
borrower's monthly housing expense which is comprised of mortgage
principal, interest, taxes, insurance, and if applicable, condominium,
co-operative, or homeowners' association dues.
[11] Unpaid principal balance limits (prior to modification) are
$729,750 for a one-unit building; $934,200 for a two-unit building;
$1,129,250 for a three-unit building; and $1,403,400 for a four-unit
building.
[12] The principal forbearance amount is noninterest-bearing and
nonamortizing and cannot accrue interest under the HAMP guidelines or
be amortized over the loan term. Rather, the amount of principal
forbearance will result in a balloon payment fully due and payable
upon the borrower's transfer of the property, payoff of the interest-
bearing unpaid principal balance, or maturity of the mortgage loan.
If, in order to reach the target DTI ratio, the investor will be
required to forbear more than 30 percent of the unpaid principal
balance, or an amount of principal necessary to reach 100 percent of
the mark-to-market loan-to-value ratio (MLTV), the servicer may, but
is not required to modify the loan.
[13] The GSEs have directed all of their approximately 2,000 servicers
to implement parallel HAMP programs on first-lien mortgages owned or
guaranteed by the GSEs.
[14] The balance of the difference between this amount and the $45.6
billion allocated to housing programs was allocated to the FHA Short
Refinance Program and the HFA Hardest-Hit Fund.
[15] Roughly 46 percent of borrowers who were either in trial or
permanent modifications as of September 30, 2010, had non-GSE loans
and, therefore, fell under the TARP-funded portion of HAMP.
[16] In commenting on a draft of this report, Treasury noted that
participating servicers were matching HAMP first liens with second
liens in their portfolio, and by December 31, 2010, had generated over
200,000 matches, which they were in the process of modifying.
[17] See [hyperlink, http://www.gao.gov/products/GAO-10-634] for a
discussion of the implementation challenges associated with the HAMP
first-lien modification program.
[18] The remaining servicer told us that it had not signed a 2MP
participation agreement since second liens represented only a small
portion of the loans it serviced.
[19] Under a deed-in-lieu of foreclosure, the homeowner voluntarily
conveys all ownership interest in the home to the lender as an
alternative to foreclosure proceedings. In a short sale, a house is
sold by the homeowner through a real estate agency or other means,
rather than through foreclosure, and the proceeds of the sale are less
than what the homeowner still owes on the mortgage. The lender must
give permission to such a transaction and can agree to forgive the
shortfall between the loan balance and the net sale proceeds. Under
HAFA, accepting a deed-in-lieu must satisfy the borrower's entire
mortgage obligation in addition to releasing the lien on the subject
property.
[20] Treasury's revised guidelines continue to require servicers to
verify the borrower's financial hardship by obtaining a signed
Hardship Affidavit or Request for Modification and Affidavit, official
documents used in the HAMP first-lien modification program.
[21] MHA, MHA Handbook (Washington, D.C., Dec. 2, 2010) Section 6.2.1.
[22] The alternative waterfall includes principal reduction as the
second step, after capitalization of accrued interest and certain
expenses. The mark-to-market LTV is the unpaid principal balance
divided by the property value at the time of modification.
[23] The NPV 4.0 model is the updated version of the NPV model that
went into effect on October 1, 2010, and incorporates PRA. The NPV 4.0
model changed several assumptions from the prior NPV model such as the
probability of default based on more recent loan performance
information. The NPV 4.0 model calculates the net present value of the
modification under the standard HAMP waterfall as well as the
alternative waterfall under PRA. The alternative waterfall includes
principal reduction as the required second step for all loans with a
LTV ratio greater than 115 percent.
[24] SIGTARP, Quarterly Report to Congress (Washington, D.C., July 21,
2010).
[25] [hyperlink, http://www.gao.gov/products/GAO-10-634].
[26] [hyperlink, http://www.gao.gov/products/GAO-10-634].
[27] Back-end DTI ratio consists of items included in the front-end
DTI (principal, interest, taxes, insurance, and any homeowners'
association or condominium fees associated with the first-lien
mortgage and property) and all other monthly debt payments
(installment debts, payments on junior liens, alimony, car payments,
etc.).
[28] Treasury has recognized challenges with documentation as a reason
for the low conversion rate to permanent modifications and, as of June
2010, began requiring that servicers verify borrowers' income before
placing borrowers into trial modifications.
[29] Congressional Oversight Panel, December Oversight Report: A
Review of Treasury's Foreclosure Prevention Programs (Washington,
D.C., Dec. 14, 2010).
[30] [hyperlink, http://www.gao.gov/products/GAO-10-634].
[31] Richard Brown, The FDIC Loan Modification Program at IndyMac
Federal Savings Bank. Presented at Mortgages and the Future of Housing
Finance Conference, Washington, D.C., Oct. 25, 2010.
[32] Treasury publicly reports these outcomes for the eight largest
HAMP servicers, but we calculated the percentages for six of these
servicers based on Treasury's report in order to compare them with the
data we received from these same servicers.
[33] Several differences exist between the populations of borrowers
reported in our data and Treasury's report. First, our data included
only borrowers who were denied a HAMP trial modification, while
Treasury's also included borrowers who were offered but declined this
option. Second, Treasury did not begin requiring servicers to report
on borrowers who applied for but did not receive a HAMP trial
modification until December 1, 2009, so some servicers did not have
data on these borrowers until that date. Third, one servicer reported
to us borrowers in a business division not reported in Treasury's
survey, and another reported borrowers to Treasury for a business
division not included in our report. Fourth, our data may reflect
loans that have not yet been reported to Treasury due to differences
in timing of reporting. Finally, Treasury defines "current" as being
less than 60 days delinquent, while our "current" category includes
borrowers who ranged from 0 to 30 days past due.
[34] We requested that servicers provide the data as of August 31,
2010, but servicers may report borrowers with a canceled HAMP trial
modification to Treasury until early September 2010, for August 2010
reporting. In addition, servicers may have included loans in our data
request that have not yet been reported to Treasury and, therefore,
would not be reflected in the number of borrowers that Treasury
reports. Lastly, one servicer reported borrowers to Treasury for a
business division not included in our data.
[35] Two servicers provided the data as of their closing date for
reporting August 2010 data to Treasury, September 6, 2010, and
September 8, 2010, respectively.
[36] Because we requested that servicers report all outcomes that a
borrower received, a borrower may be reflected more than one time
across these outcomes. One servicer only provided the most recent
outcome of these borrowers.
[37] We requested that servicers provide the number of borrowers who
were 0 days past due on their original loan without need for further
loss mitigation efforts. Two servicers provided the number of
borrowers who were 0 to 29 days delinquent, while another servicer
provided the number of borrowers who were 0 to 30 days delinquent.
[38] Three servicers were unable to provide the number of borrowers
who had a payment plan pending because they only track payment plans
once the payment plan has been set up or the borrower begins making
payments.
[39] We requested that servicers provide the number of borrowers who
were referred for foreclosure at any time after redefaulting, having
their modification canceled, or being denied.
[40] Because borrowers who redefault on a HAMP modification would
still retain the terms of their HAMP modification, we would not expect
many borrowers who redefaulted to receive a proprietary modification.
One servicer, however, reported that 95 percent of those borrowers who
redefaulted from a HAMP permanent modification had an action pending
for a proprietary modification. The servicer explained that it
evaluates the majority of these borrowers for another modification
program after they redefault.
[41] HOPE NOW is an alliance between counselors, mortgage companies,
investors, and other mortgage market participants. According to its
December 2010 Industry Extrapolations and Metrics report, HOPE NOW
estimates the survey covers 88 percent of the industry market.
[42] The Dodd-Frank Certification form certifies that the borrower has
not been convicted of a financial felony, such as felony larceny,
money laundering, or tax evasion, within the past 10 years.
[43] Because Treasury does not report whether borrowers had GSE or non-
GSE loans for all borrowers denied HAMP, this percentage includes both
GSE and non-GSE HAMP denials.
[44] [hyperlink, http://www.gao.gov/products/GAO-09-837].
[45] For a one-unit property, the unpaid principal balance limit to be
eligible for the HAMP program is $729,750; for a two-unit, $934,200;
for a three-unit, $1,129,250; for a four-unit, $1,403,400.
[46] One servicer was unable to report the amount of principal
forbearance for roughly 99 percent of those borrowers who had
proprietary modifications and, therefore, is not included in this
range.
[47] The OCC and OTS publish a quarterly mortgage metrics report that
includes data on first-lien residential mortgages serviced by national
banks and thrifts, focusing on credit performance, loss-mitigation
efforts, and foreclosures. OCC and OTS collect these data from the
eight national banks and one thrift with the largest mortgage-
servicing portfolios among national banks and thrifts. The data
represent 64 percent of all first-lien residential mortgages
outstanding in the country.
[48] Treasury did not require servicers to report data on borrowers
who were denied a HAMP trial modification until December 1, 2009. As a
result, three of the six servicers provided the outcomes of borrowers
who were denied a HAMP trial modification from December 1, 2009,
through August 31, 2010, or the date they submitted their August 2010
reporting to Treasury.
[49] The econometric methodology and findings were reviewed by
Professor Anthony Pennington-Cross, Marquette University, Marquette,
Wis., and Professor Hashem Dezhbakhsh, Emory University, Atlanta, Ga.
[50] The data used for the analysis were restricted to one-unit single
family, principal residence, owner-occupied housings located in the 50
states of the United States and the District of Columbia.
[51] Treasury, Making Home Affordable Program: Servicer Performance
Report Through September 2010 (Washington, D.C., October 2010).
[52] We note that this approach is appropriate since we are primarily
interested in the probability that a trial loan falls out and not the
hazard rate of the fallout (i.e., the probability that a trial loan
falls out at a certain time if it has not already fallen out up to
that time). Furthermore, the available data do not permit us to
analyze the latter situation.
[53] Since the servicers have more than one loan in HAMP, the fixed
effects allow us to adjust the standard errors for dependence among
those loans, and also control for all stable characteristics of the
servicers, whether observed or unobserved. The fixed effects technique
uses the variation within the servicers to estimate the coefficients.
[54] An economically significant result implies the impact is large
and meaningful. We use a threshold of 5 percent marginal effect.
[55] The odds ratios of the estimates are also reported. An odds ratio
close to one means the variable is neither more nor less likely to
influence fallouts. Deviations from one indicate the direction and
strength of the effects. An odds ratio greater than one means the
factor is more likely to impact fallouts; similarly, an odds ratio
less than one means the factor is less likely to impact fallouts.
[56] These are for loans where, prior to June 1, 2010, a servicer
allowed borrowers to provide stated income documentation to start the
trial plan.
[57] Loans that received principal forbearance were 3 percent less
likely to be canceled, and about 20 percent of the loans received this
form of principal reduction.
[58] The key results were generally unchanged when we used all the
trial loans, including the newer trial modifications from July 2010 to
September 2010.
[59] We used a variable for the month of the year when the trial
started to capture the contemporaneous economic conditions when the
loan entered the trial plan. In order to obtain valid estimates, since
both the start time for the trial and the stated income variable--
which are both time-related--overlap, we excluded the stated-income
variable when the start-time variable was included.
[60] See Anthony Pennington-Cross, "The Duration of Foreclosures in
the Subprime Mortgage Market: A Competing Risk Model with Mixing,"
Journal of Real Estate Finance and Economics, vol. 40:109-129, 2010
for a discussion of this approach.
[End of section]
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