by Broderick Perkins
(12/27/2010) - The Obama Administration's mortgage modification program failed to reach sufficient numbers of home owners facing foreclosure and likely will never achieve a third of it's original goal.
Fraught with mismanagement and conflicts of interest, the government's Home Affordable Modification Program (HAMP) will likely only achieve 800,000 or fewer permanent modifications, according to the Congressional Oversight Panel's scathing new study: "December 2010 Oversight Report: A Review of Treasury's Foreclosure Prevention Programs."
The U.S. Treasury's HAMP was launched in 2009 in an effort to stop 3 to 4 million targeted foreclosures.
"The Panel now estimates that, if current trends hold, HAMP will prevent only 700,000 to 800,000 foreclosures — far fewer than the 3 to 4 million foreclosures that Treasury initially aimed to stop, and vastly fewer than the 8 to 13 million foreclosures expected by 2012. Because the Treasury's authority to restructure HAMP ended on Oct. 3, 2010, the program's prospects are unlikely to improve substantially in the future," according to the report's executive summary.
Other government and private reports reveal many modifications were trial modifications that failed to become permanent, putting thousands of hopeful home owners back on the foreclosure track.
The report firmly places much of the blame at the doorstep of the U.S. Treasury and offers a litany of Treasury shortcomings that point to mismanagement, including the Treasury
• Failing to collect and analyze data that could explain HAMP's shortcomings.
• Refusing to specify meaningful goals to measure HAMP's progress. "The program's sole initial goal - to prevent 3 to 4 million foreclosures - has been repeatedly watered down."
• Failing to hold loan servicers accountable when they repeatedly lost borrower paperwork or refused to perform loan modifications.
• Essentially outsourcing servicer oversight responsibility to Fannie Mae and Freddie Mac, companies with business relationships with servicers that created a conflict of interest.
"Treasury's reluctance to acknowledge HAMP's shortcomings has had real consequences. Absent a dramatic and unexpected increase in HAMP enrollment, many billions of dollars set aside for foreclosure mitigation may well be left unused. As a result, an untold number of borrowers may go without help — all because Treasury failed to acknowledge HAMP's Shortcomings in time," the Dec. 13 report charged.
Days after the panel released the report, U.S. Treasury Secretary Timothy Geithner testified Dec. 16 before the oversight panel, effectively refuting the report and gushing about government housing program successes.
The secretary testified that the U.S. government contributed to more than 3.73 million modifications between April 2009 and the end of August 2010, "more than double the number of foreclosure completions during that time. These modifications include nearly 1.4 million trial HAMP modification starts, more than 600,000 Federal Housing Administration (FHA) loss mitigation and early delinquency interventions, and nearly 1.8 million proprietary modifications reported through HOPE Now data."
While the oversight panel report largely fingers the Treasury, it also said conflicts of interest between lenders and servicers and problems with second lien holders contributed to fewer modifications than hoped.
The study says, HAMP architects believed because lenders receive less in a foreclosure than through a successful loan modification, that they would jump at the opportunity to modify and keep mortgages. The Treasury also sweetened deals with financial incentives to coax more lenders to the modification table.
Unfortunately, servicers hired by lenders to handle the day-to-day management of loans are more adept at turning a profit from foreclosure-related fees, putting the servicer's interest in sharp conflict with those of lenders and borrowers seeking modifications. It's in the servicer's financial interest to move a delinquent loan to foreclosure rather than move for modification, the report said.
"HAMP attempted to correct this market distortion by offering incentive payments to loan servicers, but the effort appears to have fallen short, in part because servicers were not required to participate," the oversight report says.
Second mortgages proved another obstacle difficult to hurdle. Second lien holders stand to profit by blocking the modification of a first mortgage. In a foreclosure, they get a cut. Modifications generate a much smaller, if any, payoff for second lien holders.
The report said the time is up for the Treasury to revamp its foreclosure prevention strategy in any substantial way, but that it can take steps to "wring every possible benefit from its programs."
The report suggested allowing online applications, intervention for home owners falling behind on modifications, and other steps.
"Preventing redefaults is an extremely powerful way of magnifying HAMP's impact, as each redefault prevented translates directly into a borrower keeping his home," the oversight report summary says.
During his testimony, Geithner said there's still work to be done and results to be culled from the frequently updated HAMP program.
"Our goal remains to help as many eligible homeowners as possible, and along with improvements to HAMP, we are implementing a range of additional programs, including the Treasury's second lien program, which provides a simultaneous modification of the second lien when a first lien is modified; a foreclosure alternatives program for borrowers who don't qualify for a modification; a principal reduction program; and a forbearance program for unemployed borrowers, the Treasury secretary testified.
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