GAO-16-375SP: Economic development: 17. Treasury's Foreclosure Prevention Efforts

Economic development > 17. Treasury's Foreclosure Prevention Efforts

The Department of the Treasury could potentially achieve billions in financial benefits by reviewing the potential for unexpended balances for the Making Home Affordable Program and deobligating excess funds, which Congress could rescind and direct to other priorities.

Why This Area Is Important

Since 2009, the U.S. Department of the Treasury (Treasury) has been using funds under the  Troubled Asset Relief Program (TARP) authorized by the Emergency Economic Stabilization Act of 2008 (EESA) to address weaknesses in the U.S. housing market.[1] Treasury initially announced that up to $50 billion would be used to help as many as 3 million to 4 million struggling homeowners avoid preventable foreclosure but subsequently reduced the amount to $37.5 billion. Of that amount, Treasury obligated $27.8 billion (as of February 2016) in TARP funds for the Making Home Affordable (MHA) program.[2] The cornerstone program under MHA is the Home Affordable Modification Program (HAMP), which provides financial incentives for eligible borrowers, servicers, and mortgage holders/investors to modify first-lien mortgages. These modifications are intended to prevent foreclosure by reducing homeowners’ monthly mortgage payments to affordable levels.

Treasury has made extensive modifications to MHA programs, including HAMP, since their introduction. These modifications include expanding HAMP to cover additional homeowners and investors, providing additional payment relief, and granting underwater borrowers principal reduction. The modifications could result in additional expenditures of program funds in the billions of dollars. However, billions of dollars obligated under the MHA program remain unexpended, and GAO and the Congressional Budget Office have raised questions about the potential for excess funds. In December 2015, Congress mandated that the MHA programs be terminated on December 31, 2016, with an exemption for HAMP loan modification applications made before that date.[3] At that time, Congress also provided Treasury with the authority to obligate up to $2 billion to current program participants in the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (Hardest Hit Fund).[4]

As of October 2015, Treasury had obligated $29.8 billion for all MHA programs, $12.6 billion of which had been expended, leaving $17.2 billion in obligated but unexpended funds.  Of this $17.2 billion, according to Treasury’s estimate, a maximum of $9.5 billion could be expended through future payments to servicers for HAMP loan modifications completed before October 2015 and for other activities that servicers have already initiated. The remaining $7.7 billion in obligations represented the amount potentially available to servicers for future HAMP modifications and other MHA transactions, as established in the original contracts. Due to restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, Treasury may obligate TARP funds only for programs that were initiated prior to June 25, 2010.



[1] Pub. L. No 110-343, 122 Stat. 3765 (codified at 12 U.S.C. §§ 5201-5261). EESA provided Treasury with authority to purchase up to $700 billion worth of troubled assets. The Dodd-Frank Wall Street Reform and Consumer Protection Act (1) reduced Treasury’s authority to purchase or insure troubled assets to a maximum of $475 billion and (2) prohibited Treasury, under EESA, from incurring any obligations for a program or initiative that was not initiated prior to June 25, 2010. Pub. L. No. 111-203, § 1302, 124 Stat. 1376, 2133 (2010) (codified as amended at 12 U.S.C. § 5225(a)).

[2] Treasury has also allocated $7.6 billion in TARP funds to state housing finance agencies to help borrowers in the areas most affected by the housing crisis, and plans to allocate an additional $2 billion in TARP funds to the state housing finance agencies in 2016.  Also, Treasury has allocated $100 million to support the Department of Housing and Urban Development’s Federal Housing Administration refinance program for borrowers in negative equity positions.

[3] See Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, Div.O, tit. VII, § 709, 129 Stat. 2242 (2015).

[4] First announced in February 2010, the Hardest Hit Fund provided $7.6 billion in TARP funds to 18 states, plus the District of Columbia, to develop locally tailored programs to assist struggling homeowners in their communities. In February 2016, Treasury officials stated that they expect to obligate $2 billion to the Hardest Hit Fund.

What GAO Found

Treasury monitors activity and aggregate expenditures under the MHA program, but it has not systematically reviewed the extent to which it is likely to use all obligated funds. Treasury did not update its estimate of potential future participation and associated expenditures of HAMP—the largest MHA program—between 2009 and 2015. In a July 2009 report, GAO found that Treasury’s estimates may have been overstated, reflecting uncertainty caused by data gaps and assumptions that had to be made, and recommended that Treasury periodically review and update its estimates.

In response, Treasury started performing periodic estimations of the eligible HAMP population, but it has not used these estimates to assess likely future expenditures or excess MHA program funds. Instead of producing updated estimates of future program participation and related expenditures, Treasury historically had assumed that all funds obligated for MHA would be spent. GAO recognizes that no estimate of future participation and expenditures can be made with certainty. However, prior GAO work has concluded that reviewing unexpended balances, including those that have been obligated, can help agencies identify possible budgetary savings.[1] Moreover, Congress’s recent action to terminate the MHA program on December 31, 2016, and to allow Treasury to obligate up to $2 billion in TARP funds to current program participants in the Hardest Hit Fund, provides Treasury with greater certainty and opportunity with respect to estimating and reprogramming any excess MHA fund balances.[2]

GAO performed its own analysis of mortgage data to estimate potential future HAMP participation and costs. This analysis resulted in estimates of MHA program balances as of October 16, 2015, that ranged from using the full $7.7 billion in funds available at that time (a surplus of $0) to a surplus of $2.5 billion. In preparing these estimates, GAO attempted to provide a wide range of possible outcomes and generally used inclusive assumptions about program participation levels. Thus, the actual amount of unexpended MHA program funds would likely have been higher than GAO’s estimates. The President’s fiscal year 2017 budget submission indicates that Treasury estimated a $4.7 billion reduction in total outlays for the MHA program.  Treasury deobligated $2 billion of the $4.7 billion on February 25, 2016. In addition, Treasury has indicated it plans to commit $2 billion to the Hardest Hit Fund.  Treasury officials also told GAO that deobligating all MHA funds in excess of the current cost estimate would unduly increase the risk of insufficient funding for program expenditures. Estimating likely future participation and associated expenditures would allow Treasury to identify and deobligate excess funds, and, to the extent funds are deobligated, Congress may then have an opportunity to use those funds for other priorities.



[1] GAO, Budget Issues: Key Questions to Consider When Evaluating Balances in Federal Accounts, GAO-13-798 (Washington, D.C.: Sept. 30, 2013).

[2] See Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, Div. O, tit. VII, § 709, 129 Stat. 2242. The termination of the MHA program will not apply to MHA loan modification applications made before December 31, 2016.

Actions Needed

To better ensure that taxpayer funds are being used effectively, in March 2016, GAO suggested that Congress consider taking the following action:

  • Rescind any Treasury-deobligated excess MHA balances that Treasury does not move into the Hardest Hit Fund.

In addition, in order to provide Congress and others with accurate assessments of the funding that has been and will likely be used to help troubled borrowers and to identify any obligations not likely to be used, in March 2016, GAO recommended that the Secretary of the Treasury take the following two actions:

  • Review potential unexpended balances by estimating future expenditures of the MHA program.
     
  • Deobligate funds that Treasury’s review shows will likely not be expended and move up to $2 billion of such funds to the TARP-funded Hardest Hit Fund, as authorized by the Consolidated Appropriations Act, 2016.

While the actual financial benefits associated with these actions are unknown, GAO’s analysis resulted in estimates of unused funds that ranged from using all available funds to a surplus of $2.5 billion. Treasury’s estimation of its future expenditures will require it to make assumptions that may differ from those made during GAO’s estimation. Additionally, taking these actions should better position Treasury for the eventual end of the MHA program, mandated by Congress to occur on December 31, 2016. Treasury agreed with the recommendations in GAO’s March report and wrote that it plans to evaluate whether to deobligate additional funds after the complete universe of MHA transactions (i.e., mortgage modifications, short sales, and deeds-in-lieu of foreclosure) is known, sometime after all MHA transactions are completed in late 2017. These actions are consistent with the intent of GAO’s recommendation.

How GAO Conducted Its Work

The information contained in this analysis is based on findings from the March 2016 report listed in Related GAO Product section. To assess the extent to which Treasury was reviewing unexpended balances and cost projections for the MHA program, GAO collected and reviewed internal Treasury memoranda on the purpose and justification of program changes made in 2014 and 2015. GAO reviewed servicer survey results as well as projections of eligible borrowers and loans to understand the factors that might affect program participation.[1] GAO reviewed internal Treasury estimates of the average cost of modifications and of obligations, outlays, and remaining funds for the MHA programs. GAO also reviewed a prior GAO report on best practices concerning reviews of unexpended balances and cost projections.[2] In addition, GAO conducted its own analysis of potential future program participation and the likely associated costs to illustrate the potential for unexpended balances.  To do so, GAO used analyses it directed that were prepared by a private data vendor, Black Knight Data & Analytics LLC.[3] GAO also conducted and reviewed past interviews with Treasury officials about the status of the programs, including any future program changes, and their projections for completing disbursement of TARP-housing funds.

Table 11 in appendix V lists the programs GAO identified that might have opportunities for cost savings or revenue enhancement. 



[1] Treasury initiated HAMP and the other TARP housing programs using its authority under EESA and authorized Fannie Mae to act as a financial agent.

[3] Black Knight Data & Analytics LLC is a private data vendor that provides comprehensive property, multiple listing service, and mortgage performance data. According to Black Knight Data & Analytics, there were about 30 million active first-lien mortgages in its mortgage performance database, which they estimated to cover about 60 percent of the total mortgage universe.

Agency Comments & GAO Contact

In commenting on a draft of GAO’s March 2016 report on which this analysis is based, Treasury agreed with each of GAO’s recommendations, and noted that it was planning to address each of the recommendations. Specifically, Treasury indicated that it had updated its MHA program cost estimates and, as a result, subsequently deobligated $2 billion of MHA funds on February 25, 2016. Treasury also indicated that it plans to commit $2 billion to the Hardest Hit Fund program.

GAO provided a draft of this report section to Treasury for review and comment. Treasury provided technical comments which are incorporated as appropriate.

For additional information about this area, contact Mathew Scire at (202) 512-8678 or sciremj@gao.gov.