Troubled Asset Relief Program:

Treasury Actions Needed to Make the Home Affordable Modification Program More Transparent and Accountable

GAO-09-837: Published: Jul 23, 2009. Publicly Released: Jul 23, 2009.

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GAO's sixth report on the Troubled Asset Relief Program (TARP) focuses on the Department of the Treasury's (Treasury) efforts to establish its Home Affordable Modification Program (HAMP). This 60-day report examines (1) the design of HAMP's program features with respect to maximizing assistance to struggling homeowners, (2) the analytical basis for Treasury's estimate of the number of loans that are likely to be successfully modified using TARP funds under HAMP, and (3) the status of Treasury's efforts to implement operational procedures and internal controls for HAMP. For this work, GAO reviewed documentation from Treasury and its financial agents and met with officials from Treasury, its financial agents, and other organizations.

Under HAMP, Treasury will use up to $50 billion in TARP funds to (1) modify the first-lien mortgages of homeowners in danger of foreclosure, (2) encourage the modification of mortgages in areas experiencing serious declines in property values, (3) reduce or pay off second-lien mortgages for homeowners with loans modified under HAMP, (4) arrange deeds-in-lieu or short sales as alternatives to foreclosure; and (5) provide incentive payments to encourage refinancing under the HOPE for Homeowners program. The first-lien mortgage modification effort is the largest and most developed part of HAMP, and Treasury and its financial agents are establishing the operational infrastructure for this effort. However, one of the requirements under the first-lien program--that borrowers with high levels of household debt agree to obtain counseling--may not fully meet Treasury's goals. Treasury's estimate of the number of borrowers who would likely be helped under its HAMP loan modification program reflects uncertainty created by data gaps and the need to make numerous assumptions, and this projection may be overstated. In addition, Treasury has not specified its plans for systematically updating key assumptions and calculations. Treasury announced that up to 3 to 4 million borrowers who were at risk of default and foreclosure could be offered a loan modification under HAMP. Treasury has taken a number of important steps toward implementing operational procedures and internal controls for HAMP but has not finalized all of the associated processes and is not systematically evaluating servicers' capacity during program admission. Treasury officials have developed and continue to refine key operational procedures and internal controls, including establishing an organizational structure for overseeing HAMP, delegating implementation authorities and responsibilities to its financial agents, and drafting work flows for processes such as those associated with the payment of incentives. As of July 20, 2009, about 180,000 borrowers have entered into trial modifications but HAMP incentive payments will not be made until July 27 at the earliest--pending successful completion of the 90-day trial periods. Yet concerns have been raised by Treasury, the Congressional Oversight Panel, and federal banking regulators about servicers' capacity to fulfill program requirements and implement HAMP. Because servicers are not fully evaluated during the admittance process, Treasury is unable to adequately identify, assess, and address any potential risks that may prevent them from fulfilling program requirements.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should expeditiously finalize a comprehensive system of internal control over HAMP, including policies, procedures, and guidance for program activities, to ensure that the interests of both the government and taxpayer are protected and that the program objectives and requirements are being met once loan modifications and incentive payments begin.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: Treasury has engaged the services of Fannie Mae and Freddy Mac as financial agents as part of its efforts to establish and maintain a system of internal control over Home Affordable Modification Program (HAMP). Fannie Mae acts as the Making Home Affordable (MHA) program administrator and Freddie Mac acts the compliance agent for the program. In turn, Treasury has implemented a formal process for oversight of Fannie Mae's and Freddy Mac's MHA activities through its MHA Governance Committee, the MHA Compliance Committee, and the HAMP Budget and Compensation Review Committee. Each committee is comprised of representatives of HPO, Chief Financial Officer, OFS-Compliance and Treasury?s Office of Financial Agents (OFA). According to Treasury, Weekly meetings of the Governance and Compliance Committees are also attended by staff from OFS' Office of the Chief Counsel, and representatives of the GSEs and the Federal Housing Finance Agency (FHFA) in its role as Conservator, attend all three. The MHA Governance Committee oversees operational implementation of HAMP by Fannie Mae, including key initiatives, performance tracking and reporting processes, reviews servicer adoption and performance of HAMP, identifies and recommends potential enhancement(s) to programs or to implementation requirements, and serves as a forum to facilitate communication among stakeholders and other related parties. Freddie Mac in its capacity as the MHA compliance agent (MHA-C), is overseen by OFS-Compliance and reports all compliance results to the Compliance Committee. The Compliance Committee reviews the results of all compliance activities to ensure consistent evaluation of servicers. MHA-C compliance activities have primarily focused on ensuring that homeowners are appropriately treated in accordance with HAMP guidelines. Components of the compliance program include: on-site reviews, NPV model reviews, incentive payment reviews, and loan file reviews including the process known as "Second Look." Second Look loan file reviews evaluate those loans that have not been offered HAMP modifications to ensure that the exclusion was appropriate.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should place a high priority on fully staffing vacant positions in HPO--including filling the position of Chief of Homeownership Preservation with a permanent placement--and evaluate HPO's staffing levels and competencies to determine whether they are sufficient and appropriate to effectively fulfill its HAMP governance responsibilities.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: Treasury hired a permanent Chief Homeownership Preservation Officer on November 9, 2009. Based upon input from Homeownership Protection Office (HPO) senior staff, the Chief Homeownership Preservation Office subsequently evaluated the staffing levels and expertise of HPO and consequently reduced the staffing levels for HPO. Since then, Treasury indicated that HPO's staffing needs have been and are continuously evaluated to determine whether its staffing levels are sufficient and appropriate to effectively fulfill its HAMP governance responsibilities. For example, bi-weekly staff check-ins are held with HPO senior staff and succession planning meetings are held with the Assistant Secretary for Financial Stability, HPO senior staff and Chief Operations Officer (COO) senior staff. Additionally, workforce planning meetings are routinely held with the Assistant Secretary for Financial Stability, HPO senior staff and COO senior staff. These meeting have resulted in a number of staffing changes as evidence by changes in HPOs organization chart over time.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should institute a system to routinely review and update key assumptions and projections about the housing market and the behavior of mortgage-holders, borrowers, and servicers that underlie Treasury's projection of the number of borrowers whose loans are likely to be modified under HAMP and revise the projection as necessary in order to assess the program's effectiveness and structure.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: As of January 31, 2011, Treasury estimated that there are approximately 1.4 million Home Affordable Modification Program (HAMP)-eligible borrowers. Treasury derived this estimate based on the Mortgage Bankers Association (MBA) National Delinquency Survey (Q4 2010) data for 1st lien 60+ day delinquencies (5.0 million) and subtracting (1) the market share estimate of servicers not participating in HAMP (~0.5 million), (2) the market share estimate of Federal Housing Authority/Department of Veterans Affairs loans (~0.8 million), (3) the estimate of non-owner occupied loans at origination (~0.6 million), (4) loans originated after January 1, 2009, (5) non-conforming and jumbo loans (~0.2 million), (6) estimation of borrowers with a debt-to-income ratio of less than 31 percent (~0.8 million), (7) estimation of negative net present value test results (~0.2 million); and (8) vacancies and other exclusions (~0.5 million). According to Treasury, this estimate is revised regularly, as the MBA National Delinquency Survey is published quarterly and other estimates are revised to reflect updated data. Treasury publishes the results of its estimate in its monthly program performance reports.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should reevaluate the basis and design of the HPDP program to ensure that HAMP funds are being used efficiently to maximize the number of borrowers who are helped under HAMP and to maximize overall benefits of utilizing taxpayer dollars.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: According to Treasury, it revised the Home Price Decline Protection (HPDP) program design subsequent to the issuance of GAO's July 2009 report to improve the targeting of incentive payments to mortgages that are at greater risk of default because of home price declines. Treasury provided GAO with a sensitivity analysis performed on a large sample of Home Affordable Modification Program(HAMP)-eligible loans that were 60 days or more delinquent. The sensitivity analysis applied the HAMP net present value (NPV) model to a sample of loans both with and without the potential HPDP payments, and the pass rates were examined for various loan characteristics.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should consider methods of (1) monitoring whether borrowers with total household debt of over 55 percent of their income who have been told that they must obtain HUD-approved housing counseling do so, and (2) assessing how this counseling affects the performance of modified loans to see if the requirement is having its intended effect of limiting redefaults.

    Agency Affected: Department of the Treasury

    Status: Closed - Not Implemented

    Comments: Treasury officials indicated that it had taken some action but did not plan to fully implement it, stating that Treasury considered it to be too burdensome for it and servicers to monitor whether borrowers were obtaining the required counseling. As a result, Treasury has no data on the extent that borrowers are obtaining the required counseling or whether the counseling provision is having its intended effect of limiting borrower redefaults.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should expeditiously develop a means of systematically assessing servicers' capacity to meet program requirements during program admission so that Treasury can understand and address any risks associated with individual servicers' abilities to fulfill program requirements, including those related to data reporting and collection.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: In January, 2010 Treasury finalized and began implementing a self-assessment form to be completed by prospective servicers as they apply to participate in HAMP. These self-assessments are used by Treasury to determine whether or not to admit the servicer into HAMP, and to inform future compliance reviews of the servicer. Using the self-assessment form, prospective servicers describe their capacity to utilize a net present value model to assess borrowers for a loan modification, and to complete basic HAMP reporting requirements. Treasury retroactively applied this form to servicers that began program participation in December 2009, and has received completed self-assessments from all of the servicers that began participation after January 2010. According to Treasury, some of the servicers decided to drop out of the HAMP program after completing the self-assessment and determining that they lacked the necessary capacity to meet the program's requirements.

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