Troubled Asset Relief Program:

Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs

GAO-10-634: Published: Jun 24, 2010. Publicly Released: Jun 24, 2010.

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Congress created the Troubled Asset Relief Program (TARP) to, among other things, preserve homeownership and protect home values. In March 2009, the U.S. Department of the Treasury (Treasury) announced the Home Affordable Modification Program (HAMP) as its cornerstone effort to achieve these goals. This report examines (1) the extent to which HAMP servicers have treated borrowers consistently and (2) the actions that Treasury has taken to address the challenges of trial modification conversions, negative equity, redefaults, and program stability. GAO obtained information from 10 servicers that account for 71 percent of HAMP funds and spoke with Treasury, Fannie Mae, and Freddie Mac officials.

While one of Treasury's stated goals for HAMP was to standardize the loan modification process across the servicing industry, GAO found inconsistencies in how servicers were treating borrowers under HAMP that could lead to inequitable treatment of similarly situated borrowers. First, because Treasury did not issue guidelines for soliciting borrowers for HAMP until a year after announcing the program, servicers notified borrowers about HAMP anywhere from 31 days to more than 60 days after a delinquency. Many borrowers also complained that they did not receive timely responses to their HAMP applications and had difficulty obtaining information about the program. Treasury has recently issued guidelines on borrower communications, and plans to monitor compliance with the guidelines. Second, Treasury has emphasized the importance of reaching borrowers before they are delinquent but has not issued guidelines for determining when borrowers are in imminent danger of default. As a result, the 10 servicers that GAO contacted reported 7 different sets of criteria for determining imminent default. Third, while Treasury required servicers to have internal quality assurance procedures to ensure compliance with HAMP requirements, Treasury did not specify how loan files should be sampled for review or what the reviews should contain. As a result, some servicers did not review trial modifications or HAMP denials as part of their quality assurance procedures. Fourth, Treasury has not specified which HAMP complaints should be tracked, and several servicers track only certain types of complaints. Fifth, Treasury has not clearly informed borrowers that the HOPE Hotline can be used to raise concerns about servicers' handling of HAMP loan modifications and to challenge potentially incorrect denials, likely limiting the number of borrowers who have used the hotline for these purposes. Finally, Treasury does not have clear consequences for servicers that do not comply with program requirements, potentially leading to inconsistencies in how instances of noncompliance are handled.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: Treasury comments in its August 23, 2010 letter in responding to the recommendations in our report indicated that it did not plan to establish specific criteria for servicers to follow in determining whether a borrower is in imminent danger of default. Specifically, Treasury stated that servicers and investors were in the best position to judge when the imminent default classification was appropriate and therefore planned to take no further action. However, the results of our prior work showed that there were notable differences between the criteria used by servicers that we contacted that would result in similarly situated borrowers being treated differently.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should expeditiously establish clear and specific criteria for determining whether a borrower is in imminent default to ensure greater consistency across servicers.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: In February 2011, Treasury issued program guidelines that provided additional clarification regarding a servicer's responsibility to develop and execute an effective internal quality assurance program covering its MHA activities. These guidelines included specific requirements on the scope and methodology of the quality assurance reviews, including requiring either statistically valid sampling with a 95 percent confidence level, or a stratified sample of loans. In either case, the sampling methodology must be documented and must include both random and risk-based selection criteria, as appropriate. The guidance also requires that servicers include areas such as solicitation and outreach, determination of borrower eligibility, and documentation of investor-specific requirements.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should expeditiously develop additional guidance for servicers on their quality assurance programs for HAMP, including greater specificity on how to categorize loans for sampling and what servicers should be evaluating in their reviews.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: In November 2010, Treasury issued guidance to servicers on implementation requirements for the Making Home Affordable (MHA) program, which included HAMP. The guidance requires that servicers, among other things, establish a borrower support center and track certain types of complaints related to the program. Specifically, it required servicers to report the status of referred complaints escalated to servicers by the MHA Help and HAMP Solution Center, Escalated cases include, but are not limited to allegations that the servicer did not properly assess a borrower for a MHA program, inquiries regarding inappropriate program denials, and the initiation or continuance of foreclosure action in violation of program guidelines. Further, the guidance establishes a timeline for the resolution of the complaints (30 calendar days) and requires servicers to provide Treasury with data on these escalated complaints on a weekly basis.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should expeditiously specify which complaints servicers should track to ensure consistency and to facilitate program oversight and compliance.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Implemented

    Comments: According to Treasury, it has promoted the HOPE Hotline through a number of channels to the public as a resource for borrowers with questions and problems about their HAMP application, trial period plan or permanent modification. For example, the hotline number is published on Treasury's Making Home Affordable (MHA) Web site, featured in media campaigns, and used in talking points for borrower/counselor events and media interviews. Treasury's MHA program guidelines require that servicers include in their notices to borrowers regarding the status of their request for a HAMP loan modification the telephone number for the HOPE Hotline with an explanation that the borrower can seek assistance at no charge from HUD-approved housing counselors and can request assistance in understanding the Borrower Notice by asking for MHA Help. In MHA program guidance issued on November 3, 2010, Treasury standardized the process required for handling certain borrower inquiries and disputes related to the MHA Program. The guidance also outlines the servicer's obligations for tracking borrower inquiries and disputes and conducting reviews in a timely fashion, whether received directly from a borrower or indirectly from the HOPE Hotline, through MHA Help, or the HAMP Solution Center. Fannie Mae as the program administrator prepares weekly and monthly performance reports for the HOPE Hotline and the MHA support centers. Treasury officials in the Office of Financial Agents and the Homeownership Preservation Office review these reports with management from the program administrator and, as necessary, its vendors. In addition, Treasury reviews a sample of escalated case files monthly to ensure that the support centers are providing the services Treasury expects of them.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should expeditiously more clearly inform borrowers that the HOPE Hotline may also be used if they are having difficulty with their HAMP application or servicer or feel that they have been incorrectly denied HAMP, monitor the effectiveness of the HOPE Hotline as an escalation process for handling borrower concerns about potentially incorrect HAMP denials, and develop an improved escalation mechanism if the HOPE Hotline is not sufficiently effective.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: Starting with program activity through April 2011, Treasury has begun publishing quarterly assessments of the performance of the 10 largest participating servicers in meeting the requirements for implementing MHA programs. Treasury uses the results of compliance reviews conducted by Freddie Mac in its capacity as the compliance agent for MHA and quantitative data on performance on individual loan files maintained by Fannie Mae in its capacity as the MHA program administrator. Treasury reviews the compliance data and ratings, the program results metrics, and other relevant factors affecting servicer performance in determining whether a servicer needs substantial improvement, moderate improvement, or minor improvement to its performance under MHA guidelines. For servicers in need of substantial improvement, Treasury will, absent extenuating circumstances, withhold financial incentives owed to those servicers until they make certain identified improvements. In certain cases, particularly where there is a failure to correct identified problems within a reasonable time, Treasury may also permanently reduce the financial incentives. Servicers in need of moderate improvement will be subject to withholding in the future if they fail to make certain identified improvements. All withholdings apply only to incentives owed to servicers for their participation in MHA; these withholdings do not apply to incentives paid to servicers for the benefit of homeowners or investors. Based on performance through the first quarter of 2011, Treasury has imposed monetary sanctions (withholding of financial incentives) on 3 servicers that it identified as needing to make substantial improvement in their performance with respect to meeting MHA program requirements.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should expeditiously finalize and issue consequences for servicer noncompliance with HAMP requirements as soon as possible.

    Agency Affected: Department of the Treasury

  6. Status: Open

    Comments: Starting with its monthly Making Home Affordable (MHA) performance report for activity through May 2011, Treasury has begun reporting summary data on the principal reduction alternative (PRA) program. Specifically, Treasury provides information on PRA trial modification activity (started, cumulative, and permanent) as well as the median principal amount reduced for active permanent modifications. In June 2012, Treasury officials stated that they had been working with servicers to improve the quality of the data provided on PRA and were undertaking additional research to look at the effectiveness. Since principal reduction is voluntary for servicers, Treasury needs to ensure that public reporting of this program promotes transparency and addresses potential questions about whether individual servicers are treating all borrowers fairly.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should expeditiously report activity under the principal reduction program, 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.

    Agency Affected: Department of the Treasury

  7. Status: Closed - Implemented

    Comments: Since June 2011, Treasury has been reporting in its MHA program performance reports on the performance of the largest MHA servicers in three categories: (1) identifying and contacting homeowners; (2) homeowner evaluation and assistance; and (3) prgram management and reporting. Treasury has established quantitative and qualitative benchmarks for each of the three performance categories. The performance metrics include the HAMP first lien modifications and other TARP-funded MHA programs.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should expeditiously finalize and implement benchmarks for performance measures under the first-lien modification program, as well as develop measures and benchmarks for the recently announced HAMP-funded homeowner assistance programs.

    Agency Affected: Department of the Treasury

  8. Status: Closed - Implemented

    Comments: In July 2013, Treasury conducted a risk assessment of MHA programs, including measurement of internal control activities of the second lien modification, principal reduction alternative, home affordable alternative foreclosure, and unemployed borrowers programs. Treasury has also periodically assessed the design of other TARP-funded housing programs, including the Federal Housing Administration's Short Refinance Program, which resulted in Treasury de-obligating $7.1 billion in funds during fiscal year 2013.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of HAMP, the Secretary of the Treasury should expeditiously implement a prudent design for remaining HAMP-funded programs.

    Agency Affected: Department of the Treasury

 

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