Troubled Asset Relief Program:

Treasury Continues to Face Implementation Challenges and Data Weaknesses in Its Making Home Affordable Program

GAO-11-288: Published: Mar 17, 2011. Publicly Released: Mar 17, 2011.

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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.

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. 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. 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. 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. 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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Treasury issued Supplemental Directive 11-10 in September 2011, which required servicers to inform each borrower who receives a permanent first-lien modification under HAMP of the borrower's potential eligibility for a second-lien modification under 2MP. Treasury updated the Home Affordable Modification Agreement Cover Letter form to include model clauses that servicers can use to notify borrowers, including a link to the MHA website to determine whether the second-lien servicer is participating in 2MP and a statement encouraging the borrower to contact the second-lien servicer if the servicer does not contact the borrower within 60 days. By requiring servicers to notify borrowers of their potential eligibility for 2MP, Treasury may have increased the likelihood of borrowers receiving modifications that are affordable and sustainable, which would reduce redefaults.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of MHA, the Secretary of the Treasury should 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 Lender Processing Services (LPS) matching database and, therefore, are not offered second-lien modifications.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: Treasury has contracted with Freddie Mac to serve as the compliance agent for the Making Home Affordable program (MHA-C). In addition to conducting readiness assessments, MHA-C performs evaluations of servicer's implementation of MHA programs including 2MP, HAFA, and PRA. The specifics of these evaluations are designed to ensure adherence with the program guidelines, as well as the servicer's ability to meet those guidelines. According to Treasury, in instances where a servicer may have implementation challenges and is unable to meet specific elements of the program, these matters are raised to Treasury's Office of Financial Stability management and tracked to resolution by MHA-C to ensure that implementation occurs as soon as practicable.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of MHA, the Secretary of the Treasury should ensure that servicers demonstrate they have the operational capacity and infrastructure in place to successfully implement the requirements of the Second-Lien Modification Program (2MP), Home Affordable Foreclosure Alternatives (HAFA), and Principal Reduction Alternatives (PRA) programs.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: In its 60-day response letter, Treasury stated that it had revised the survey it conducts of the 10 largest MHA servicers regarding the on the disposition of borrowers who have been denied HAMP modifications, or were canceled from trials, to ask about dispositions of borrowers who are "in process" and "completed" to clarify their status. Treasury provided the updated survey template in February 2013. Treasury officials said they also considered capturing multiple outcomes but decided against it. Instead, they have servicers report dispositions according to a hierarchy specified in the template.

    Recommendation: As part of its efforts to continue improving the transparency and accountability of MHA, the Secretary of the Treasury should 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 Affected: Department of the Treasury

 

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