The Treasury’s homeowner aid effort is “ineffective” and has failed to hold mortgage companies accountable, the Congressional Oversight Panel for the Troubled Asset Relief Program said in a report released today.
“The program has turned out to be a lot smaller and have a lot less impact on the housing market than we expected,” said former U.S. Senator Ted Kaufman, the chairman of the panel.
The Home Affordable Modification Program, or HAMP, pays lenders and servicers to rewrite loan terms for borrowers who can’t make their current mortgage payments. Since its 2008 creation, HAMP’s goal of preventing 3 million to 4 million foreclosures “has been repeatedly redefined and watered down,” the panel said.
“If current trends hold, HAMP will prevent only 700,000 to 800,000 foreclosures,” a small portion of the 8 million to 13 million foreclosures expected by 2012, said Kaufman, a Democrat from Delaware.
The Treasury will spend only about a fourth of the $50 billion it allocated for the program in 2009, according to the Congressional Budget Office.
“For this reason, Treasury’s reluctance to acknowledge HAMP’s shortcomings has had real consequences,” the TARP panel found. “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.”
Homeowners are dropping out of the program at a faster rate than they’re joining it, the Treasury reported last month. The number of borrowers aided by HAMP grew to nearly 520,000 in October, up 23,750 from a month earlier, while 36,300 dropped out after failing to make their modified payments.
Timothy Massad, Treasury’s acting assistant secretary for financial stability, called the report “somewhat unfair.”
Massad said that while 500,000 homeowners have received permanent loan modifications under HAMP, the impact goes beyond those numbers because mortgage servicers have imitated HAMP with their own programs.
“We’ve set a new standard for the industry,” Massad told reporters in a conference call. When “ millions of modifications” by the industry are taken into account, “it is having a real impact on the ground,” he said.
HAMP’s premise is that lenders have an incentive to reduce a borrower’s payments to prevent a foreclosure because they usually recover only a fraction of the value of a mortgage when they seize a home.
Through HAMP, “Treasury attempted to sweeten this deal by offering incentive payments to all parties to a mortgage loan modification,” the panel reported. “Yet despite the apparent strength of HAMP’s economic logic, the program has failed to help the vast majority of homeowners facing foreclosure.”
Companies that manage mortgage loans can profit from foreclosure-related fees and are reluctant to participate in the Treasury program, the report found. In addition, many borrowers have second mortgages from lenders who might profit by blocking a loan modification. Pooling and servicing agreements that govern securitized mortgages might also limit servicers’ ability to modify loans.
“Mortgages are, in practice, far more complicated than a one-to-one relationship between borrower and lender,” the panel found.
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