Mortgage Re-Defaults Need Treasury’s Focus, Audit Finds

The U.S. Treasury Department needs to do more to learn why more than a quarter of the borrowers in a federal mortgage workout program have re-defaulted, costing taxpayers at least $815 million, according to an audit report released today.

“You have, right now, a situation where Treasury does not understand and the servicers do not understand why homeowners are falling out” of the Home Affordable Mortgage Program, Christy Romero, the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP, said in a telephone interview yesterday. “That has to change so that action can be taken to prevent that from happening.”

The report underscores a disagreement between the auditor and Treasury over the performance of HAMP, which has used TARP funds to pay lenders incentives to modify loans for nearly 1.2 million delinquent borrowers since February of 2009. More than 300,000 of those homeowners had re-defaulted by the end of April this year. SIGTARP also said it found an “alarming” number of HAMP re-defaults in an April audit.

Treasury officials said about 11 percent of borrowers who re-defaulted after receiving a HAMP modification lost their houses in foreclosure sales. The rest received other types of loan workouts or gave up their homes before foreclosure.

“It is important to keep in mind that HAMP targets borrowers in demonstratively difficult financial situations,” Treasury Assistant Secretary Timothy Massad wrote in a July 5 letter to Romero. “While the program is designed to reduce the default probability of these loans as much as possible, these loans present a higher-than-usual risk of default to begin with.”

Program Improvements

Treasury officials said borrowers are more likely to stay current on their mortgages the longer they stay in the program and that the most recent TARP recipients have been more successful after improvements to the program including larger average monthly payment reductions.

The audit found that struggling borrowers who entered the program in 2009 and 2010, who make up more than half of all HAMP participants, had re-default rates of 46 percent and 38 percent, respectively.

“Rather than trying to defend this number or that number, how can you help homeowners who may be at risk of re-defaulting and take pro-active steps to help them?” Romero said in the interview.

Mistakes by mortgage servicers may be partially to blame, Romero said in the report, citing 13 different examples of complaints from among “thousands” the auditor received from troubled borrowers between 2010 and July of 2013. Homeowners said lenders had lost their modification records, miscalculated payments, failed to credit payments or had foreclosed on them while a modification was in effect -- a violation of program rules.

A Treasury official, who asked not to be identified as a condition for briefing reporters on Tuesday, said servicer performance had improved over time. Some servicers still have room for improvement, the official said.