Homeowners defaulting in federal loan modification program, report says

Struggling homeowners who received loan modifications under a federal government program are defaulting on their mortgages at an alarming rate, according to a watchdog report released Wednesday.

The report from the special inspector general for the Troubled Asset Relief Program said the Treasury Department’s Home Affordable Modification Program, or HAMP, has failed to ensure that mortgage reductions are sustainable.

Home loans modified in the third and fourth quarters of 2009 are now defaulting at a rate of 46 percent and 39 percent, respectively. As of the end of March, more than 312,000 homeowners have defaulted on mortgages modified under HAMP, according to the report.

“This is a significant problem,” said Christy Romero, special inspector general for TARP. “When homeowners fall out of these modifications, all of a sudden they’re facing huge mortgage payments. If they can’t afford it, they’re going to get foreclosed on.”

The Obama administration created HAMP in 2009 as a lifeline for the millions of homeowners facing default in the wake of the housing bust. The program provided $75 billion to help lenders reduce borrowers’ monthly payments to 31 percent of their income.

At the time, the administration estimated that HAMP would help as many as 4 million homeowners avoid foreclosure. But the program has been plagued with delays and has faced criticism for not reaching enough struggling Americans.

Diane Cipollone of the National Fair Housing Alliance is still hearing complaints from homeowners about the pace of reviews and a lack of transparency in the denial process.

“It’s the same old stuff,” she said, “although we understand that the numbers [of defaults] are much better since principal reductions” were introduced at the end of 2010.

According to the inspector general, only 862,279 homeowners are in an active permanent HAMP modification, a number that the watchdog said would probably fall if the default trend continues. The report did not offer specific reasons for the high default rate, noting that Treasury does not require mortgage servicers to report on such matters.

The inspector general called on the department to conduct research to better understand and address the root causes of the defaults. The office is recommending that the agency work with servicers to develop an early-warning system to reach out to HAMP homeowners who are on the verge of default.

Treasury officials rebutted the inspector general’s assertions about the shortcomings of HAMP. They said the program has helped nearly 6.5 million homeowners avoid foreclosure since 2009. That claim stands in contrast with the inspector general’s findings, which say that barely a million people have received a permanent modification directly from HAMP.

As for the rate of defaults, Treasury spokesman Anthony Coley said, “Data shows that the majority of homeowners who receive assistance from HAMP have a high likelihood of long-term success to avoid foreclosure, and . . . HAMP modifications continue to outperform private industry modifications.”

The Office of the Comptroller of the Currency has said that HAMP modifications exhibit lower delinquency and re-default rates than modifications done by private-sector companies. The bank regulator attributed the difference to the program’s emphasis on the affordability of monthly payments relative to a borrower’s income, verification of income and a trial-period plan.

The inspector general’s criticisms of HAMP were part of a quarterly report to Congress, which also took aim at bailed-out banks’ failure to lend to small businesses. Earlier in the month, the watchdog said that banks used billions from Treasury’s small-business lending program to repay government bailout funds, rather than on its intended purpose — charges the department denied.

Danielle Douglas covers the banking industry for The Washington Post.
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