Inspector general says changes to Making Home Affordable may impede help
Wednesday, April 21, 2010
Proposed changes to the government's marquee foreclosure-prevention initiative may impede efforts to help troubled homeowners and could lead to more fraud in the program, a federal watchdog concluded in a report released Tuesday.
The Making Home Affordable program was intended to reach as many as 4 million struggling borrowers when it was launched a year ago, but it has permanently modified only 230,000 loans. That prompted the Obama administration to announce changes to the program last month as it aims to help unemployed borrowers and homeowners who are "underwater," owing more than their homes are worth.
When the changes are adopted later this year, lenders will be required to slash the mortgage payments of unemployed borrowers for three to six months. For the first time, the government will offer financial incentives to lenders that reduce the loan balances of underwater borrowers.
But the goals of these changes are ill-defined, and their guidelines are unclear, which could lead to increased fraud, according to the quarterly report by Neil Barofsky, the special inspector general for the federal Troubled Assets Relief Program.
Although the government has said it does not expect to spend more than $50 billion on these adjustments, it has not provided a breakdown of costs for each new initiative; nor has it specified how many borrowers it hopes to reach or fully formulated its ideas, the report said.
"Criminals feed on borrower confusion, and frequent changes to the programs provide opportunities for experienced criminal elements to prey on desperate homeowners," Barofsky wrote.
The report singles out the larger government payouts soon to be offered to borrowers and lenders who participate in short sales, in which lenders allow struggling borrowers to sell their homes for less than what they owe on them.
These short sales are vulnerable to "flopping," a scheme that typically involves industry insiders who appraise a home at a deflated value, arrange its sale to a straw purchaser and then quickly resell the property at market value, pocketing the profit.
Deterring such activity requires adopting a uniform appraisal system similar to the one in place at the Federal Housing Administration, the report said. Without that, the program is likely to attract crooks, especially since firms will soon to be able to collect $1,500 for allowing a short sale, instead of the current $1,000, the report concluded.
In a letter to Barofsky, a Treasury Department official said the administration plans to roll out a public-service campaign to raise awareness of mortgage fraud. The government will also provide fraud warnings as it makes changes, Herbert M. Allison Jr., assistant Treasury secretary for financial stability, wrote in the letter.
Other recommendations in Barofsky's report include having the administration consider extending the three-to-six-month window for mortgage assistance to jobless homeowners, given that 43 percent of the unemployed have been out of work for 27 weeks.
As for underwater borrowers, the report praised the administration for encouraging lenders to cut their loan balances, something it had been reluctant to do in the past for fear that such a move would encourage borrowers to stop paying their loans.
But the success of that plan hinges on lenders' willingness to participate; the report recommended that the administration reconsider the voluntary nature of the program.
Lenders will be asked -- but not required -- to reduce the principal owed on a loan if the amount exceeds the value of the home by 15 percent or more. The reduced amount would be set aside and forgiven by the lender over three years if the borrower keeps up with monthly payments.