U.S. foreclosure-prevention program fell short, Congressional Oversight Panel says

By Brady Dennis
Washington Post Staff Writer
Tuesday, December 14, 2010; 1:29 AM

The Treasury Department's primary foreclosure-prevention program has failed to live up to expectations and has suffered from a lack of "meaningful goals," according to a report from a congressional watchdog panel due out Tuesday.

The government's Home Affordable Modification Program, or HAMP, is on pace to prevent 700,000 to 800,000 foreclosures - a significant figure, but far fewer than the 3 million to 4 million struggling homeowners Treasury officials originally hoped to help, according to the bipartisan Congressional Oversight Panel.

"This has turned out to be a lot more complicated and a lot harder" than expected, the panel's chairman, Sen. Ted Kaufman (D-Del.), told reporters. He said he didn't consider HAMP a "failure" because it had helped many homeowners, but he added, "I think the program has just turned out to be smaller and has had a lot less impact" than anticipated.

The panel's report cites various reasons that HAMP has fallen woefully short of expectations, namely conflicting incentives within the mortgage industry.

For instance, although homeowners and their lenders often would benefit from modifying existing loans, companies that service those loans sometimes reap bigger financial gains with foreclosures. Treasury's efforts to encourage more servicers to modify loans by offering them payments have fallen short, the panel said, "in part because servicers were not required to participate."

Another factor is that many borrowers hold a second mortgage from lenders that stand to gain from blocking modifications to the first mortgage. "For these reasons and many others," the report states, "HAMP's straightforward plan to encourage modifications has proven ineffective in practice."

The panel also criticizes Treasury for failing to collect more data about HAMP, not setting more meaningful goals by which to measure the program's progress and failing to hold mortgage servicers accountable for repeatedly losing paperwork or resisting modifications.

Tim Massad, Treasury's acting assistant secretary for financial stability, called the report's criticisms "somewhat unfair" in a conference call with reporters Monday evening.

"This program has had many critics, and there have obviously been many criticisms of it, but I think it's important to recognize what it has accomplished," he said, noting that HAMP so far has aided half a million troubled homeowners. "That's a lot of people. We shouldn't discount that."

In addition, Massad said that the standards put in place by Treasury have set a model for the private industry, where the number of modifications far outpaces those completed through HAMP. Massad also noted that other government-backed efforts, such as those undertaken by the Federal Housing Administration and mortgage giants Fannie Mae and Freddie Mac, have resulted in additional modifications.

Massad said Treasury officials had tried to walk a fine line, structuring HAMP in a way that helped as many homeowners as possible while avoiding unnecessarily wasting taxpayer dollars and modifications that would result in redefaults. "I certainly acknowledge there are a lot of challenges and a lot of difficulties in doing that," he said.

Still, the oversight panel report states that HAMP modifications on average offer "more relief to the borrower" and have "a lower likelihood of redefault" than proprietary modifications.

Massad said the agency would continue to focus on fixing problems plaguing the mortgage-servicing industry, which has been overwhelmed by the housing crisis, and he added that "we may very well withhold or claw back payments in the future" if servicers fail to live up to the requirements of the program.

HAMP has helped about 500,000 homeowners, but oversight panel members lamented that the expiration of the government's bailout program this fall means that Treasury missed an opportunity to revamp the program to reach more of them.

"The ability to do any major modifications to the program has been lost," Kaufman said. The panel estimated that Treasury would spend only about $4 billion of the nearly $30 billion originally set aside for HAMP.

Still, the report urges Treasury to take other steps to decrease foreclosures. Among its recommendations: Flagging HAMP delinquencies early in order to prevent redefaults, as well as allowing borrowers to apply for loan modifications online.

Even so, the panel's report states, "An untold number of borrowers may go without help - all because Treasury failed to acknowledge HAMP's shortcomings in time."

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