SIGTARP: Mortgage Mod Failures

Econintersect:

Office of the Special Inspector General for the Troubled Asset Relief Program

The SIGTARP reporthas this specifically about mortgage modifications:

A Rising Number of Redefaulted HAMP Mortgage Modifications
As of March 31, 2013, Treasury had spent less than 2% (approximately $7.3 billion) of TARP funds on TARP homeowner relief programs, including HAMP and the Hardest Hit Fund, compared with the 75% of TARP funds Treasury spent to rescue financial institutions. For example, The PNC Financial Services Group, a large regional east coast bank, alone received $7.6 billion, nearly the same amount of TARP funds used to help struggling homeowners throughout the nation. SunTrust Banks, Inc., a large southeastern regional bank, alone received $4.85 billion, just slightly less than the $5 billion spent on TARP’s signature housing program HAMP. The six largest banks each received much more. Treasury pulled out all the stops for the largest financial institutions, and it must do the same for homeowners.
Treasury also has a responsibility to ensure that help to homeowners through TARP is sustainable. When Treasury launched HAMP, in early 2009, Treasury said it would provide affordable and sustainable relief for as many as 3 to 4 million at-risk homeowners to help them avoid foreclosure. The only way a homeowner avoids a foreclosure through HAMP is to remain active in a permanent mortgage modification. Only 862,279 homeowners are in an active permanent HAMP modification, about half of which were funded through TARP. Trends indicate this number of homeowners is likely to fall even further, as many homeowners are redefaulting on their HAMP permanent modifications. As of March 31, 2013, more than 312,000 homeowners have redefaulted on their HAMP permanent modification. For these homeowners, the HAMP permanent mortgage modification they received was not sustainable.
SIGTARP is concerned that the number of homeowners who have redefaulted on a HAMP permanent mortgage modification is increasing at an alarming rate. Treasury’s data shows that the longer a homeowner remains in HAMP, the more likely he or she is to redefault out of the program. As of March 31, 2013, the oldest HAMP permanent modifications, from the third and fourth quarter of 2009, are redefaulting at a rate of 46.1% and 39.1%. HAMP permanent modifications from 2010 also had high redefault rates, ranging from 28.9% to 37.6%.
Treasury should work to curb HAMP redefaults to keep homeowners safe from losing their homes. Redefaulted HAMP modifications often inflict great harm on already struggling homeowners when any amounts previously modified suddenly come due. When the homeowner cannot pay it, they lose their home to foreclosure, which has a devastating impact on families, neighborhoods, and the economy.

Treasury must address why homeowners are falling out of the HAMP program. Exactly why these HAMP permanent modifications failed is not well understood by Treasury. SIGTARP understands from meetings with Treasury officials that Treasury does not require servicers to report on the reasons for redefault. Because redefaults are so harmful to all, Treasury should develop a better understanding of why homeowners redefault, and the characteristics of loans that are more likely to redefault. Better knowledge of the characteristics of the loan, the homeowners,
the servicer, or the modification, more prone to redefault will increase Treasury’s understanding of the underlying problems that cause redefaults and provide Treasury an opportunity to address these issues proactively.
This month, SIGTARP recommended that Treasury conduct research and analysis to understand better and attack the underlying root causes of homeowner redefaults on HAMP modified mortgages. Already, Treasury has gathered a significant amount of data from servicers on the loans modified in HAMP that have redefaulted that it should analyze, including the characteristics of HAMP modifications that are more likely to redefault. To reduce redefaults and better assist struggling homeowners, Treasury should work with those servicers, who already have reporting requirements to Treasury, to learn additional information about the causes or characteristics of redefaulted HAMP modifications.
SIGTARP recommended that Treasury work with servicers to develop an early warning system to identify risks of future redefaults before they happen and intervene. Understanding the causes and characteristics of HAMP redefaults allows Treasury and HAMP servicers to predict which homeowners are most at risk of redefaulting. Armed with a better understanding about the causes and characteristics of HAMP redefaults, Treasury and servicers can develop an early warning system to reach out to homeowners participating in HAMP who may share the characteristics that lead to redefault, prior to the homeowner missing a payment, and provide or recommend counseling and other TARP program assistance that could help the borrowers avoid redefault and the unfortunate consequences that would ensue.

Here is a selected list of shortcomings of TARP and related programs that can be found in the latest SIGTARP report:

TARP lost money.  The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost).

A significant legacy of TARP is increased moral hazard and potentially disastrous consequences associated with institutions deemed “too big to fail.”

TARP’s legacy also includes the impact on consumers and homeowners from the large banks’ failure to lend TARP funds. TARP continues to be subject to criticism that TARP helped large banks but not homeowners.

…after 3½ years, community banks have an uphill battle to exit TARP because they cannot find new capital to replace TARP funds.

TARP’s legacy includes whitecollar crime that SIGTARP is uncovering and stopping.

Federal Reserve economists reported how the large banks that received Government bailouts through TARP are now taking more risks than banks that did not receive taxpayer money. According to the
Federal Reserve economists, the loans that the bailed-out banks are making today are riskier than those of their non-bailed-out counterparts.

Many of the same large banks have greatly increased their executive compensation despite the fact that regulators have stated that compensation played a role in causing the crisis by encouraging risky behavior.

According to Federal Reserve data, five financial institutions – JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. – held $8.5 trillion in assets at the end of 2011, equal to 56 percent of U.S. economic output, whereas before the financial crisis, these institutions held approximately $6.1 trillion in assets, equal to 43 percent of U.S. economic output.

It is vital that Treasury and the regulators act now when our nation is not in a financial crisis to make
effective use of the authorities granted to them under the Dodd-Frank Act in order to safeguard taxpayers.

Many smaller and medium-size banks are still feeling the effects of the crisis and are not exiting TARP with the same speed as the larger banks. More than 400 financial institutions remain in TARP.

During a crisis of record numbers of foreclosures and high unemployment, TARP is not reaching homeowners as was originally intended by Congress.

Only 9% of the TARP funds set aside for mortgage modifications have been spent to help a fraction of eligible homeowners after more than three years.

Additionally, despite the fact that Treasury designed the Hardest Hit Fund to address unemployment and underwater homes as causes of foreclosure, after two years, only 3% of the funds obligated have been spent to help only approximately 30,000 homeowners.

SIGTARP has made 96 recommendations designed to prevent fraud, waste, and abuse in TARP programs. However, Treasury has only fully or partially implemented about one third of these recommendations.

John Lounsbury

Source:

Quarterly Report to Congress (Office of the Special Inspector General for the Troubled Asset Relief Program, 25 April 2013)