Borrowers who have received loan modifications on home mortgages are redefaulting at an alarming rate, according to the special inspector general for the Troubled Asset Relief Program, which released its quarterly report to Congress July 24.
Christy Romero, special inspector general for TARP, noted in the report that its programs have cost taxpayers billions of dollars and that the U.S. Department of the Treasury has failed to properly analyze its own data to determine which borrowers were most at risk of foreclosure after receiving a loan modification.
The report noted that 46 percent of homeowners who received assistance through the Home Affordable Modification Program in 2009 have redefaulted, and 38 percent who received loan modifications in 2010 have redefaulted.
Under HAMP, homeowners in default who have loans held by banks or investors can apply for a reduction in monthly payments. In exchange for granting loan modifications, servicers can receive incentives to make borrowing more affordable for distressed homeowners.
In 2009, when the Obama administration unveiled HAMP, the Treasury claimed it would help up to four million borrowers stay out of foreclosure. However, by April 2013 only 865,100 homeowners were active in the program, and 10 percent of them have missed one or two payments. The overall default rate stands at 26 percent.
Romero noted in the report that the Treasury — which extended HAMP through 2015 — must do a better job of monitoring the program. “No servicer has ever paid a penalty for HAMP despite all the misconduct out there. It cannot just be about the carrot — the incentive payments — but must also be about penalties and it's been an ongoing problem that Treasury is really not coming down on servicers for misconduct.” She noted that the Treasury needs to take a “hardline approach,” although it does not have the authority to impose penalties in the same way as a regulatory or law enforcement agency.
The report noted that only 22 percent of TARP funds actually have gone to programs for helping distressed borrowers, and that taxpayers have lost $815 million in incentive payments made through April 30 on more than 163,000 HAMP modifications that eventually redefaulted.
The report also revealed that 91 percent of the TARP funds that were administered through HAMP modifications and that redefaulted were paid to the nation’s top 10 servicers, including Ocwen Loan Servicing, JPMorgan Chase and Bank of America.
“Homeowners who receive a HAMP permanent modification but end up losing their homes to foreclosure or fall out of the TARP program are not being helped to keep their homes as TARP intended, and taxpayers lose the positive impact these funds were to provide for the individual family and community at large,” Romero noted in the report.
Romero said that homeowners who are most vulnerable to redefault are those who received less than a 5 percent reduction in housing expenses, who still are underwater on mortgages or who have subprime credit scores or high debt loads.
Romero recommended that the Treasury conduct an in-depth analysis of the causes of redefaults and said that Treasury must modify HAMP and other TARP housing programs to reduce redefault rates. She also recommended that servicers develop an “early warning system” that allows them to be proactive in reaching out to at-risk borrowers. She said the Treasury should permanently withhold incentives from services who fail to provide borrowers with alternatives to foreclosure, too.
Read the quarterly report to Congress.