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Mortgage Market Watchdogs Urge House Lawmakers to Rally HAMP Reform

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[Update 1: clarifies Mark Calabria's statements.] A watchdog over the bailout efforts of Troubled Asset Relief Program (TARP), along with a government watchdog and an affordable housing interest group, told a panel of House of Representative lawmakers the administration's mortgage modification plan lacks clarity and oversight. In testimony to the House Committee on Oversight and Government Reform today, Special Inspector General for TARP (SIGTARP) Neil Barofsky remarked it will remain unclear how many permanent modifications are actually expected until the Treasury Department clarifies its goals for the Home Affordable Modification Program (HAMP). He called the Treasury’s failure to identify an actual goal for permanent modifications “unacceptable." A year into the program, which originally aimed to aid 3-4m borrowers, servicers placed only 170,000 trial modifications into permanent status. Additionally, the pace of trial modifications starts leveled out in recent months, and the share of permanent modifications only recently started keeping pace: The delay has been traced to a number of issues within HAMP, as outlined in SIGTARP's latest audit. Barofsky said HAMP showed a lack of planning upfront — what he called a “ready, fire, aim” approach on the part of the Treasury — and indicated the constant changes in guidance and documentation requirements cause servicers to reset their systems. This causes delays in the process and jumbled paperwork. “One of the servicers explained to us that they did in fact lose paperwork because they were so overwhelmed, because of the verbal modifications, because of the constant changes to their systems, that they hired a vendor and the vendor lost all the documents,” Barofsky said in the hearing. Gene Dodaro, acting comptroller general at the Government Accountability Office (GAO), told the Committee the Treasury should pick up its efforts to move forward on its Second Lien Modification Program (2MP), Home Affordable Foreclosure Alternatives (HAFA) program and the $1.5bn Hardest Hit Fund. He also recommended the Treasury to follow-up on debt counseling for borrowers with high debt-to-income (DTI) ratios. He noted that, of the 170,000 permanent modifications, 1,473 have re-defaulted so far. John Taylor, President and CEO, National Community Reinvestment Coalition urged mandatory compliance with HAMP and a larger focus on principal reduction. Taylor issued a statement yesterday supporting the move by Bank of America (BAC) to reduce principal balances on loans that are underwater. “Principal reduction is an important tool in making loans sustainable for many borrowers,” he said. “The rest of the industry should follow suit. And federal policy should reflect the growing consensus that principal reductions are required to stem the foreclosure crisis, not more half measures that push the problem down the road.” He noted, for example, that HAMP’s provision for principal reduction is “hamstrung” by a lack of an explicit requirement mandating principal reduction. He added in Wednesday's statement: “Lenders and servicers must be compelled to take more aggressive actions to prevent foreclosure. And the loans the federal government has the authority to mandate such reductions on loans held by Fannie Mae and Freddie Mac.” Mark Calabria, director of financial regulation studies at the Cato Institute, told the House panel the Treasury should end programs focused on helping borrowers that are underwater and can’t refinance. Instead, he said, help should be given to families facing foreclosure. Calabria estimated that, should the Treasury spend the total $75bn under the program and not increase the volume of permanent modifications substantially, the expenditure could work out to as much as $400,000 per permanently modified loan. He noted that’s “more than twice the median house price” and said, “it would be cheaper to buy them a house.” Write to Diana Golobay.

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