The watchdog on the federal bailout efforts came down hard on the Treasury Department in its latest audit of the program, in particular criticizing the high risk of re-default within the Home Affordable Modification Program (HAMP). So far, HAMP results have been “disappointing” as, a year into the program, only 168,708 modifications became permanent out of more than 1m trials, according to audit report by Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program. Significant risks of re-default remain among even the permanent modifications, and the Treasury’s management and expectations of the program lack transparency, according to the report e-mailed to HousingWire. When the program began a year ago, Treasury officials estimated 3-4m borrowers would receive help under HAMP. It was unclear whether this goal represented trial modifications offered, started or transferred into permanent status. During the audit process, SIGTARP said a Treasury official estimated 3m borrowers will enter trial modifications through the life of the four-year program, and 1.5m to 2m will convert to permanent status. SIGTARP noted this “may only be a small fraction” of the volume of foreclosures that will occur over the same time. The pace of HAMP modifications has failed to meet expectations so far, with the rate of growth in trial modifications leveling out in recent months and permanent modifications lagging far behind: HAMP has disappointed in part because program rules were not defined at the start of the program and the Treasury as a result repeatedly revised the program, causing delay and confusion among servicers, the report claims. SIGTARP also noted the freedom of servicers to begin trial modifications before receiving supporting documentation proved “counterproductive” as many of the trials will never become permanent. Additionally, the Treasury’s marketing of the program remains “limited” even a year after the program began. The risk of borrowers re-defaulting even after permanent modification status remains high within HAMP. The element of HAMP’s design chiefly responsible for this is the fact a borrower’s non-mortgage debts are not considered when modifying mortgage payments to within 31% debt-to-income. SIGTARP also noted that, under a HAMP modification, the interest rate is set to adjust after the five-year modification period. If the interest rate rises but the borrower’s income does not, for example, the re-default risk is high. Second liens also present significant risk to the performance of modified first liens, as monthly payments might still be unaffordable if the second lien is not modified or extinguished, SIGTARP said. Treasury recently began signing the first servicers to the Second Lien Modification Program (2MP), with Bank of America (BAC), Wells Fargo (WFC) and JP Morgan Chase (JPM). SIGTARP also pointed to the prevalence of negative equity in mortgages eligible for modification: “[R]e-defaults resulting from negative equity, including strategic defaults, may be a factor as borrowers decide that it makes more economic sense for them to walk away from their mortgages notwithstanding the lower payments.” The report recommends the Treasury disclose goals for how many borrowers “will actually be helped” with permanent modifications and set goals for performance under the modifications. also recommended launching a public service announcement campaign to increase awareness of HAMP. SIGTARP said Treasury concurred with these suggestions, but “non-concurred” with the last two, that the Treasury should reconsider its decision to allow servicers to substitute alternative forms of income verification, and should re-examine HAMP’s structure to minimize the risk of re-default. Write to Diana Golobay. Disclosure: The author holds no relevant investment positions.
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