TARP Watchdog Says HAMP Changes Could Impede Modifications
The watchdog of the federal bailout efforts criticized the US Treasury Department's recent revisions to the Home Affordable Modification Program (HAMP), saying the changes could slow the effectiveness of a program that has shown "very little progress" so far. The Special Inspector General Troubled Asset Relief Program (SIGTARP) took Treasury to task in its latest quarterly report to Congress (download here), which studies the continued financial unraveling in the US mortgage market. While foreclosures and bank repossessions rose in Q110 above year-ago levels -- 16% and 35%, respectively -- HAMP results in "very little progress" so far, SIGTARP said, with only 230,000 permanent modifications completed over 12 months of operation (illustrated below). This represents only 8.2% of the foreclosures initiated in 2009, and fewer than only the most recent quarter's bank repossessions. SIGTARP previously criticized Treasury for its "disappointing" rate of permanent modifications. In a March report, the watchdog said significant risks of re-default remain among even the permanent modifications, and the Treasury’s management and expectations of the program lack transparency. Just days after the March report, Treasury launched major revisions to HAMP, including new provisions to address unemployed homeowners, and to require consideration of principal write-downs for underwater borrowers. SIGTARP said these changes appear designed to expand HAMP participation and improve the permanent modification rate and re-default risk. "However, the program changes, as announced, also raise several issues that could impede HAMP’s effectiveness and efficiency," SIGTARP said. "Treasury’s urgency in rolling out the new initiatives, laudable as it is, risks significant costs in the form of ill-defined goals, incomplete program guidelines, increased vulnerability to fraud, incentives that may prove ineffective, and the potential for arbitrary treatment of participating borrowers." SIGTARP recommended Treasury identify participation goals and expected costs for each HAMP program and subprogram, as well as launch a fraud awareness campaign and include warnings with each new program announcement. The watchdog also urged Treasury to adopt the Federal Housing Authority's appraisal standard for all principal reduction and short sale programs. SIGTARP said the Treasury should reevaluate the voluntary nature of its principal reduction program, to both ensure the greatest extent of the program as possible and prevent servicer conflicts of interest. It also recommended the Treasury reconsider the length of three-month minimum term of its unemployment forbearance program. "Questions remain as to whether the real estate markets have truly found bottom or are headed for further decline," SIGTARP said. "In sum, notwithstanding that the financial system appears to be stabilizing and record profits are returning to Wall Street, the plain fact is that too many Americans on Main Street are still in imminent danger of losing their businesses, their jobs, and their homes." Unemployment -- which remains a significant factor in a borrower's ability to make mortgage payments and apply for HAMP modification -- is becoming more and more permanent. SIGTARP noted the duration of unemployment remains at a record high. At the same time, smaller and regional banks are suffering -- with 50 having closed so far in 2010 -- meaning the supply of credit continues to contract. Bailout efforts through the Troubled Asset Relief Program (TARP) -- which funds $50bn of the $75bn HAMP program -- remain costly. SIGTARP said that, despite $205.9bn of reapaid TARP funds, the program is still expected to cost taxpayers $127bn. These costs are concentrated in programs supporting American International Group (AIG) ($50bn), US housing ($49bn), and the automotive industry ($31bn). Write to Diana Golobay. Disclosure: the author holds no relevant investments.