When the Treasury Department opened the Home Affordable Modification Program to real estate investors in January, it didn't do enough to shield taxpayers from potential fraud, according to a government watchdog.
Treasury expanded HAMP at the beginning of the year to ease qualifications and pay servicers and bond investors more for principal reductions. But the changes also allowed property investors to modify up to four homes as long they intend to rent them out.
The problem is in proving it. The Treasury does not require the mortgage servicer to independently verify the property is rented, according to a Special Inspector General of TARP report released this week. Instead, it relies on the borrower's certification that he or she intends to rent the property.
"This does not go far enough," SIGTARP wrote in the report. "It is absolutely essential that Treasury establish a vigorous compliance regime related to this expansion of HAMP. Requiring only a self-certification, without a strong compliance and enforcement regime to ensure that the intent is carried out and the property is actually rented, leaves the program vulnerable to risks that TARP funds will pay investors for modifications for mortgages on vacation homes that are not rented."
The watchdog long criticized Treasury for lax oversight of HAMP servicers and for not setting strict benchmarks. Of the $29.9 billion in TARP funds set aside for HAMP, roughly $2.7 billion had been spent as of March 31.
The program was originally estimated to reach between 3 million and 4 million borrowers, but to date has permanently modified only 794,000 loans.
There is no estimate yet from the Treasury on what the expanded program would bring in.
According to SIGTARP, a borrower with a vacation home could certify his or her intention and get the modification without ever intending to fill the property. Also, the borrower could rent it out for only a short period as vacation homeowners often do for as little as one week during a five-year modification period.
"Loan servicers cannot know a borrower's true financial situation until there is a renter, meaning that eligibility decisions may be made in error based on a borrower's certification of an intent to rent," according to the report.
SIGTARP made several recommendations. It suggested Treasury force a borrower to prove the property is rented at the time of the modification and state under threat of perjury that the occupancy hasn't changed.
It also suggested Treasury require the borrower to immediately notify a servicer if the property goes vacant for more than three months, and that servicers should report any changes to Treasury in the monthly reports. Finally, SIGTARP asked Treasury to bar any payments through HAMP for a property vacant for more than three months.
Treasury Assistant Secretary Tim Massad wrote in a response letter to SIGTARP that a pilot program has been under way since October 2010 to verify owner occupancy.
"With no compliance regime to determine that a renter is in place, the program remains vulnerable to TARP funds being paid to modify mortgages that do not fit within the intended expansion of the program," SIGTARP said.