The government failed to help homeowners as much as it helped Wall Street firms, and a federal program intended to avert home foreclosure fell vastly short of its goals, according to the recently released final report of a government watchdog panel.
The Troubled Asset Relief Program, or TARP, is best known for bailing out financial firms, insurance giants and automakers. But it also included a program called the Home Affordable Modification Program designed to help struggling homeowners keep their houses. It functioned by paying mortgage servicers incentives for adjusting the terms of those loans. If TARP was the bailout of Wall Street, HAMP was intended to be the help for Main Street.
But the program hasn’t helped anywhere near the number of families that it was supposed to, according to the Congressional Oversight Panel, the government’s official TARP watchdog.
“(T)he TARP program that directly reached the most participants – HAMP – was also one of the least effective, in part because Treasury found the task of coordinating hundreds of banks and loan servicers and millions of homeowners to be nearly overwhelming,” the panel wrote. It has previously reported that HAMP “would not make a significant dent in the foreclosure crisis.”
Local officials have a vested interest in the success of HAMP, since foreclosures hurt property values and destabilize communities. Groups representing localities are opposed to recent efforts by Republicans to eliminate HAMP, largely because it's been the federal government's largest tool for addressing foreclosures. There is little that localities can do to help distressed homeowners.
When President Obama announced HAMP in early 2009, he said it would prevent 3 to 4 million foreclosures, yet it now appears on pace to aid only 700,000 to 800,000, according to the panel.
The program functions by temporarily modifying the terms of home loans by reducing their interest rates or extending their lengths. On average, those lucky enough to get HAMP modifications save $500 per month. In theory, if homeowners make their modified payments on time, their modifications are rendered permanent. But Treasury has actually kicked more people out of HAMP (740,000) than have received permanent aid through the program (608,000).
(See chart below comparing the cumulative number of permanent modifications to the cumulative number of cancelled modifications. Article continues after chart.)
The panel, as it has in the past, criticized Treasury for not adjusting its goals or providing a meaningful metric against which to measure HAMP’s success or failure. “Absent meaningful goals, the public has no meaningful way to hold Treasury accountable, and Treasury has no clear target to strive toward in its own deliberations,” the panel wrote.
Overall, TARP is projected to cost $25 billion – vastly less than the $356 billion originally projected –- but those savings are largely due to the shortcomings of HAMP. The program only pays incentives when mortgages are modified, so just a fraction of money available to the program was actually expended. The Congressional Budget Office estimates that Treasury will spend $12 billion on its foreclosure prevention programs – of which HAMP is the largest – even though $50 billion was allocated. From the panel’s perspective, those savings aren’t good news, since it means Treasury wasn’t able to help homeowners to the degree it could have.
“Viewed from this perspective, the TARP will cost less than expected in part because it will accomplish far less than envisioned for American homeowners,” the panel wrote.
The panel has devoted more attention to its examination of HAMP than any other aspect of TARP, despite it being relatively small compared to other programs, a fact that underscores the scale of the shortcomings the panel saw in the program.
One major problem with HAMP was that lenders should theoretically have shared the government's goal of modifying loans, since they are typically less expensive than foreclosures. But incentives for modifications are paid to the mortgage servicers, who in many cases stand to gain more money though a foreclosure.
Because Treasury relied almost entirely on servicers to administer the program, homeowners failed to see as much relief as the government originally promised, the panel wrote. Horror stories abound of borrowers whose modifications were jeopardized by servicers who repeatedly lost their paperwork. Others report that servicers frequently provided them with inaccurate information about their eligibility. Because Treasury has never issued any monetary penalties against those servicers – like clawing back incentive payments – there has been little accountability if they break the rules of the program.
Meanwhile, the number of new monthly foreclosures has steadily climbed during the life of the program and only began to fall in the fall of 2010 when some lenders voluntarily suspended foreclosures amid irregularities.
The panel has documented HAMP’s failures since its onset, but because Treasury’s authority to restructure HAMP ended in October, significant changes to HAMP’s underlying strategy will likely never be made. The program ends in December 2012, and at that point, no new trial modifications can be made.
In the wake of HAMP’s shortcomings, some Republicans members of the House are calling for its elimination altogether. In a conference call with reporters, panel chair Ted Kaufman, a former senator, declined to tell Governing whether he believes the program should be axed. But he did emphasize HAMP’s major shortcomings that he blamed squarely on the Treasury Department.
Under TARP, “there was a heck of a lot more attention paid to Wall Street than to Main Street,” Kaufman said. “That’s not political rhetoric. It’s what I believe.”
Meanwhile, there is little chance that Treasury will be able to make some of recommendations the panel has made regarding HAMP’s implantation since nearly day one.
Tim Massad, acting assistant secretary for financial stability at the Treasury Department, said his office is focusing its efforts on taking steps to avoid HAMP's elimination. Despite its shortcomings, HAMP has helped hundreds of thousands achieve mortgage relief, and absent a replacement, it may be the best option distressed homeowners have.
“The program continues to help tens of thousands of families each month,” Massad said in a conference call with reporters.
He also said that his office is, in fact, forcing servicers to take corrective actions, despite the panel’s criticism of Treasury’s enforcement.