In addition, the enterprises, federal agencies, and servicers have  expanded their existing modification programs in an effort to reach  additional borrowers. According to Treasury, about 1.9 million borrowers had their  HAMP loan modification application denied, as of December 2011. Treasury had paid $8.8 million in PRA  incentives to participating servicers as of December 2011. In some cases, state programs funded under Treasury’s HHF program  include foreclosure alternatives and transition assistance for borrowers  who cannot afford to keep their homes. Millions of Loans Face Elevated Risk of Foreclosure and Indicators Show Housing Market Remains Weak

Based on our analysis of CoreLogic data that cover approximately 65  percent to 70 percent of the prime and approximately 50 percent of the  subprime mortgage market, we found that as of June 2011, 1.9-3.0 million  loans had characteristics associated with an increased likelihood of  foreclosure, including delinquency and significant negative equity (current  LTV ratios of 125 percent or higher). Other key housing market  indicators, such as home prices and home equity, remained near their  recent lows. Enhancing Current Federal Foreclosure Mitigation Efforts Could Improve Their Effectiveness

Most stakeholders we contacted said that enhancing existing federal  foreclosure mitigation efforts was the most appropriate action to take to  facilitate the recovery of the housing market, and we found that  opportunities existed for federal agencies to improve the effectiveness of  their efforts. Although federal agencies and the enterprises have taken steps to help  ensure that servicers reached struggling borrowers, not all agencies were  conducting the necessary analyses to determine which of their  foreclosure mitigation actions were most effective. We also found some evidence to  suggest that principal forgiveness as a mitigation tool could help some  borrowers—those with significant negative equity—but that federal  agencies and the enterprises were not using it consistently and some  were not convinced of its overall merits. Moreover, there are other policy  issues to be considered when determining how widely this option should  be used, including moral hazard (borrowers strategically defaulting to  become eligible for assistance). Most but Not All Federal Agencies and the Enterprises Have Increased Efforts to Reach Struggling Borrowers Early in a Delinquency

All of the federal agencies—Treasury, FHA, VA, and USDA—as well as  the enterprises have policies in place for servicers to follow once a  borrower becomes delinquent. Long-term costs include  payments by the government to cover defaults and delinquencies, among  other things. Further,  FHA does not use results from analyses to provide the basis for not  offering assistance to struggling homeowners. FHFA, the conservator and regulator of Fannie Mae and Freddie Mac,  has not allowed them to use their own funds to offer principal forgiveness. While these efforts resulted in  more than 4 million loan modifications between January 2009 and  December 2011, the volume of modifications has declined since 2010  and millions of borrowers have sought but have been unable to receive a  permanent modification. Specifically, our analysis of mortgage data  showed that 1.9-3 million loans still had characteristics associated with an  increased likelihood of foreclosure, such as serious delinquency and  significant negative equity (LTV ratio of 125 or higher), as of June 2011. In addition,  indicators such as home prices and home equity remain near their  postbubble lows. And finally, as of December 2011, total U.S. household  mortgage debt was $3.7 trillion greater than households’ equity in their  homes. Our analysis found that several agencies and the enterprises could do  more to better manage the costs associated with foreclose mitigation  efforts and step up their efforts to reach and help borrowers, specifically  the following,
Treasury has not reassessed its need for the letter of credit on FHA’s  Short Refinance program, which will not likely reach the number of  borrowers that it initially estimated it would help. However, FHA, VA, and USDA have not assessed  the impact of loan and borrower characteristics on the performance of  their foreclosure mitigation efforts. In some cases, these agencies do  not have the data needed to conduct these analyses. Given the  December 31, 2013, deadline for entry into a HAMP permanent loan  modification and the lead time required for the enterprises to implement a  principal forgiveness program, it is critical that FHFA take the steps  needed to expeditiously make a decision about allowing the enterprises to  engage in HAMP principal forgiveness modifications. However, the ability of federal agencies and the  enterprises to make such determinations is unclear, unless they collect  and analyze the data needed to demonstrate the success and cost- effectiveness of individual actions. This information can help program  managers and policymakers decide what further steps, if any, to take in  their efforts to mitigate the foreclosure crisis. Treasury, HUD, VA, and FHFA each agreed to consider or concurred with  the recommendations and indicated that action was either under way or  planned in response to our recommendations. In response, we  clarified the text of the report and the associated recommendation to  provide additional examples of data that would enhance USDA’s ability to  monitor servicers’ borrower outreach and foreclosure mitigation efforts. Specifically, this  report examines (1) the federal and nonfederal response to the housing  crisis, (2) the number of loans potentially at risk of foreclosure and the  current condition of the U.S. housing market, and (3) opportunities to  enhance the effectiveness of current foreclosure mitigation efforts. To identify these indicators, we reviewed a wide range of  publicly available information and interviewed housing market participants  and stakeholders. During the  same period, FHA paid incentives on about 67,000 Type I special forbearance  plans. Appendix V: Description of GAO’s Econometric Analysis of Redefault of Modified Loans

This appendix provides (1) a summary of the characteristics of loans in  the CoreLogic proprietary loan-level servicing database that we used in  our econometric analysis of loans that redefaulted (became 90 days or  more delinquent or in foreclosure) 6 months after receiving loan  modification actions and a comparison of the characteristics of loans in  the CoreLogic data set and Treasury’s Home Affordable Modification  Program (HAMP) data set, and (2) the results of our econometric analysis  of the relationship between redefault rates and modification actions,  controlling for several observable borrower and loan characteristics. Modified loan becomes 90 or more days past due (dpd) or in  foreclosure within 6 months  Modified loan becomes 90 or more days past due (dpd) or in  foreclosure within 12 months  Modified loan becomes 90 or more days past due (dpd) or in  foreclosure within 18 months  Percentage change in monthly payment of principal & interest  Payment reduction is less than10%  Payment reduction is between 10% and 19%  Payment reduction is between 20% and 29%  Payment reduction is between 30% and 39%  Payment reduction is between 40% and 49%  Payment reduction is between 50% and 59%  Payment reduction is 60% or higher  Change in interest rate (bps)

		TERM CHANGE (months) Borrower and loan characteristics at modification CURRENT, AT MOD

Definition   FICO greater than or equal to 620 and less than 660 at  modification  FICO greater than or equal to 660 and less than 680 at  modification  FICO greater than or equal to 680 and less than 700 at  modification  FICO greater than or equal to 700 and less than 750 at  modification  FICO greater than or equal to 750 at modification  Current loan-to-value (CLTV) ratio at modification  CLTV is greater than or equal to 10% and less than 80% at  modification  CLTV is greater than or equal to 80% and less than 95% at  modification  CLTV is greater than or equal to 95% and less than 100% at  modification  CLTV is greater than or equal to 100% and less than 115% at  modification  CLTV is greater than or equal to 115% and less than 125% at  modification  CLTV is greater than or equal to 125% and less than 150% at  modification  CLTV greater than or equal to 150% at modification  Housing backend debt-to-income ratio (DTIBE), at modification  DTIBE is greater than or equal to 30% and less than 35% at  modification  DTIBE is greater than or equal to 35% and less than 40% at  modification  DTIBE is greater than or equal to 40% and less than 45% at  modification  DTIBE is greater than or equal to 45% and less than 50% at  modification  DTIBE is greater than or equal to 50% and less than 55% at  modification  DTIBE is greater than or equal to 55% and less than 65% at  modification  DTIBE is greater than or equal to 65% at modification  Percentage change in house prices after modification, zip code  level  Change in unemployment rate after modification, county level  Interest rate at modification (basis points)

		Variable (unit used) MOD REQUIRES PMI Loan modification start MOD STARTED, 2009Q1

		Borrower and loan characteristics at origination FICO CREDIT SCORE, AT ORIGN

Fair Isaac Corporation (FICO) credit score at loan origination  FICO greater than or equal to 350 and less than 550 at loan  origination  FICO greater than or equal to 550 and less than 580 at loan  origination  FICO greater than or equal to 580 and less than 620 at loan  origination  FICO greater than or equal to 620 and less than 660 at loan  origination  FICO greater than or equal to 660 and less than 680 at loan  origination  FICO greater than or equal to 680 and less than 700 at loan  origination  FICO greater than or equal to 700 and less than 750 at loan  origination  FICO greater than or equal to 750 at loan origination  Loan-to-value (LTV) ratio at origination  LTV greater than or equal to 10% and less than 70% at  origination  LTV greater than or equal to 70% and less than 80% at  origination  LTV equal to 80% at origination  LTV greater than 80% and less than 90% at origination  LTV greater than or equal to 90% and less than 100% at  origination  LTV greater than or equal to 100% at origination  Interest rate at origination (basis points)

		Variable (unit used) Other: product characteristics

If loan is owned by government-sponsored enterprises (Fannie  Mae or Freddie Mac)
If loan is owned by non-agency private investors  If loan is owned by lender  Prime loan = 1, subprime loan = 0  Adjustable rate (ARM) = 1, Fixed rate (FRM) = 0  Condominiums, including PUDs (planned unit developments)
Other housing units, including cooperatives  Conventional loans (nongovernment owned or guaranteed loans)
Federal Housing Administration (FHA) loans  Veterans Affairs (VA)
If owner-occupied housing versus a nonowner occupied   Loans for refinance, with cash-out  Loans for refinance, without cash-out  Loans for refinance, reason unknown  Loan originated in 2003 or before  The payment change is the result of modification actions, including, rate reduction, balance reduction  (from principal forgiveness or principal forbearance), capitalization, and term extension.
Why GAO Did This Study

Historically high foreclosure rates remain a major barrier to the current economic recovery. To assist policymakers and housing market participants in evaluating foreclosure mitigation efforts, GAO examined (1) the federal and nonfederal response to the housing crisis, (2) the current condition of the U.S. housing market, and (3) opportunities to enhance federal efforts. To address these objectives, GAO analyzed government and mortgage industry data, including loan-level data purchased from a private vendor; reviewed academic and industry literature; examined federal policies and regulations; and interviewed housing industry participants and observers.

What GAO Found

In an effort to help the millions of homeowners struggling to keep their homes, a range of federal programs have offered relief in the form of loan modifications and refinancing into loans with lower interest rates, among other things. Under Treasurys Home Affordable Modification Program (HAMP), initiated in early 2009, servicers have modified almost 1 million loans between 2009 and 2011. During the same period, servicers modified nearly 1 million additional loans under programs administered by the Departments of Agriculture (USDA) and Veterans Affairs (VA), Federal Housing Administration (FHA), and Fannie Mae and Freddie Mac (the enterprises). Servicers have also modified about 2.1 million loans under nonfederal loan modification programs resulting in a total of about 4 million modifications between 2009 and 2011. However, a large number of borrowers have sought assistance, but were unable to receive a modification. For example, approximately 2.8 million borrowers had their HAMP loan modification application denied or their trial loan modification canceled. Further, the volume of federal modifications has declined since 2010. Recent efforts have expanded refinancing programs. However, low participation rates in FHAs program raise questions about the need for Treasurys financial support, which could reach a maximum of $117 million.
In spite of these efforts, the number of loans in foreclosure remains elevated, and key indicators suggest that the U.S. housing market remains weak. GAOs analysis of mortgage data showed that in June 2011 (most current data available for GAOs use and analysis) between 1.9 and 3 million loans still had characteristics associated with an increased likelihood of foreclosure, such as serious delinquency and significant negative equity (a loan-to-value ratio of 125 percent or greater). These loans were concentrated in certain states, such as Nevada and Florida. Further, more recent indicators such as home prices and home equity remain near their postbubble lows. As of December 2011, total household mortgage debt was $3.7 trillion greater than households equity in their homesrepresenting a significant decline in household wealth nationwide.
Despite the scope of the problem, most stakeholders GAO interviewed said that enhancing current foreclosure mitigation efforts would be preferable to new ones. GAO found that agencies could take steps to make their programs more effective. Collectively, FHA and the enterprises had 1.8 million loans in their portfolios that were 90 days or more past due as of December 2011. GAO found that most of the agencies and enterprises, with the exception of USDA, had stepped up their efforts to monitor servicers outreach to struggling borrowers. However, not all the agencies were conducting analyses to determine the effectiveness of their foreclosure mitigation actions. Experiences of Treasury and the enterprises and GAOs econometric analysis strongly suggest that such analyses can improve outcomes and cut program costs. For example, GAOs analysis showed that the size of payment change, delinquency status, and current loan to value ratio, can significantly influence the success of the foreclosure mitigation action taken. In contrast, not all federal agencies consider redefault rates and long-term costs when deciding which loan modification action to take. Nor have they assessed the impact of loan and borrower characteristics. In some cases, agencies do not have the data needed to conduct these analyses. GAO found some evidence to suggest that principal forgiveness could help some homeownersthose with significant negative equitystay in their homes, but federal agencies and the enterprises were not using it consistently and some were not convinced of its merits. In addition, there are other policy issues to consider in how widely this option should be used, such as moral hazard. The Federal Housing Finance Agency (FHFA), for instance, has not allowed the enterprises to offer principal forgiveness. Treasury recently offered to pay incentives to the enterprises to forgive principal, and FHFA is reevaluating its position. Until agencies and the enterprises analyze data that will help them choose the most effective tools and fully utilize those that have proved effective, foreclosure mitigation programs cannot provide the optimal assistance to struggling homeowners or help curtail the costs of the foreclosure crisis to taxpayers.

What GAO Recommends

GAO recommends that: Treasury reevaluate the need for its financial support of FHAs refinance program; USDA increase its efforts to monitor servicers outreach tostruggling borrowers; FHA, VA, and USDA collect and analyze
information needed to fully assess the effectiveness and costs of their foreclosure mitigation efforts; andFHFA expeditiously finalize analysis on whether to allow the enterprises to offer HAMP principal forgiveness modifications. Treasury, FHA, VA and FHFA agreed to consider or concurred with the reports recommendations. USDA provided additional information in its comments. In response, we clarified the text and recommendation on USDAs monitoring of servicers outreach efforts.