Implementation of Treasury’s Newer Housing Programs Has Been Slow and Capacity of Servicers to Carry Out These Programs Remains Unclear, Raising Uncertainty About the Potential Impact of These Programs

Treasury has recently implemented programs to reduce or eliminate  payments on second-lien mortgages, provide incentives for the use of  short sales or deeds-in-lieu as alternatives to foreclosure, and provide  incentives for the forgiveness of principal for borrowers whose homes are  worth significantly less than their mortgage balances. Treasury has  taken some steps to address these challenges, but could take further  action to ensure that borrowers are aware of their potential eligibility for  the program. Similar to  the first-lien modification program, Treasury has not established effective  performance measures for these three programs, including goals for the  number of borrowers it expects to help. Borrowers had to first be evaluated for HAMP. Restrictive short-sale requirements. Treasury Could Do More to Incorporate Lessons Learned from the First- Lien Modification Program in Implementing Newer Programs

In our June 2010 report, we pointed out that it was important that Treasury  incorporate lessons learned from the challenges experienced with the  HAMP first-lien modification program into the design and implementation  of the newer MHA-funded programs. Nonetheless, it  is unclear what actions Treasury has taken to ensure that the servicers  who did not submit the required documentation have the capacity to  effectively implement the programs, making less certain the ability of  these servicers to fully participate in offering troubled homeowners  second-lien modifications, principal reduction, and foreclosure  alternatives. Treasury Has Some Data on the Characteristics of Borrowers in HAMP’s First-Lien Program, but Data Were Sometimes Missing or Questionable

Our analysis of Treasury’s HAMP data through September 30, 2010,  indicated that borrowers who entered into trial modifications or received  permanent modifications continued to have elevated levels of debt, as  evidenced by the median back-end DTI for these two groups (55 and 57  percent, respectively). Most Borrowers Denied or Canceled from Trial Modifications Appear to Have Avoided Foreclosure To Date, but Weaknesses in Treasury’s Data Collection Limit its Ability to Understand the Outcomes of These Borrowers

Because there have been more HAMP trial modification cancellations than  conversions to permanent modifications, we evaluated Treasury’s  reporting of the disposition paths, or outcomes, of borrowers who were  denied or canceled from HAMP trial modifications and obtained additional  information from six large MHA servicers to understand the extent to  which these borrowers have been able to avoid foreclosure to date. However, 2 years after Treasury first announced that it would use $50  billion in TARP funds for various programs intended to preserve  homeownership and protect home values, foreclosure rates remain at  historically high levels. Recommendations for Executive Action

As part of its efforts to continue improving the transparency and  accountability of MHA, we recommend that the Secretary of the Treasury  take actions to  require servicers to advise borrowers to notify their second-lien servicers  once a first lien has been modified under HAMP to reduce the risk that  borrowers with modified first liens are not captured in the LPS matching  database and, therefore, are not offered second-lien modifications;    ensure that servicers demonstrate they have the operational capacity and  infrastructure in place to successfully implement the requirements of the  2MP, HAFA, and PRA programs; and    consider methods for better capturing outcomes for borrowers who are  denied, canceled, or redefaulted from HAMP, including more accurately  reflecting what actions are completed or pending and allowing for the  reporting of multiple concurrent outcomes, in order to determine whether  borrowers are receiving effective assistance outside of HAMP and whether  additional actions may be needed to assist them. We continue to believe that such action is needed to better  ensure the likelihood of success of these newer MHA programs. Appendix I: Scope and Methodology

To examine the status of the Department of Treasury’s (Treasury) second- lien modification, principal reduction, and foreclosure alternatives  programs and the design and implementation challenges Treasury and  servicers have faced with these programs to date, we spoke with and  obtained information from six large Making Homes Affordable (MHA)  servicers, including the four largest servicers participating in the Second- Lien Modification Program (2MP) at the start of our review. Without pre-established performance measures  and goals, Treasury will not be able to effectively assess the outcomes  of its MHA programs or hold servicers accountable for their  performance.
Why GAO Did This Study

Two years after the Department of the Treasury (Treasury) first made available up to $50 billion for the Making Home Affordable (MHA) program, foreclosure rates remain at historically high levels. Treasury recently introduced several new programs intended to further help homeowners. This report examines (1) the status of three of these new programs, (2) characteristics of homeowners with first-lien modifications from the Home Affordable Modification Program (HAMP), and (3) the outcomes for borrowers who were denied or fell out of first-lien modifications. To address these questions, GAO analyzed data from Treasury and six large MHA servicers.

What GAO Found

The implementation of Treasury's programs to reduce or eliminate second-lien mortgages, encourage the use of short sales or deeds-in-lieu, and stimulate the forgiveness of principal has been slow and limited activity has been reported to date. This slow pace is attributed in part to several implementation challenges. For example, servicers told GAO that the start of the second-lien modification program had been slow due to problems with the database Treasury required them to use to identify potentially eligible loans. Additionally, borrowers may not be aware of their potential eligibility for the program. While Treasury recently revised its guidelines to allow servicers to bypass the database for certain loans, servicers could do more to alert HAMP first-lien modification borrowers about the new second-lien program. Implementation of the foreclosure alternatives program has also been slow due to program restrictions, such as the requirement that borrowers be evaluated for a first-lien modification even if they have already identified a potential buyer for a short sale. Although Treasury has recently taken action to address some of these concerns, the potential effects of its changes remain unclear. In addition, Treasury has not fully incorporated into its new programs key lessons from its first-lien modification program. For example, it has not obtained all required documentation to demonstrate that servicers have the capacity to successfully implement the newer programs. As a result, servicers' ability to effectively offer troubled homeowners second-lien modifications, foreclosure alternatives, and principal reductions is unclear. Finally, Treasury has not implemented GAO's June 2010 recommendation that it establish goals and effective performance measures for these programs. Without performance measures and goals, Treasury will not be able to effectively assess the outcomes of these programs. Treasury's data provide important insights into the characteristics of borrowers participating in the HAMP first-lien modification program, but data were sometimes missing or questionable. More homeowners have been denied or canceled from HAMP trial loan modifications than have received permanent modifications. To understand which borrowers HAMP has been able to help, GAO looked at Treasury's data on borrowers in HAMP trial and permanent modifications. These data showed that HAMP borrowers had reduced income and high debt, but the reliability and integrity of some of Treasury's information was questionable.

What GAO Recommends

GAO recommends that Treasury require servicers to advise borrowers to contact servicers about second-lien modifications and ensure that servicers demonstrate the capacity to successfully implement Treasury's new programs. GAO also recommends that Treasury consider methods to better capture outcomes for borrowers denied or canceled from HAMP first-lien modifications. Treasury acknowledged challenges faced by servicers in implementing the program, but felt that certain criticisms of MHA were unwarranted. However, we continue to believe that further action is needed to better ensure the effectiveness of these programs.