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August 18, 2022

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Documents: Government has failed at protecting struggling homeowners


Sam Morris

Foreclosure territory: Housing sprawls across the Las Vegas Valley. A study found that Southern Nevada is particularly susceptible to homeowners walking away from their mortgage responsibilities.

Why has the administration’s flagship foreclosure prevention program been so ineffective in helping struggling homeowners get loan modifications and stay in their homes? One reason: The government’s supervision of the program has apparently ranged from nonexistent to weak.

Documents obtained by ProPublica — government audit reports of GMAC, the country’s fifth largest mortgage servicer — show that the company operated with almost no oversight for the program’s first eight months. When auditors finally conducted a major review more than a year into the program, they found that GMAC had seriously mishandled many loan modifications — miscalculating homeowner income in more than 80 percent of audited cases, for example. Yet GMAC suffered no penalty and acknowledges it hasn’t reversed a single foreclosure as a result of a government audit.

The documents also reveal that government auditors signed off on GMAC loan-modification denials that appear to violate the program’s own rules, calling into question the rigor and competence of the reviews.

Some of the auditors’ mistakes are “appalling,” said Diane Thompson of the National Consumer Law Center, an advocacy group. “It suggests the government isn’t taking the auditing process seriously.”

In a written response to ProPublica questions, a spokeswoman for the Treasury Department, which runs the program, denied there were serious flaws in its oversight system, calling it “effective and unprecedented in many ways.”

The audits of GMAC, though revealing, give only a limited view into the program, because the Treasury has refused to release the documents for other servicers. For more than a year, ProPublica has sought the audits for 10 of the largest program participants through a Freedom of Information Act request. The Treasury provided only GMAC’s audits, because the company consented to their release. ProPublica continues to seek all of the reports.

Abuses of the foreclosure process, in which banks and mortgage servicers cut corners or even created false documents to force trouble borrowers out of their homes, have been extensively documented, along with failures by government to regulate the industry. But the lapses revealed in the documents obtained by ProPublica stand out because they occurred within the government’s main effort to prevent foreclosures, the Home Affordable Modification Program, or HAMP.

Oversight shrouded in secrecy

For HAMP’s first two years, the government offered very little public detail about its oversight efforts. It was virtually impossible for the public — or even Congress — to know how well the banks and mortgage servicers were complying with the government’s effort to prevent struggling homeowners from losing their homes. Those years were crucial, because that’s when the vast majority of homeowners eligible for a modification — about 3 million — were evaluated by servicers.

The documents obtained by ProPublica show auditors finding serious problems at a major servicer during that time. Instead of publicly revealing the findings, Treasury chose to privately request that GMAC fix the problems.

“For two years, they’ve known how abysmal servicers were performing and decided to do nothing,” said Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program, better known as TARP or the bank bailout, which provided the money for HAMP.

“It demonstrates that if you have a set of rules for which compliance is completely voluntary and no meaningful consequences for those who violate them, having all the audits and reviews in the world are not going to make a bit of difference,” he said. “It’s why the program has been a colossal failure.”

Treasury continued to release few details about its audits until this June, when it began publishing quarterly reports based on the audits’ results. The public report showed what Treasury called “substantial” problems at four of the 10 largest servicers — Bank of America, JPMorgan Chase, Wells Fargo, and Ocwen — and Treasury for the first time withheld taxpayer subsidies from three of them.

Mortgage servicers that signed up for the program agreed to follow strict guidelines on how to evaluate struggling homeowners seeking a reduced mortgage payment. In exchange, they’d receive taxpayer subsidies. But the largest servicers haven’t abided by the guidelines. Homeowners have often been foreclosed on in the midst of review for a modification or been denied due to the servicer’s error. For many homeowners, navigating what was supposed to have been a simple, straightforward program has proven a maddening ordeal.

Meanwhile, HAMP has fallen dramatically short of the administration’s initial goals to help 3-4 million homeowners. So far, fewer than 800,000 homeowners have received a loan modification through HAMP, less than one in four of those who applied.

Part of the $700 billion TARP, HAMP launched in early 2009 with a $50 billion budget to encourage loan modifications by paying subsidies to servicers, investors and homeowners. But in another example of how the program has fallen short, only about $1.6 billion has gone out so far.

The nine servicers who objected to the reports’ release either declined to coment to ProPublica on why they wanted the audits kept secret or said the reports contained confidential information. Collectively, these companies have so far been paid more than $471 million in cash and are eligible for hundreds of millions more. The country’s four largest banks — Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup — are also the largest servicers of mortgage loans.

In its written response, Treasury’s spokeswoman said it agreed to withhold the records in part because they could undermine “frank communications between mortgage servicers and compliance examiners” and hurt the program’s effectiveness. The department declined to provide either redacted versions or an index of the documents.

Early reviews “useless,” flawed

Since the program’s beginning, homeowner advocates have wondered where HAMP’s watchdog was and why it was having so little effect. That watchdog is Freddie Mac, tapped by Treasury in February 2009 and working under a contract worth $116 million and rising. The Freddie Mac unit, now staffed with 121 employees and about 150 contractors, is supposed to regularly audit servicers in the program to make sure they are following the rules.

For the program’s crucial first eight months, there effectively was no watchdog, in part because Treasury found Freddie Mac’s staff “unqualified” and their first batch of reviews “inconsistent and incomplete.” Nationwide, servicers filed to pursue foreclosure on about 2 million loans during that time.

Freddie Mac’s first audit, in December 2009, notes that GMAC might have already foreclosed on loans that auditors had flagged as potentially mishandled, but didn’t order remedial steps. It only requests that GMAC not take “further action.”

A Treasury spokeswoman said auditors have reviewed more than 50,000 loan files, but did not directly answer whether a servicer had ever reversed a foreclosure action because of a HAMP audit. Where auditors have found problems, she wrote, the department has “required servicers to take steps to tighten controls” and “re-evaluate any borrowers who may have been potentially impacted.”

In early 2010, around the same time the auditing unit was issuing its first reports, auditors complained that servicers’ lack of responsiveness to their requests was hampering their efforts. Getting the right documents from servicers was “a cumbersome process,” the head of Freddie Mac’s audit team, Paul Heran, said in February 2010 at a mortgage industry conference.

However uncooperative the banks and mortgage services may have been, Freddie Mac’s auditing reports contain errors that call into question their reliability.

Every few months, the auditors examine a sample of the servicer’s loans that have been denied a HAMP modification to check whether the denials are legitimate. In each GMAC report reviewed by ProPublica, auditors found that the servicer had, with very few exceptions, given the homeowner fair and appropriate consideration. But among the justifications listed in the audits are some that violate the program’s rules or simply don’t make sense.

For instance, the December 2009 review says that 35 of the 247 loans auditors reviewed were denied because the homeowner was “less than 60 days delinquent.” In the report, auditors said that was the right decision in all but one case. But being less than 60 days delinquent is never on its own a legitimate reason for a servicer to deny a modification, according to the program rules. Homeowners are eligible for a modification even if they’re current on their loans, as long as they can show they’re in imminent danger of defaulting.

“It makes you wonder if the Treasury even knows the rules for their own program,” said National Consumer Law Center’s Thompson.

A congressionally appointed panel, among others, has pointed to a fundamental flaw in the way the oversight was carried out: Auditors have had no direct contact with homeowners. The program has been dogged by servicers’ inadequate document systems. Borrowers have long reported faxing and mailing the same documents over and over, because servicers kept losing them. Servicers have denied about a quarter of all modification applications due to an alleged lack of documentation. Because HAMP’s auditors do not contact borrowers, there’s no way for them to ascertain if a denial for inadequate documentation was correct.

In response to this criticism from the Congressional Oversight Panel for the TARP last December, Treasury said auditors did not contact homeowners to avoid giving them added stress. The panel rejected that reason, saying that contacting borrowers was “critical to assessing the accuracy of a servicer’s determination.”

Instead of talking with borrowers, auditors conduct on-site reviews of mortgage servicing companies, Treasury’s spokeswoman said in her written response to ProPublica. Treasury believes that focusing “on servicer processes and internal controls is the most effective deployment of our compliance efforts,” she wrote.

Audit shows serious problems

It wasn’t until July 2010, 16 months after HAMP launched, that the unit performed its first major audit of GMAC. The review included a visit to GMAC’s offices and a detailed review of a sample of loans.

The report enumerated various rule violations, including that GMAC’s practice was to wait only 20 days to begin the foreclosure process even though the program gave the homeowner 30 days to respond to a trial modification offer.

GMAC’s Proia said no homeowners were “negatively impacted by this issue.”

Auditors also found that GMAC was regularly miscalculating the homeowner’s income, raising questions about whether GMAC was accurately evaluating homeowners’ applications.

Penalties: Late and weak

Typical of the Treasury’s oversight of the program, GMAC was never penalized for any of the rule violations. For the first two years of the program, Treasury officials publicly threatened servicers with the possibility of penalties, but instead followed a cooperative approach. When auditors found problems, servicers were asked to fix them.

Treasury has sent mixed messages about its ability to penalize banks over the course of the program, threatening “monetary penalties and sanctions” in late 2009, and then later saying it lacked the power to enforce such penalties. Treasury finally departed from its cooperative approach this June, when it withheld incentive payments from three of the top 10 servicers. (GMAC was not among them.) The companies would not receive the public subsidies for completing modifications until they made certain changes. The companies were cited for some of the same problems for which auditors had criticized GMAC, such as regularly miscalculating the borrower’s income. JPMorgan Chase, for instance, had erred in estimating income in about a third of the homeowner loan files reviewed.

The punishment hasn’t had much sting to it. Two of the three companies had their incentive payments restored when Treasury’s most recent report declared they’d improved. Only Chase and Bank of America, the country’s largest servicer, would continue to have their incentives withheld, Treasury said.

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