By Paul Kiel, ProPublica
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 — provide the first detailed look at the program’s oversight. They show that the company operated with almost no oversight for the program’s first eight months. When auditors did finally conduct 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. GMAC itself said 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 [1], 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, through a Freedom of Information Act request, ProPublica has sought the audits of 10 of the largest program participants. 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 [2] to move troubled borrowers out of their homes, have been extensively documented [3], along withfailures by government [4] 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.
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 servicers evaluated the vast majority of homeowners eligible for a modification — about three million.
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 continued. “It’s why the program has been a colossal failure.”
Treasury continued to release few details about its audits until 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 [5] 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 reduced mortgage payments. In exchange, the servicers would receive taxpayer subsidies. But as we’ve reported extensively, the largest servicers haven’t abided by the guidelines [6]. Homeowners have often been foreclosed on in the midst of reviews for a modification [7] or denied because of the servicer’s error. For many homeowners, navigating what was supposed to have been a simple, straightforward program has proven a maddening ordeal [6].
HAMP has fallen dramatically short of the administration’s initial goal to help three million to four million homeowners. So far, fewer than 800,000 homeowners have received loan modifications through HAMP, or fewer than one in four of those who applied [8].
As part of the $700 billion bailout program, HAMP was launched in early 2009 with a $50 billion budget to encourage loan modifications by paying subsidies to servicers, investors and homeowners. But only about $1.6 billion has gone out so far [9].
GMAC said it agreed to release its audits under the program because the company “believes in honoring the spirit of the Freedom of Information Act process” and “elected to be transparent on our work with the [modification] program,” spokeswoman Gina Proia said.
GMAC's parent company has changed its name to Ally Financial, but its mortgage division is still called GMAC. The government owns a majority stake in Ally because it rescued the company with TARP funds, but both the company and the Treasury said that didn’t factor into the company’s decision to allow the documents to be released.
ProPublica contacted all nine servicers that objected to the reports’ release. All either declined to comment on why they wanted the audits kept secret or defended keeping them out of the public domain by saying the reports contained confidential information. Collectively, these companies have so far been paid more than $471 million — dubbed “servicer incentive payments” — through the program. They 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.
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