A federal overseer is urging the Treasury Department to get tough on mortgage servicers who drag their feet on HAMP loan modifications, with real penalties for those who violate program guidelines.

Citing "the abysmal performance of loan servicers" as one of the great frustrations with the federal HAMP program, the Special Investigator General for the Troubled Asset Relief Program (TARP) said servicers must be held accountable if the program is to meet even limited goals for helping homeowners avoid foreclosure.

Program "dramatically short" of success

The report, released this week, was unsparing in its criticism of HAMP, the federal government's primary anti-foreclosure program, which it said "continues to fall dramatically short of any meaningful standard of success." It said that while HAMP has been a boon for those fortunate enough to obtain a loan modification, it described its achievements as "remarkably modest" and said any hope for achieving its original goals are slipping away.

Originally predicted to assist 3-4 million homeowners, the program has resulted in only half a million permanent modifications to date, the report noted. The Congressional Oversight Panel has estimated that number will only rise to 700,000-800,000 if current trends hold.

The report said the program's troubles were due in large part to a rushed launch in March 2009 without an adequate analysis of the problems it was addressing and poorly developed rules. That led to frequent changes in program guidelines and unnecessary confusion and delays, it said.

Voluntary participation seen as problem

However, the report also laid much of the blame for the program's struggles on mortgage servicers, the lenders that administer the loans on behalf of investors, act as the point of contact for borrowers and make the ultimate decision as to whether a mortgage will be modified. A key problem, it said, is that servicers have conflicts of interest in administering HAMP, with financial interests that are frequently at odds with those of both investors and borrowers.

The report noted that "stories of servicer negligence and misconduct are legion," citing such things as the repeatedly losing paperwork, blatantly failing to follow program guidelines and unnecessary delays that harm borrowers while benefitting the servicers themselves.

The Special Inspector General said the Treasury Department has been reluctant to crack down on servicers for fear they may withdraw from the program. However, it questioned "what value there is in a program in which not only participation, but also compliance with the rules, is voluntary."

"Without meaningful servicer accountability, the program will continue to flounder," the report said. "Treasury needs to recognize the failings of HAMP and be willing to risk offending servicers. And if getting tough means risking servicer flight, so be it; the results could hardly be much worse."

Published on January 29, 2011