Inspector General Slams Obama Foreclosure-Prevention Drive By James R. Hagerty Wall Street Journal 03-24-2010

Inspector General Slams Obama Foreclosure-Prevention Drive
By James R. Hagerty
The Wall Street Journal
March 24, 2010

A government watchdog agency criticized the Obama administration's $50 billion campaign to avert foreclosures by reducing mortgage payments for millions of distressed borrowers.

A report by the inspector general of the federal Troubled Asset Relief Program, or TARP, said results of the loan-modification program so far have been disappointing. The report, released Tuesday evening, also said that the U.S. Treasury has failed to measure results properly for the Home Affordable Modification Program, known as HAMP, and that it may merely delay foreclosures in too many cases.

When President Obama launched HAMP in early 2009, the government said it would help as many as three million to four million homeowners avoid foreclosure. So far, however, about 169,000 households have successfully completed trial periods and been given long-term payment relief. The report quoted a Treasury official as estimating that HAMP will produce 1.5 million to 2 million modifications over the program's planned four-year term. That compares with about eight million households currently behind on their mortgage payments or in the foreclosure process.

Yet the Treasury has said the program is on track to reach the initial goal because more than a million people have been offered trial loan modifications. Measuring the number of offers made is "not particularly meaningful," the report said, and the Treasury should instead focus on assessing HAMP by the number of people who are able to keep their homes long term.

HAMP results have fallen short of expectations partly because the Treasury has had to revise its guidelines to lenders repeatedly, "causing confusion and delay," the report said. For instance, the Treasury initially pushed lenders to put borrowers into trial modifications without first verifying their incomes and other financial information. Many of the borrowers later were found not to be eligible. Now the Treasury is requiring lenders to verify financial information before starting trials.

The report also said HAMP leaves borrowers vulnerable to defaulting again because many of them remain overly indebted even after their home-loan payments are reduced. HAMP is designed to cut payments for the mortgage, property taxes, insurance and homeowners association or condo fees to 31% of pretax income. But many of the eligible households have huge amounts of credit card and other debts. Even after loan modifications, the median ratio of monthly debt payments to pretax income is 60%.

If HAMP "merely delays foreclosures rather than preventing them, the program will be of questionable value," the report said.

Under HAMP, lenders get federal subsidies if they modify loans. That is done by cutting the interest rate to as low as 2%. In addition, lenders sometimes extend the term of the loan to 40 years. If those steps don't reduce the payment enough, lenders are supposed to defer principal payments.