Desperate homeowners beware: Getting help from the federal government to lower your monthly mortgage bill may actually force you into foreclosure.
That warning comes from Neil Barofsky, the government watchdog monitoring the Treasury Department’s loan modification program. The problem, he says, is that borrowers struggling to pay the mortgage are first put into a trial version of the Home Affordable Modification Program (HAMP) that often only makes their situation worse.
“This program has hurt people,” said Barofsky, the inspector general of the Troubled Asset Relief Program which bailed out the banks and was also supposed to help homeowners facing foreclosure. “It’s heartbreaking.”
The trial program cuts the monthly mortgage bill temporarily while a borrower’s application for a permanent loan modification is processed. But most borrowers are rejected for the permanent program.
While 1.4 million have gone through the trial, only 550,000 have had their modifications made permanent. The other 900,000 borrowers suddenly got whopping bills to repay the trial reduction in their mortgage payment, often for thousands of dollars.
Barofsky said the Treasury Department even allows loan companies retroactively to charge late fees for each month of the trial.
Little Incentive for Loan Servicers
While borrowers are caught in a terrible bind, loan servicers profit from the borrower’s misery, because they take all their fees off the top of a foreclosure. So there’s not much incentive for them to get borrowers into a permanent modification, Barofsky told the Center for Public Integrity in an interview earlier this week.
In testimony before the House Oversight and Government Reform Committee yesterday, Barofsky called the program’s performance “abysmal.”
Tim Massad, the Treasury official who oversees the program, defended its performance, calling it a success because it had helped a half-million borrowers.
Treasury had initially expected more than 3 million borrowers to get permanent modifications but the latest projections are for no more than 800,000 borrowers to get help. In the last three years, 8 million American homeowners were served with foreclosure notices.
“People are losing their homes,” said Rep. Edolphus Towns, a Democrat from New York. “I wish you could just come and spend just one day in my office and listen to people who are coming in and the stories they are telling.”
Applicants Don't Meet Criteria
Massad agreed that the performance of loan servicers has been “abysmal” but he said part of the reason so many borrowers are turned down is because they don’t meet the program’s eligibility requirements. In fact, only 1.5 million borrowers who applied meet the criteria, Massad told lawmakers.
“We don’t help people who have million-dollar mansions,” Massad said. “We don’t help people who have vacation homes.”
Barofsky, however, scoffed at the notion that the problem was too many million-dollar mansions, and blamed the Treasury Department’s reluctance to penalize loan servicers for forcing people into foreclosure. But Massad said the only penalty Treasury can impose is to withhold funds.
The Treasury Department has also been criticized for failing to disclose more specific loan-level data from mortgage servicers about which borrowers obtain HAMP modifications.The Dodd-Frank financial reform law requires loan servicers to disclose how they arrived at the decision to deny a loan modification.
And Fannie Mae, the loan financing giant, has also been accused of bungling its stewardship of the HAMP_program by mismanaging and wasting taxpayer funds, according to whistleblower allegations reported by the Center in August.
Meanwhile, Treasury has so far spent only $1 billion of the $50 billion allocated for helping homeowners.