A government watchdog panel issued a report today sharply rebuking the government's loan modification program and saying it represents "a failure to make a dent in the foreclosure crisis." The panel has been flagging shortcomings on the program for over a year: that the program has lax enforcement, unclear goals, is riddled with conflicts of interest and will fall far short of the Obama administration's public statements that it will to help 3 million to 4 million homeowners. It also said the Treasury Department, which oversees the effort, has failed to acknowledge the programs' flaws.
This report, however, spent far more time dwelling on a growing problem that also provided some opportunity: Since the program won't reach as many homeowners as originally hoped, the panel said Treasury should focus on making sure homeowners stay in the program once they receive a modification.
As we've reported, the program, called Home Affordable Modification Program, or HAMP, could start shrinking, as homeowners defaulting on their modified loans will soon eclipse the number of new modifications, if current trends continue. Twenty-one percent of homeowners have defaulted on their modifications within a year. The report called preventing redefaults “an extremely powerful way of magnifying” the program’s impact. The panel wrote:
Delinquencies that are flagged in their early stages can potentially be brought current through a repayment plan, but delinquencies that are left unchecked have the potential to undermine even the modest progress made by HAMP. Worse still, each redefault represents thousands of taxpayer dollars that have been spent merely to delay rather than prevent a foreclosure.
The panel said that to monitor the problem, Treasury needs to work harder at collecting and analyzing data on the performance of modifications. Treasury doesn’t have data on 13 percent of completed modifications, for example. Thorough data would allow Treasury to understand why homeowners are re-defaulting so it could improve the program, the panel wrote. Early warnings of when people start falling behind on payments could also provide an opportunity to intervene and offer more help before a homeowner re-defaults and faces foreclosure.