Nov. 12: This post was updated to include details of documents ProPublica obtained after the story’s publication.
The Obama administration launched its main program to
prevent foreclosures in the spring of 2009 with $50 billion and abundant promises.
What the Home Affordable Modification Program, or HAMP, lacked — and
wouldn’t have for years — was effective oversight of the big banks that were
crucial to the program’s success.
Documents obtained by ProPublica shed new light on this
failing in 2009 and 2010, when the foreclosure crisis was at its peak and six
million American homeowners were in danger of losing their homes. HAMP required
mortgage servicers to offer loan modifications to eligible homeowners so that
their monthly payments would be lower. The servicers — the largest of
which were owned by the banks that had fueled the crisis in the first place —
were in charge of reviewing homeowner applications, but the government set the
rules and was supposed to supervise their work.
But the documents show that the government did not complete a
major audit of the two largest banks in the program, Bank of America and Wells
Fargo, until over a year after the program launched.
Such audits were rare at the other large mortgage servicers throughout
2009 and 2010, according to the documents. During these years, when the
government provided little oversight and administered no sanctions, servicers
reviewed 2.7 million modification applications and denied
two-thirds of them. Meanwhile, homeowners regularly
complained they had been mistreated by servicers in the program.
The documents also show how the Treasury Department coddled
servicers that weren’t complying with the program’s rules. Once a year,
servicers are required to certify that they are complying with the program’s
rules. But servicers define for themselves what it means to comply. A company that
admits violating the rules is allowed to merely submit a cover letter with
their certification stating the exceptions and how it would fix the problems.
For instance, on September 28, 2010, PNC Mortgage submitted
its certification. Along with that certification, it disclosed five “instances
of noncompliance” or “gaps,” as it called them, along with its plans to address
the issues (“steps”).
Like all of the documents ProPublica received, PNC’s letters
are heavily redacted, so the nature of their “gaps” and “steps” remains secret.
The Treasury defended the oversight of HAMP. “The robust
nature of our compliance program, together with the steps we have taken to
strengthen protections for homeowners under the program, are critical reasons
why homeowners who enter HAMP today show a strong likelihood of long-term
success to avoid foreclosure,” said a Treasury spokeswoman.
Prying loose the
documents
The documents were hard to obtain. They came as a result of
two Freedom of Information Act requests by ProPublica. Initially, the Treasury
Department, which administers HAMP, refused to release any documents at all. It
was only after ProPublica appealed the denial that Treasury agreed to release
some documents, although with large portions blacked out.
One of our requests has dragged on for more than two years,
and even after all that time, the department continues to withhold certain
documents, though it says it intends to turn over more. (See here for a full index of the documents we’ve obtained so far. If we receive more, we will add
them to our collection when we receive them.)
Update: On Nov. 9, ProPublica received another batch of documents. Treasury said it was the final response to our requests. We’ve updated our index to reflect the new documents.
In some cases, the Treasury even withheld the documents of
servicers who never objected to their release. When ProPublica informed the
Treasury that certain servicers had said they had no objection to releasing the
documents, the Treasury finally turned them over.
“It seems like they’re trying to prevent the information
from getting out,” said Rick Blum, coordinator of the Sunshine in
Government Initiative, a
coalition of media groups. FOIA protects business trade secrets from
being divulged, but Blum doubts whether that exception is being fairly applied
in this case. The documents mainly concern how servicers were breaking HAMP’s
rules, he noted, and “a screw-up is not a trade secret.”
A Treasury Department spokeswoman said HAMP has brought “an unprecedented
level of transparency” to the mortgage servicing industry and servicers are
“subject to an unprecedented level of compliance oversight.”
That’s damning by faint praise, say consumer advocates. “The
reason that the level of transparency and accountability is ‘unprecedented’ is
because no one has ever held servicers to account. Just because you have
something where before there was nothing, that doesn’t mean that something
works or is effective,” said Diane Thompson of the National Consumer Law
Center.
Audits slow and rare
By now, HAMP’s disappointing performance is well known. The
program was launched with President Obama’s promise to help three to four
million homeowners avoid foreclosure. Three and a half years later, the program
is only approaching 1.1 million modifications. It’s spent
just $4 billion of its original $50 billion budget.
A recent study found a
big reason for the program’s failure was that, despite all its rules, it didn’t
change the behavior of the biggest banks. The banks did a poor job of modifying loans before HAMP was
launched and weren’t much better after.
To oversee the program, the Treasury awarded Freddie Mac a $209
million contract to be the program’s watchdog. Freddie Mac formed a group,
called Making Home Affordable – Compliance, or MHA-C for short, but it got
off to an inauspicious start. In
August 2009, Treasury
rejected its first reviews of servicers as inadequate because they were “inconsistent and
incomplete” and its staff was “unqualified.”
The Treasury has refused to turn over MHA-C’s audit reports —
with one exception. The servicer GMAC Mortgage expressly consented to the
release of the documents. Those audits, we
reported last year, revealed that the servicer had seriously mishandled
many loan modifications. MHA-C’s audits themselves contained numerous errors,
calling into question the competence of the reviews.
The Treasury didn’t dispute the fact that no major audits of
the biggest banks were completed until well after HAMP’s launch. But the
spokeswoman said “it is important to note that Treasury began unprecedented
reviews of servicer compliance with program directives within the first months
of program implementation.” Those earlier “compliance activities” included
“on-site reviews” and “sampling of homeowner loan file reviews,” she said.
But the GMAC audits show how cursory those earlier reviews could
be. In December 2009, MHA-C reviewed a sample of files, but when it reported
its findings to GMAC, it
told the servicer that the report was “being provided for informative
purposes only, and no response is required from you at this time.” GMAC itself
was not the subject of a major audit until
July 2010. It was never penalized.
In the new batch of documents, the government has kept
secret the audits themselves. But ProPublica has obtained the servicers’
written responses to the audits (see here for an
index of the documents). The Treasury scrubbed or withheld almost all of the responses’
substantive content. Even so, they reveal some basic facts.
The watchdog was very slow to conduct major audits of the
biggest servicers. MHA-C’s
first major audit of Bank of America, the largest servicer in the program, wasn’t
completed until July of 2010, more than a year after HAMP launched. The first
major audit of Wells Fargo was completed in August of 2010.
By July of 2010, Wells and Bank of America had already denied
about 430,000 homeowners a HAMP modification.
Even for big banks that received an audit sooner, oversight was
infrequent, the documents show. JPMorgan Chase, the other mortgage servicing
titan, received a major audit within HAMP’s first year, but through all of 2009
and 2010, it only responded
to two major audits. CitiMortgage, the fourth largest servicer, only received
three major audits in that time period.
When Treasury did conduct a major audit of one of the big
banks, it often reviewed files that were many months old. A
Wells Fargo audit delivered in March of 2011, for example, covered a
“review period” of “May/June 2010.”
Once the audits were finished and delivered to the servicers,
there was another delay: servicers had
a month to respond with “action plans with implementation dates” to address
the problems.
A
Bank of America audit in late November of 2010 was based on information
that was six months old. One month later, Bank of America replied: “In the
Report, you requested that Bank of America management respond to the
observations, and if we agree, provide a detailed remediation plan, and if we
disagree, provide a detailed explanation and evidence to support our
position.” A page of redacted text follows, so the substance of the bank’s
response remains secret.
Bank of America spokesman Rick Simon declined to discuss the
communications: “As part
of the MHA compliance reporting, servicers may provide information and
statements that are of a proprietary and confidential nature, with the full
expectation that the Department of Treasury and its agents will treat it
appropriately.”
Banks evaluate
themselves
In September 2010, the robo-signing
scandal hit. A number of the nation’s biggest banks announced they were halting
foreclosures to investigate whether they had submitted false filings to courts.
The revelations drew immediate attention to mortgage servicers’ failings and eventually
led to action by bank regulators and state and federal law enforcement.
Yet the same month that the scandal erupted, mortgage
servicers submitted their first annual certification to the Treasury Department
that they were complying with HAMP’s rules.
The certifications were toothless. In fact, following a
fox-guarding-the-henhouse model, servicers could certify that they were complying
even when they were not.
It was up to the servicer to decide whether it was in
“material compliance,” according to the certification form. What rose to the
level of being a material problem? A Treasury directive gave
guidance that is so vague it borders on no guidance at all: “This
evaluation of materiality may or may not be quantifiable in monetary terms and
should include, but is not limited to, consideration of the nature and
frequency of noncompliance as well as qualitative considerations, including the
impact on Program goals and objectives.”
If the servicer found that it was, by its own definition,
noncompliant, it was required to list the problems and its “action plan” in a
separate “cover letter” to be sent with the certification filing. But that was
it. There was no penalty.
The Treasury continues to withhold many of the cover letters
from ProPublica. Among the documents the Treasury is still keeping secret are the
letters for the four largest servicers in the program (Bank of America, Wells
Fargo, JPMorgan Chase, and Citibank), although the Treasury has produced their
certifications.
Update: On Nov. 9, ProPublica received the cover letters for Bank of America, Wells, Chase, and Citi, among other servicers. All four letters disclosed the banks were not in compliance with HAMP’s rules, but Treasury redacted the details.
Still, the documents that ProPublica has received show that
several servicers claimed they had no problems to report.
“None to the best of our knowledge,” wrote
a GMAC Mortgage executive.
There are reasons to question that statement. Two months earlier,
a
MHA-C audit had found a number of problems at the servicer, including that
it had miscalculated homeowner income in more than 80 percent of audited cases.
And that same month, September 2010, GMAC had kicked off the robo-signing scandal by halting its foreclosures across the
country.
GMAC spokeswoman Susan Fitzpatrick said the company has “rigorous internal and external controls in place that maintain
consistent compliance with HAMP guidelines” and that the servicer was
materially compliant with HAMP’s rules when it filed the certification. “The
foreclosure issues identified in September 2010 are not related to servicer
compliance with HAMP guidelines.”
The Treasury said the certifications were “only one part of
a more comprehensive process” that included its audits. “While Treasury uses these
certifications as part of the compliance process, certainly we do not rely
solely on servicers to self-identify and report their weaknesses,” said the
department’s spokeswoman. Servicers were allowed to define materiality
for themselves in the certifications because, she said, a “‘one size fits all’
approach would not have been practical.”
“All instances of non-compliance are tracked and pursued to ensure
that servicers have and are executing against remediation plans, and that any
potentially-affected homeowners are identified and re-evaluated if applicable,”
she said.
Penalties were late
and fleeting
It was only in the wake of the robo-signing
scandal that Treasury decided to take punitive action against servicers
breaking HAMP’s rules. In June 2011, it
withheld the program’s subsidies to the three largest servicers in the program.
HAMP provides incentive payments to servicers, as well as borrowers and
investors, to encourage modifications. The servicer subsidies would stop until
the banks showed “substantial improvement,” Treasury said.
Wells Fargo soon received a passing grade, but the Treasury
continued to withhold subsidies from Bank of America and JPMorgan Chase until
the payments were restored as part of the February 2012, $25 billion national
mortgage settlement between federal agencies, 49 states, and the five largest
servicers. Together, the servicing subsidiaries of Chase
and Bank
of America have received about $509 million in subsidies through the
program.
When asked for comment about HAMP’s limited oversight, the
three largest servicers in the program all pointed to Treasury’s
recent assessments of how servicers comply with the
program’s rules. Those assessments show the banks requiring only
“moderate improvement.”
