GAO Finds Big Problems in Mortgage Modification Program

A study of the Home Affordable Modification Program (HAMP) confirms problems cited by consumer advocates, homeowners and others who have found the program routinely fails financially-troubled consumers trying to modify their mortgages and stay in their homes.

The Government Accountability Office (GAO) study found loan servicers losing documents, taking too long to make decisions and miscalculating homeowners' income.

The study found that the Treasury Department had asked loan servicers to clear up the problems but has not sanctioned servicers who don't comply and has not finalized any plans to punish servicers who continue to abuse homeowners.

The report echoes the findings of a December 2010 report by the Congressional Oversight Panel that called the program  a failure.  The findings also replicate the complaints that consumers have been filing with ConsumerAffairs.com since the program's inception. 

Counselors surveyed

The GAO surveyed 394 housing counselors who worked with troubled homeowners and found that roughly 76 percent of them characterized borrowers' overall experiences with HAMP – from the time they first inquired to the point at which they received a decision – as "negative" or "very negative."

Fewer than 9 percent of counselors described borrowers' overall experience with HAMP as "positive" or "very positive."

Roughly 40 percent of the 312 counselors that provided written comments on their experiences with HAMP said that they had experienced difficulties working with loan servicers. Roughly 39 percent said paperwork had been lost or needed to be resubmitted.

30 days

According to Treasury's HAMP guidelines, servicers are required to notify borrowers that they have been approved for or denied a trial modification within 30 days of receiving a complete HAMP application package. However, over 86 percent of counselors who responded to the GAO survey said that it typically took 4 months or more for borrowers to receive a decision about a HAMP trial modification from the time the borrower requested it.

Nearly 46 percent said that the process typically took 7 months or more. Roughly 60 percent of the counselors said the frequency for denial was "often" or "sometimes."

Of these, over half of the counselors said that a substantial number of these denials were related to servicers' miscalculations of borrowers' gross monthly income.

Misplaced documents

Treasury has reported that one of the most common reasons for canceling trial modifications is insufficient documentation. However, Treasury indicated that it was unable to determine whether borrowers had not submitted the required documentation or servicers had lost or misplaced it.

According to 96 percent of the counselors surveyed, "servicer continues to request borrower's updated financial documentation" was one of the three principal challenges borrowers faced in providing the required documentation. In addition, over 78 percent of the counselors ranked "servicer lost the borrower's documentation" as one of the three highest challenges.

Sanctions needed

To improve the rate of successful modifications, counselors most often said that Treasury should enforce sanctions on servicers that did not comply with HAMP guidelines (60 percent). Treasury said that it had asked servicers to rectify issues associated with noncompliance and in some cases had withheld financial incentives but had not yet finalized consequences for noncompliance.

Counselors also cited the need for Treasury to require servicers to make more timely decisions (51 percent) and to ensure that servicers worked with borrowers who were not yet 60 days delinquent (41 percent).

Borrowers used non-HAMP proprietary modifications for greater flexibility; fewer documentation requirements; fewer eligibility requirements; more flexibility around the debt-to-income (DTI) threshold; assistance borrowers with front-end DTI ratios below 31 percent; and targets for acceptable total debt levels.