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Gaming Uncle Sam’s Mortgage Modification Program

Posted by Larry Doyle on March 31, 2010 11:08 AM |

A new release by the SIGTARP (Office of the Special Inspector General for the Troubled Asset Relief Program) is exceptionally enlightening in detailing how a likely significant percentage of those homeowners who entered the trial mortgage modification process gamed the system.

Once again, major high five to our friends at 12th Street Capital for sharing this report and providing insightful commentary. As 12th Street points out this morning:

With all of the hoopla surrounding the government and Bank of America announcements to push principal forgiveness to the top of the waterfall for mortgage modification triage, it would have been easy to miss the latest report from the SIGTARP (Special Inspector General of TARP). I have attached the report here and would encourage you to print it out and read it.

In spite of the best efforts of the government and mortgage servicer community, I believe some of the challenges that have resulted in lower than expected modification volume could continue (or even get worse) when it comes to gaining critical mass regardless of the type of modification utilized. It would be easy to get bogged down in the report where it disparages the metrics upon which the government measures volume of modifications and success rate versus initial projections, but I would say flip to page 12 of the report and take a look at the stagnating number of trial mods and then on page 13 it talks about conversion to permanent mods, which I believe will become even more challenging.

Verbal financial information was acceptable to start a trial modification, however that meant there was more work to do down the road (sound familiar?) to confirm eligibility for permanent modifications. That additional work has slowed down the process and added work for the servicers. The ability to qualify via ‘stated doc.’ will end on April 15th, which I have to assume means there will be far less trial modifications occurring:

The second issue affecting conversion relates to when payments are due during the trial period. On or prior to April 15, 2010, after the borrower makes the first trial modification payment during the initial month in which the trial modification becomes effective, he or she has the full length of the trial period to satisfy further trial payment requirements. As such, a borrower’s likelihood for default is concealed during the trial period and borrowers may have an incentive to delay entering into permanent modifications. Several of the servicers interviewed reported concerns about homeowners trying to game the system in this fashion. Treasury changed these payment requirements so that after April 15, 2010 a borrower must make monthly payments to be considered current.

I never knew about the payment schedule. I know there are a lot of people who think the principal reduction is a game changer, however I would temper the enthusiasm given the ongoing implementation problems of the government programs and the tightening of guidelines and processes that go into effect on the not so ironic date of April 15th.

For those who may not have fully appreciated the words of wisdom provided by 12th Street, I will reduce it to layman’s terms: under Uncle Sam’s mortgage modification plan, homeowners were not required to provide written documentation of verified income in order to qualify. Additionally, the homeowners were not required to continue making monthly mortgage payments. What happened as a result? Just as night follows day, lots of people clearly misrepresented income levels and did not maintain their monthly payments. They beat Uncle Sam and the taxpayers supporting this program like a drum. The report highlights this reality and other issues with the program starting on the bottom of page 24. The report reads:

All five of the servicers interviewed in connection with this audit have identified problems of one sort or another that they have experienced due to repeated changes in program guidelines. One servicer in particular noted that it changed from offering only fully documented trial modifications to verbal modifications after Treasury threatened to make examples of servicers with low trial modification numbers (note 22 see below). Servicers have reported among other things that:

>>repeated changes to program guidelines have made it difficult for servicers’ operators to keep up with program rules.

>>verbal modifications have allowed borrowers to obtain trial modifications due to misrepresentations, and identifying borrowers who have misrepresented their eligibility is difficult and resource intensive.

>>borrowers might be gaming the system by withholding required documents (and thereby avoiding to have to make payments until the end of the trial period and still avoid foreclosure), and that some borrowers might be withholding documents to avoid disclosing misrepresentations on their original loan applications.

Note 22: Other servicers have noted issues relating to Treasury’s drive in July 2009 to increase the rate of trial modifications. One servicer found the meeting on July 28, 2009 as not helpful and just a forum for Treasury to tout publicly its goal of 500,000 modifications. Another complained that several servicers were made examples of for the sake of providing a certain public perspective about Treasury’s oversight of the program.

Do you get the sense that Treasury was trying to game the system itself in order to present it as a success? I do.

What does this all mean for the future of the principal reduction program? Just as 12th Street highlights, look for a likely decline in the numbers even applying for the program. I would add, however, that we should expect an increase in those who will change behaviors (that is, an increase in mortgage delinquencies) in the hope of becoming eligible for this program. That development would be exceptionally unhealthy for housing and our economy.

In my opinion along with many others, the mortgage modification program has been an abysmal failure in terms of development, management, execution, and results. I would hope I am wrong but I expect no better with the principal reduction program. I see it as merely another wealth redistribution program promoted by the Obama administration.

One last comment. This $75 billion undertaking is not insignificant from a dollars standpoint, but relative to healthcare reform it is a drop in the bucket. You tell me how Uncle Sam is going to manage that.

For the overachievers in the crowd, I am happy to submit the full 60-page report (click on the image to access a pdf document). In addition, if you like what you read at Sense on Cents, please subscribe to all of my work via e-mail, an RSS feed, on Twitter, or Facebook. ~LD

  • fred

    “They beat Uncle Sam and the taxpayers supporting this program like a drum. ”

    Uncle Sam designed the system that way. They knew people would cheat, otherwise why not get the information upfront and reqire monthly payments during the trial period? Just another fraudulent method of propping up delinquent debtors on the backs of taxpayers.

  • Patriot

    Note 22: Other servicers have noted issues relating to Treasury’s drive in July 2009 to increase the rate of trial modifications. One servicer found the meeting on July 28, 2009 as not helpful and just a forum for Treasury to tout publicly its goal of 500,000 modifications. Another complained that several servicers were made examples of for the sake of providing a certain public perspective about Treasury’s oversight of the program.

    Do you get the sense that Treasury was trying to game the system itself in order to present it as a success? I do.

    Me too. Sounds like standard government smoke and mirrors.

  • USSA

    The amount of money the government wastes would go a long way toward running the government the right way in the first place.

    How long do you think it took people to figure out how to game this HAMP program? Over under is 4 hours.

  • Bill

    How is it that such people can basically engage in fraud in these government programs with impunity? While financially responsible people, if they pulled stunts like that, or like Geithner, Rangel and Daschle pulled, would be down on one knee in front of some federal judge trying to stay out of jail? Why is that?

    • LD

      The servicer nailed it when he stated that the Treasury wanted to project an air of running roughshod while making real headway. The fact is Treasury needed numbers to promote the idea that progress was really being made when the progress was really games being played with other people’s money.

      Our government is a JOKE!

      • Bill

        The gamers are Obama’s constituency. He’s a gamer himself–big time.

  • fred

    LD,

    According to a recent Dallas Fed research paper, more than 36% of mortgage defaults are “strategic defaults”; the homeowners or more accurately home squatters, could afford to make the monthly mortgage payment but because of negative equity, choose not too.

    How do we publicly expose these deadbeats for what they are, and how do we get them paying their mortgages again like everyone else?

    • LD

      Fred,

      I do not see that happening. Why?

      The moral hazard that was violated in bailing out the banks has provided the perfect excuse/line of reasoning for those who strategically default. As one homeowner indicated to me, “I’m only defaulting on the bank because they basically defaulted on me/us first.”

      Strategic defaults are one of the massive ‘unintended consequences’ of this economic turmoil.

      • fred

        I don’t get it, how did the bank default on “them” first?

        Not only are these deadbeats not paying their mortgages, I assume they’re also not paying the property taxes either.

        Why don’t we all just stop paying our mortgage and property taxes, even if we aren’t in a negative equity situation, we all experienced the same reduction in property values!

        • LD

          Fred,

          I am with you BUT when I say the “bank defaulted on me/us first”, I mean that many people feel that given the bailout that the banks received, that they should be entitled to a bailout as well.

          Additionally I should have written that I firmly believe many people are strategically defaulting because they viewed and likely still view their home as a “trade” or another “investment” within their overall portfolio as opposed to a place of value in which they raise their family.

  • Tavia Cimunt

    Attacking the community and the real estate market. Federal Bureau of Investigation is currently warning troubled homeowners in which they are becoming more vulnerable to refinancing and foreclosure prevention schemes. Related article I read entitled:FBI claims cases of home loan fraud skyrocketing .Scam at its worst.






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