LAS VEGAS — That the Obama administration’s Home Affordable Modification Program (HAMP) actually worsened the plight of many American homeowners has been well documented — if not widely discussed.
But how much of that needless distress was suffered by Nevada homeowners? And how much of the Silver State’s multiple-year economic disaster can be laid directly at HAMP’s door?
These questions gain new pertinence following the public release of surveys conducted for the Nevada Association of Realtors’ new report, Nevada’s Face of Foreclosure: An In-Depth Look at Nevada’s Housing Crisis.
Of the Nevadans queried who had personally experienced foreclosure, a remarkable 40 percent said that they had been advised to stop paying on their mortgages “in order to qualify for assistance” from their lender.
So large a proportion strongly suggests that many Nevada homeowners were victims of a “particularly pernicious type of abuse” that an illuminating and tightly documented new book says HAMP facilitated.
The book is Bailout, published by the Free Press this summer and written by Neil Barofsky, who headed the federal government’s Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) from December 2008 to February 2012.
A high-profile federal prosecutor in the Office of the U.S. Attorney for Manhattan before being tapped for the SIGTARP job, Barofsky — a life-long Democrat — had been an Obama voter and campaign contributor.
Nevertheless, when he stepped down on Feb. 14, 2012, it was big relief to Obama’s treasury secretary, Tim Geithner. An anonymous administration official in the Treasury Department even said the Barofsky resignation “was like a nice Valentine to us.”
Because the Obama administration used TARP funds for HAMP, keeping an eye on all things HAMP had been a significant part of SIGTARP’s oversight job. What led to the unhappiness in Treasury was that Barofsky’s office had pursued its responsibilities aggressively, with no respect for the administration’s political agenda.
As such, the SIGTARP office documented many of the abuses perpetrated on American homeowners under the Treasury Department’s benign neglect — describing those abuses clearly in the quarterly reports that SIGTARP made to Congress.
The bad advice servicers gave homeowners was just part of the systemic problems with HAMP that Barofsky and his team found. But, as Bailout explains, it was symptomatic of the exploitation of American homeowners that Treasury allowed:
“[S]ervicers would direct borrowers who were current on their mortgages to start skipping payments, telling them that that would allow them to qualify for a HAMP modification,” he writes in his new book.
In this way, the ex-prosecutor notes, servicers were able to pile up late fees on the borrowers — many of whom might have otherwise been able to qualify for a modification if they had not missed a payment.
“Those led to some of the most heartbreaking cases,” says Barofsky. “Home owners who might have been able to ride out the crisis instead ended up in long trial modifications, after which the servicers would deny them a permanent modification and then send them an enormous ‘deficiency’ bill.
“They were charged for the difference between the modified monthly payments and the original amount of their payments for all of those months, which could be a crippling amount, and were also slapped with a host of late fees. Borrowers who might otherwise never have missed a payment found themselves hit with whopping bills that they couldn’t pay and now faced foreclosure.
“It was a disaster,” says the former prosecutor, now a senior fellow at the NYU Law School. The Obama administration’s Treasury Department permitted servicers “to take all the preliminary legal steps necessary to foreclose at the exact same time that they were supposedly processing the trial modifications.”
Servicers weren’t supposed to foreclose on borrowers while the latter’s trial modifications were pending. But — as reporters from ProPublica and Huffington Post comprehensively documented, and as letters from homeowners made clear — servicers did so anyway.
The telling subtitle of Barofsky’s very readable book is, “An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.”
It documents, step by step, how the ex-prosecutor from the Manhattan U.S. Attorney’s office and his colleagues came to conclude that the Obama administration saw HAMP not primarily as a way to help “between 7 and 9 million families restructure or refinance their mortgages, so they can avoid foreclosure,” as Obama had told the nation in February 2009. Instead, it was seen as a way to bolster the too-big-to-fail banks.
“A lightbulb went on for me,” recounts Barofsky, when he heard Treasury’s Geithner, in a private conversation, justify the administration’s relative indifference to the ineffectiveness of HAMP for homeowners. Geithner said that HAMP “will help foam the runway” for the insolvent megabanks — stretching out foreclosures over a longer time-line, one that they could more easily handle.
Geithner apparently looked at HAMP as an aid to the banks, keeping the full flush of foreclosures from hitting the financial system all at the same time. Though they could handle up to “10 million foreclosures” over time, any more than that, or if the foreclosures were too concentrated, and the losses that the banks might suffer on their first and second mortgages could push them into insolvency, requiring yet another round of TARP bailouts. So HAMP would “foam the runway” by stretching out the foreclosures, giving the banks more time to absorb losses while the other parts of the bailouts juiced bank profits that could then fill the capital holes created by housing losses.
As it happened, HAMP never even cleared the 1 million modification mark until earlier this year — far below the “7 to 9 million” mark that the president had announced Feb. 18, 2009 in Arizona.
In Nevada, according to the Face of Foreclosure report, between Jan. 1, 2009 and May 31, 2012, the state saw 551,777 foreclosures, and easily 93 percent of them were people’s primary residences.
Small wonder, perhaps, that Nevadans surveyed for the report show little respect for government foreclosure-prevention programs.
Nevadans who had personally experienced foreclosure were asked the question, “Would you say most government foreclosure prevention programs are improving Nevada’s foreclosure situation, making it worse, or not really having an impact?”
The great majority, 58 percent, opted for “not really having an impact.” Yet, a surprising 20 percent chose “making it worse.” That was over twice the number of those who chose “improving.”
Among Nevadans generally, the questions were answered similarly. Opting for “not really having an impact” were 52 percent, choosing “making it worse” were 20 percent, while “making it better” was selected by 10 percent.
Nationally, too, three-and-a-half years after the administration launched HAMP, the program has been widely recognized to have, at best, made little difference.
“Obama’s efforts to aid homeowners, boost housing market fall far short of goals,” noted a Washington Post headline.
And ProPublica — having compiled arguably the nation’s “most detailed look yet at how the mortgage industry and the government's main effort, the Home Affordable Modification Program (HAMP), have failed homeowners” — reported that:
- Only a fraction of struggling homeowners got help;
- Mortgage servicers only reached a small fraction of struggling homeowners;
- The largest servicers, especially Bank of America, left most struggling homeowners in limbo without either modifying or foreclosing;
- HAMP itself hasn't made much difference: It did not lead to an increase in modifications.
That was the best case: In many instances HAMP actually increased the misery of homeowners and the odds that they would lose their homes — as documented by SIGTARP in its October 2010 report to Congress.
How could such an ostensibly important program go so wrong?
Barofsky says his first doubts began on Feb. 10, 2009, when Geithner — in a catastrophic news conference that sent the Dow Industrial Average down 400 points during the day — described four new TARP initiatives, one of which would be the housing program that would come to be called HAMP.
After the speech, the SIGTARP team asked Treasury for more information about the new programs. The answer, however, was that the programs “weren’t yet sufficiently formed to give us anything beyond a short stack of press releases issued by Treasury that day.”
That, he said, became Treasury’s standard M.O.:
First, announcements intended to “shock and awe” the media that made for good sound bites but were not particularly well thought out; then, weeks later, scattered and incomplete details that had to be reworked on the fly. And finally, poor program execution that accomplished little, if any, of the originally announced goals. Several of the programs announced that day followed the pattern exactly.
The next instance of the pattern followed quickly: Barofsky “heard on the radio that the president was going to announce a comprehensive mortgage modification program in Arizona the following Wednesday.”
It had been because of his extensive experience prosecuting mortgage fraud in New York that Barofsky had been selected for, and confirmed in, the SIGTARP job. Thus, because he knew “that $50 billion government cheese was going to draw out a lot of rats,” he also knew that such a program would require thoughtful planning and careful structuring. What he saw, however, was a White House “being wildly premature.”
Again, he reached out to Treasury for details, and again his fears were confirmed: No one could yet explain “the nuts and bolts of how the program would work.”
“Now we were really worried,” he writes. “It seemed inconceivable that [the administration] would be able to put together a well-thought-out program in such a short period of time. This once again seemed more like political posturing than an executable plan.”
Events over the next three years would prove that analysis spot-on. For, when Treasury’s plan finally began surfacing, the seeds of disaster were quite visible.
“I was concerned right away,” writes Barofsky, “when the Treasury presenters explained that the largest mortgage servicers would effectively be running the program on behalf of Treasury, earning taxpayer-funded incentive payments each time they agreed to permanently modify a mortgage.”
The problem, he writes, was that Treasury was placing the fate of mortgage modifications in the hands of an industry that had a solid interest in foreclosures, not in modifications:
Importantly for the servicers, when a home is sold in foreclosure, they are typically paid all of their fees and advance expenses before the owners of the mortgages get any of the proceeds of the sale. As a result, though there is a good chance that investors will lose a significant amount of money in the foreclosure of a home, the servicers are in a much better position to recoup their fees and expenses. In that way, the economic incentives of the investors and the servicers often clash. Though it may be better for an investor if a mortgage is modified, the servicer may be better off if a home goes into foreclosure. Treasury’s failure to adequately address this inherent conflict of interest would eventually help cripple its mortgage modification program.
Even when servicers had the very best intentions, however, their industry — upon which the Obama administration planned to rely so heavily — was not at all prepared to bear such a burden.
SIGTARP audits revealed that:
Treasury had failed to ensure that the servicers had the necessary infrastructure to support a massive mortgage modification program. Their business models were built around processing mortgage payments and implementing foreclosures, not modifying mortgages. They had been as caught off guard as we were by the president’s February announcement and were completely unprepared for the deluge of requests following his speech. Worse, though Treasury provided various “directives” to the servicers, they shifted constantly, making compliance all but impossible.
Treasury not only kept changing documentation guidelines, and thus “exacerbating a quickly emerging problem with the servicers’ incompetent handling of borrower documents.” Treasury also kept “changing the terms by which servicers had to evaluate borrowers for modifications.”
Those terms, called the Net Present Value (NPV) test, were “supposed to indicate what made more economic sense for the investor who owned the loan,” a modification or a foreclosure. And if the NPV test showed positive for the investor, the servicer was required to offer a modification.
“But Treasury couldn’t figure out the right formula for the test, which was at the heart of its entire program, changing it nine times in the first year alone.”
With the design and implementation of HAMP having been so badly botched, the program barely got off the ground — whereupon the “initial low participation numbers caused Treasury officials to panic, making things even worse.
“They threatened the servicers with public denunciation if they didn’t increase their numbers dramatically and called them to Washington over the summer for a very public scolding. They then set a goal of 500,000 preliminary or “trial” modifications by Nov. 1, 2009.
“To meet that goal, Treasury pressured the servicers to dispense entirely” with the anti-fraud paperwork SIGTARP had recommended, “and turn to the exact same tactic used by the banks in the lead-up to the financial crisis: undocumented ‘verbal’ trial modifications.
“For ‘verbals,’ the servicer could put the borrower into a trial modification based on a single telephone call but couldn’t convert it into a ‘permanent’ HAMP modification (at which point Treasury would start paying incentives) until the servicer received and processed all of the underlying documents.
“The no-doc liar loans of 2006 might have rightly gone the way of the dinosaurs,” writes Barofsky, “but now Treasury was pushing the servicers to issue their 2009 equivalent: no-doc trial modifications.”
The political pressure from Treasury “on the mortgage servicers over the summer of 2009 to goose their numbers through hundreds of thousands of unverified ‘verbal’ trial modifications,” began producing “horrifying results,” writes Barofsky.
“Our ongoing reports [to Congress] would eventually detail how Treasury’s pressure to loosen their up-front documentation requirements had led to the victimization of many home owners.
“The flood of trial modifications caused the servicers’ systems to first buckle and then break as borrowers seeking to make their modifications permanent flooded the underequipped servicers with millions of pages of documents. The servicers’ performance was abysmal: they routinely “lost” or misplaced borrowers’ documents, with one servicer telling us that a subcontractor had lost an entire trove of HAMP materials.”
The SIGTARP office received hordes of complaints from borrowers saying they’d had to send their documents to their servicers multiple times — on average, according to a survey by ProPublica, six times — after which the servicers would still claim that the documents had never been received and then foreclose.
The massive number of borrowers seeking modifications, writes Barofsky, “also meant that fully qualified borrowers got lost in the storm.”
Servicers would later confess to SIGTARP auditors “that the sheer volume from Treasury’s verbal trial modification surge made it nearly impossible for them to separate the modifications that fully qualified and had a chance to be successful from those that were hopeless.”
To ensure that servicers did not introduce scams into the trial modifications, SIGTARP had recommended to Treasury that the trial modifications automatically convert to permanent status after three payments over three months.
Treasury, however, rejected that proposal, and allowed trial modifications to drag on for extended periods, sometimes more than a year.
That allowed servicers to “put just about any borrowers they chose into verbal trial modifications to pump up their numbers,” notes Barofsky, “and then … refuse to convert them to permanent status as long as just a single document was supposedly outstanding.
“Aggravating the problem,” he says, “was that the design of the program potentially rewarded servicers who ‘lost’ documents: it could be more profitable for a servicer to drag out trial modifications and eventually foreclose than to award the borrowers quick permanent modifications.”
That’s because mortgage servicers profit from fees, particularly late fees, notes Barofsky, “and under HAMP, Treasury allowed mortgage servicers to charge and accrue late fees for each month that borrowers were in trial modifications, even if the borrowers made every single payment under their trial plans. (The rationale was that by not making the full unmodified payment, the borrowers were technically ‘late’ on each payment.)
“If the modifications were made permanent, Treasury required the servicer to waive the fees, but if the servicer canceled the modifications (say, for example, for the borrowers’ alleged failure to provide the necessary documents), the servicer could typically collect all of the accrued late fees once the homes were sold through foreclosure.
“In other words, servicers could rack up fees by putting home owners into late fee–generating trial modification purgatory and then pulling the rug out from under them by failing their modification for ‘incomplete documentation,’ which they did in droves,” writes Barofsky.
He notes that although Treasury eventually changed its practice of allowing undocumented trial modifications, by early 2012 HAMP modification failures still outnumbered successes.