Banks Received $814 Million In Federal Incentives For Mortgages That Ended Up In Redefault

According to the latest report from the Special Inspector General for the Troubled Asset Relief Program (or the much-cooler SIGTARP), the nation’s mortgage servicers have received more than $800 million in incentives for making modifications on mortgages that have ultimately resulted in the homeowner redefaulting on the loan.

According to the report [PDF], which now makes its way to Congress, the TARP program has paid out a total of $4.44 billion in incentives to participating mortgage servicers for getting troubled homeowners into modified mortgages under the federal HAMP program, representing around 1.19 million homes.

However, SIGTARP found that 306,538 of these loans were redefaulted on after the HAMP modification had finally been approved. The special inspector general Christy Romero calculates that this means $814 million in incentives were paid for mortgages with modifications that failed to keep the homeowner in his/her home.

“It’s lost taxpayer money,” Romero told the Charlotte Observer.

THE USUAL SUSPECTS
The list of servicers receiving large incentive payments for loans that ultimately redefaulted is full of familiar names.

At the top is Ocwen, which snapped up mortgage servicing portfolios from Goldman Sachs and Morgan Stanley, with $193 million in incentive payments for HAMP loans that eventually redefaulted. The folks at Chase received $138 million from taxpayers, followed by Bank of America with $102 million, and Wells Fargo with $99 million.

SO MANY REDEFAULTS, SO FEW EXPLANATIONS
According to the report, nearly half of the original homeowners to receive HAMP modifications in 2009 have since entered into redefault. For homeowners who received HAMP loan mods in 2010, the redefault rate is 38%.

“Treasury’s data continue to demonstrate that the longer homeowners remain in HAMP, the greater the chance that they will redefault on their permanent modification and fall out of the TARP program,” reads the report. “For the substantial number of homeowners who redefault, their modification was not sustainable. It is crucial that Treasury recognize this problem and take proactive steps to ensure that HAMP lives up to its promise and potential.”

The SIGTARP report takes issue with the Treasury Dept.’s failure to track the reasons a modified mortgage might go into default. Without such data, it’s impossible to pinpoint the causes of such widespread redefault.

“That’s troubling,” explains Romero. “Treasury’s not tracking that. They’re not requiring servicers to track that. That should have been a given.”

Even without that crucial data, SIGTARP did identify what it believes are key characteristics of homeowners likely to redefault — those who “(1) received the least reduction in their monthly mortgage payment and overall debt, (2) are still underwater on their mortgage, and (3) have subprime credit scores at the time of modification as well as a high overall debt burdens.”

TREASURY’S RESPONSE
An unnamed Treasury official disputed SIGTARP’s finding that redefaults were on the rise, claiming that the rates have actually been falling.

“I think it’s important to recognize that we launched this program in response to the worst housing crisis since the Great Depression and the worst economic crisis we’ve had since the Great Depression,” the official told the Observer. “And there will always be an inherent risk of homeowner redefault in a program like this, given the very difficult circumstances that people who need modifications face.”

The Treasury official also noted that the Dept. can not fine mortgage servicers who aren’t living up to their HAMP obligations, though it can withhold incentive payments as it has done in the past… Sort of.

As Romero points out, while Treasury did initially withhold incentive payments for servicers like BofA whose early attempts at HAMP compliance were laughable, those incentives were ultimately paid out when the banks fell into line (or at least appeared to fall into line).

“Treasury hasn’t even permanently withheld any incentive payments from them,” said Romero. “There’s been no financial repercussions on these servicers, despite repeated allegations of misconduct and mistreatment of homeowners.”

WHO’S TO BLAME?
The SIGTARP report includes a number of stories from redefaulted homeowners who claim that they were left in the dark or misled by their mortgage servicers.

One couple received a permanent HAMP modification and made all their payments on time, but still received a foreclosure notice:

“Each time we have contacted [our servicer] via the phone numbers they have given us. Each time the representative answering the phone has stated that we were delinquent; however, after stating that we have a loan modification agreement and we are actually current, they replied that the computer agrees with us; they stated that they will research the bank’s error; and that someone will get back in touch with us. [Our servicer] has never returned any of our numerous calls or answered our inquiries.”

Another family says they received a permanent HAMP modification but no one at the bank would tell them what their new monthly payment should be, in spite of efforts to get that information from the servicer. So the homeowners continued to pay what they had under the HAMP trial period. They say they received no notices of late or insufficient payments, but a few months later they were told the servicer considered their loan in redefault.

Then there’s the homeowner who received a permanent HAMP mod in 2010 and made all his payments for more than a year until the bank suddenly invoiced him for the monthly rate he’d been paying before the modification. When he contacted the bank, he was told it had no record of being approved for the modification, even though the homeowner had a signed, witnessed, and notarized document to the contrary. He is currently suing his servicer.

“Anecdotal evidence suggests that poor service by mortgage servicers contributes to homeowners redefaulting on HAMP permanent modifications,” reads the report. “Anecdotal evidence suggests servicers need more improvement.”