Secret Docs Show Foreclosure Watchdog Doesn’t Bark or Bite
Government
documents show that GMAC, the country's fifth largest mortgage servicer,
had seriously mishandled many loan modifications yet did not suffer a
penalty. (Rebecca Cook/Reuters file photo)
by
Paul Kiel ProPublica, Oct. 4, 2011, 10:25 a.m.
Why has the administration’s flagship foreclosure
prevention program been so ineffective in helping struggling homeowners
get loan modifications and stay in their homes? One reason: The
government’s supervision of the program has apparently ranged from
nonexistent to weak.
Documents obtained by ProPublica—government audit reports of GMAC,
the country’s fifth-largest mortgage servicer—provide the first detailed
look at the program’s oversight. They show that the company operated
with almost no oversight for the program’s first eight months. When
auditors did finally conduct a major review more than a year into the
program, they found that GMAC had seriously mishandled many loan
modifications—miscalculating homeowner income in more than 80 percent of
audited cases, for example. Yet, GMAC suffered no penalty. GMAC itself
said it hasn’t reversed a single foreclosure as a result of a government
audit.
The documents also reveal that
government auditors signed off on GMAC loan-modification denials that
appear to violate the program’s own rules, calling into question the
rigor and competence of the reviews.
Some of the auditors’ mistakes are “appalling,” said Diane Thompson
of the National Consumer Law Center, an advocacy group. “It suggests the
government isn’t taking the auditing process seriously.”
In
a written response to ProPublica's questions,
a spokeswoman for the Treasury Department, which runs the program,
denied there were serious flaws in its oversight system, calling it
“effective and unprecedented in many ways.”
The audits of GMAC, though revealing, give only a limited view into
the program, because the Treasury has refused to release the documents
for other servicers. For more than a year, through a Freedom of
Information Act request, ProPublica has sought the audits of 10 of the
largest program participants. The Treasury provided only GMAC’s audits,
because the company consented to their release. ProPublica continues to
seek all of the reports.
Abuses of the foreclosure process, in which banks and mortgage servicers cut corners or even
created false documents to move troubled borrowers out of their homes, have been
extensively documented, along with
failures by government
to regulate the industry. But the lapses revealed in the documents
obtained by ProPublica stand out because they occurred within the
government’s main effort to prevent foreclosures, the Home Affordable
Modification Program.
Oversight shrouded in secrecy
For HAMP’s first two years, the government offered very little public
detail about its oversight efforts. It was virtually impossible for the
public—or even Congress—to know how well the banks and mortgage
servicers were complying with the government’s effort to prevent
struggling homeowners from losing their homes. Those years were crucial,
because that’s when servicers evaluated the vast majority of homeowners
eligible for a modification—about 3 million.
The documents obtained by ProPublica show auditors finding serious
problems at a major servicer during that time. Instead of publicly
revealing the findings, Treasury chose to privately request that GMAC
fix the problems.
“For two years, they’ve known how abysmal servicers were performing,
and decided to do nothing,” said Neil Barofsky, the former special
inspector general for the Troubled Asset Relief Program, better known as
TARP or the bank bailout, which provided the money for HAMP.
“It demonstrates that if you have a set of rules for which compliance
is completely voluntary and no meaningful consequences for those who
violate them, having all the audits and reviews in the world are not
going to make a bit of difference,” he continued. “It’s why the program
has been a colossal failure.”
Treasury continued to release few details about its audits until
June, when it began publishing quarterly reports based on the audits’
results. The public report showed what Treasury called “substantial”
problems at four of the 10 largest servicers—Bank of America, JPMorgan
Chase, Wells Fargo and Ocwen—and Treasury
for the first time withheld taxpayer subsidies from three of them.
Mortgage servicers that signed up for the program agreed to follow
strict guidelines on how to evaluate struggling homeowners seeking
reduced mortgage payments. In exchange, the servicers would receive
taxpayer subsidies. But as we’ve reported extensively, the largest
servicers
haven’t abided by the guidelines. Homeowners have often been
foreclosed on in the midst of reviews for a modification
or denied because of the servicer’s error. For many homeowners,
navigating what was supposed to have been a simple, straightforward
program has proven a
maddening ordeal.
HAMP has fallen dramatically short of the administration’s initial
goal to help 3 million to 4 million homeowners. So far, fewer than
800,000 homeowners have received loan modifications through HAMP, or
fewer than one in four of those who applied.
As part of the $700 billion bailout program, HAMP was launched in
early 2009 with a $50 billion budget to encourage loan modifications by
paying subsidies to servicers, investors and homeowners. But
only about $1.6 billion has gone out so far.
GMAC said it agreed to release its audits under the program because
the company “believes in honoring the spirit of the Freedom of
Information Act process” and “elected to be transparent on our work with
the [modification] program,” spokeswoman Gina Proia said.
GMAC's parent company has changed its name to Ally Financial, but its
mortgage division is still called GMAC. The government owns a majority
stake in Ally because it rescued the company with TARP funds, but both
the company and the Treasury said that didn’t factor into the company’s
decision to allow the documents to be released.
ProPublica contacted all nine servicers that objected to the reports’
release. All either declined to comment on why they wanted the audits
kept secret or defended keeping them out of the public domain by saying
the reports contained confidential information. Collectively, these
companies have so far been paid more than $471 million—dubbed “servicer
incentive payments”—through the program. They are eligible for hundreds
of millions more. The country’s four largest banks—Bank of America,
JPMorgan Chase, Wells Fargo and Citigroup—are also the largest servicers
of mortgage loans.
In its written response, Treasury’s spokeswoman said it agreed to
withhold the records in part because they could undermine “frank
communications between mortgage servicers and compliance examiners” and
hurt the program’s effectiveness. The department declined to provide
either redacted versions or an index of the documents.
Early reviews “useless” and flawed
Since the program’s beginning, homeowner advocates have
wondered where HAMP’s watchdog was
and why it was having so little effect. That watchdog is Freddie Mac,
tapped by Treasury in February 2009 and working under a contract worth
$116 million and rising. The Freddie Mac unit, now staffed with 121
employees and employing about 150 more through contractors, is supposed
to regularly audit servicers in the program to make sure they are
following the rules. Treasury is ultimately responsible for deciding
whether to punish a servicer but relies on auditors’ findings to make
that decision.
It took several months for the unit to even get off the ground. In August 2009,
Treasury rejected Freddie Mac’s first reviews of servicers as inadequate because
they were “inconsistent and incomplete” and its staff was
“unqualified,” according to a report by the TARP’s special inspector
general. Freddie Mac promised to improve. That process took several more
months.
As a result, for the program’s crucial first eight months, there was
effectively no watchdog. Nationwide, servicers filed to pursue
foreclosure on about 2 million loans during that time.
Treasury disputed the idea that there was no watchdog for those
months, saying that auditors had performed “readiness reviews” of
servicers as early as May 2009, one month after the program was begun.
The documents obtained by ProPublica, however, show that Freddie Mac’s
auditing unit, called Making Home Affordable—Compliance (MHA-C),
didn’t issue its first report for GMAC until early December 2009.
That audit was a modest effort that involved collecting a sample of
323 loans handled by GMAC and determining whether they’d been properly
reviewed for the program. Because of the delays in starting the reviews,
the report was based on a sample of loans that was five months old. Such delays continued into 2010. Another Freddie Mac review, completed at the end of March 2010, was
based on GMAC loans selected in October of the previous year.
The delays make those reviews “largely useless to homeowners,” said
Thompson of the National Consumer Law Center. If a homeowner lost a
house to foreclosure in July, it wouldn’t help to have an auditor notice
that several months later, she explained.
The December 2009 audit noted that GMAC might have already foreclosed
on loans that auditors had flagged as potentially mishandled, but
didn’t order remedial steps. It only requested that GMAC
not take “further action.”
GMAC said it had never reversed a foreclosure action as a result of a
HAMP audit. ProPublica put the same question to the other nine
servicers that objected to the audits’ release. American Home Mortgage
Servicing, the only other servicer that answered the question, said it
also had never reversed a foreclosure action due to a HAMP audit.
American Home handles
about 384,000 loans, putting it among the 10 largest servicers in the program.
A Treasury spokeswoman said that auditors have reviewed more than
50,000 loan files, but did not directly answer whether a servicer had
ever reversed a foreclosure action because of a HAMP audit. Where
auditors have found problems, she wrote, the department has “required
servicers to take steps to tighten controls” and “re-evaluate any
borrowers who may have been potentially impacted.”
In early 2010, around the same time that the auditing unit was
issuing its first reports, auditors complained that servicers’ lack of
responsiveness to their requests was hampering their efforts. Getting
the right documents from servicers was "a cumbersome process," the head
of Freddie Mac’s audit team, Paul Heran, said in February 2010 at a
mortgage industry conference. It seemed, he added, that servicers often
relegated responding to the auditors to low-level staff who didn’t
understand the requests. Another manager in the unit, Vic O’Laughlen,
said servicers tended to respond with “at best 50 percent of what we’re
expecting to see.”
However uncooperative the banks and mortgage services may have been,
Freddie Mac’s auditing reports contain errors that call into question
their reliability.
Every few months, the auditors examine a sample of the servicer’s
loans that have been denied a HAMP modification to check whether the
denials were legitimate. In each GMAC report reviewed by ProPublica,
auditors found that the servicer had, with very few exceptions, given
the homeowner fair and appropriate consideration. But among the
justifications listed in the audits are some that violate the program’s
rules or simply don’t make sense.
For instance, the December 2009 review said that 35 of the 247 loans that auditors reviewed were denied
because the homeowner was “less than 60 days delinquent.”
In the report, auditors said that was the right decision in all but one
case. But being less than 60 days delinquent is never on its own a
legitimate reason for a servicer to deny a modification, according to
the program rules. Homeowners are eligible for a modification even if
they’re current on their loans, as long as they can show they’re in
imminent danger of defaulting.
Another example: Auditors
agreed
that GMAC had correctly denied a homeowner because of a failure to sign
a trial modification offer by Dec. 31, 2012, HAMP’s end date. That
makes no sense, because the review took place in 2009. Treasury’s
spokeswoman said this was a typo and that the homeowner was denied for a
completely different reason.
There are several other examples in later reports of auditors signing
off on denial reasons that have no apparent basis in the program’s
rules. For instance,
auditors cited “grandfathered foreclosure”
as a legitimate reason for some denials. The spokeswoman said such
loans had been in the foreclosure process before GMAC signed up for the
program, but the program rules explicitly stated at the time that such
loans were eligible.
When ProPublica asked GMAC if it had denied homeowners loan
modifications for these reasons, the company said it couldn’t comment
because auditors, not GMAC, had generated those descriptions of why
homeowners had been denied. In some cases, Proia said, the descriptions
were simply wrong: GMAC had never denied homeowners simply because they
weren’t 60 days delinquent.
But Treasury defended the questionable denials, and in so doing
raised even more questions. For instance, the spokeswoman said HAMP
“does not specifically require servicers to evaluate loans that are less
than 60 days delinquent.” But Treasury’s official guidance to servicers
said such borrowers “must be screened.”
“It makes you wonder if the Treasury even knows the rules for their
own program,” said the National Consumer Law Center’s Thompson.
A congressionally appointed panel, among others, has pointed to a
fundamental flaw in the way the oversight was carried out: Auditors have
had no direct contact with homeowners. The program has been dogged by
servicers’ inadequate document systems.
Borrowers have long reported faxing and mailing the same documents over and over, because servicers kept losing them. Servicers
have denied about a quarter of all modification applications due to an alleged lack of documentation.
Because HAMP’s auditors do not contact borrowers, the auditors have no
way of determining whether a denial for inadequate documentation was
correct.
In response to this criticism from the Congressional Oversight Panel for the TARP
in December 2010,
Treasury said auditors did not contact homeowners to avoid giving them
added stress. The panel rejected that reason, saying that contacting
borrowers was “critical to assessing the accuracy of a servicer’s
determination.”
Instead of talking with borrowers, auditors conduct on-site reviews
of mortgage servicing companies, Treasury’s spokeswoman said in her
written response to ProPublica. Treasury believes that focusing “on
servicer processes and internal controls is the most effective
deployment of our compliance efforts,” she wrote.
Detailed audit shows serious problems
It wasn’t until July 2010—16 months after HAMP was launched—that the
unit performed its first major audit of GMAC. The review included a
visit to GMAC’s offices and a detailed review of a sample of loans.
The report enumerated various rules violations, including in GMAC's
evaluation of homeowners for modifications. GMAC’s practice was to
begin the foreclosure process too quickly:
The program required the servicer to give the homeowner 30 days to
respond to a trial modification offer, but GMAC’s procedure was to wait
only 20.
GMAC’s Proia said no homeowners were “negatively impacted by this issue.”
Auditors also found that GMAC was regularly miscalculating
homeowners' income. In a review of 25 loan files of homeowners who had
received modifications,
the auditors said 21 involved a miscalculation of income.
Since income is a key factor in whether a homeowner qualifies for a
modification, the high error rate raises obvious questions about whether
GMAC was accurately evaluating homeowners’ applications.
Asked about the frequent income miscalculations, GMAC’s Proia said
the “issue was identified in the early stages of the program,” that
calculating the borrower’s income is a “complicated process” and that
GMAC has improved since the mid-2010 review—an assertion backed up by
recent audit results published by the Treasury.
The July 2010 review
also found that GMAC had been aware of certain problems such as “incorrect income and expense calculations” but had not fixed them. Proia said the company does its best to fix problems when it becomes aware of them.
Penalties: late and weak
Typical of the Treasury’s oversight of the program, GMAC was never
penalized for any of the rules violations. For the first two years of
the program, Treasury officials publicly threatened servicers with
possible penalties but
instead followed a cooperative approach. When auditors found problems, servicers were asked to fix them.
The documents illustrate as much. In response to the auditors’
findings, GMAC was required to develop an “action plan.” GMAC refused to
provide the action plan to ProPublica and recommended seeking it and
similar documents by filing a Freedom of Information Act request with
the Treasury.
Treasury
has sent mixed messages about its ability to penalize banks over the course of the program,
threatening “monetary penalties and sanctions” in late 2009 and then
saying it lacked the power to enforce such penalties. Treasury finally
departed from its cooperative approach in June, when it
withheld incentive payments
from three of the top 10 servicers. (GMAC was not among them.) The
companies would not receive the public subsidies for completing
modifications until they made certain changes. The companies were cited
for some of the same problems for which auditors had criticized GMAC,
such as regularly miscalculating borrowers' income. JPMorgan Chase, for
instance, had erred in estimating income in about a third of the
homeowner loan files reviewed.
The punishment hasn’t had much sting. Incentive payments were restored for one of the three companies when Treasury’s
most recent report
declared it’d improved. Chase and Bank of America, the country’s
largest servicer, would continue to have their incentives withheld,
Treasury said.
But while those incentives have slowed, they have not stopped, according to Treasury’s monthly TARP
reports.
Since June, when Treasury first announced it would withhold incentives,
Bank of America has received $2.5 million in taxpayer incentives. While
that’s a steep reduction from the roughly $7.5 million it had been
receiving monthly, the bank is supposed to get nothing. Chase received
$404,000 during that same time.
Treasury responded that it has programs to encourage modifications on
both first and second mortgages, and that the payments Bank of America
and Chase received were related to second mortgages. “Current system
limitations” meant the Treasury couldn’t withhold these payments,
according to the Treasury spokeswoman. Treasury is working to fix the
problem, she said.
Correction (10/5): An earlier version of this story
mistakenly stated that the Treasury has restored HAMP incentive payments
for two of the three companies that had previously had their payments
withheld. In fact, only one company had its payments restored. We regret
the error.
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