Secret Docs Show Foreclosure Watchdog Doesn’t Bark or Bite

by Paul Kiel ProPublica, Oct. 4, 2011, 11:26 a.m.

Why has the administration2019s flagship foreclosure prevention program been so ineffective in helping struggling homeowners get loan modifications and stay in their homes? One reason: The government2019s supervision of the program has apparently ranged from nonexistent to weak.

Documents obtained by ProPublica 2014 government audit reports of GMAC, the country2019s fifth-largest mortgage servicer 2014 provide the first detailed look at the program2019s oversight. They show that the company operated with almost no oversight for the program2019s 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 2014 miscalculating homeowner income in more than 80 percent of audited cases, for example. Yet, GMAC suffered no penalty. GMAC itself said it hasn2019t 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 program2019s own rules, calling into question the rigor and competence of the reviews.

Some of the auditors2019 mistakes are 201Cappalling,201D said Diane Thompson of the National Consumer Law Center, an advocacy group. 201CIt suggests the government isn2019t taking the auditing process seriously.201D

In a written response to ProPublica questions [1], a spokeswoman for the Treasury Department, which runs the program, denied there were serious flaws in its oversight system, calling it 201Ceffective and unprecedented in many ways.201D

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 GMAC2019s 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 [2] to move troubled borrowers out of their homes, have been extensively documented [3], along with failures by government [4] to regulate the industry. But the lapses revealed in the documents obtained by ProPublica stand out because they occurred within the government2019s main effort to prevent foreclosures, the Home Affordable Modification Program.

Oversight shrouded in secrecy

For HAMP2019s first two years, the government offered very little public detail about its oversight efforts. It was virtually impossible for the public 2014 or even Congress 2014 to know how well the banks and mortgage servicers were complying with the government2019s effort to prevent struggling homeowners from losing their homes. Those years were crucial, because that2019s when servicers evaluated the vast majority of homeowners eligible for a modification 2014 about three 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.

201CFor two years, they2019ve known how abysmal servicers were performing, and decided to do nothing,201D 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.

201CIt 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,201D he continued. 201CIt2019s why the program has been a colossal failure.201D

Treasury continued to release few details about its audits until June, when it began publishing quarterly reports based on the audits2019 results. The public report showed what Treasury called 201Csubstantial201D problems at four of the 10 largest servicers 2014 Bank of America, JPMorgan Chase, Wells Fargo and Ocwen 2014 and Treasury for the first time [5] 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 we2019ve reported extensively, the largest servicers haven2019t abided by the guidelines [6]. Homeowners have often been foreclosed on in the midst of reviews for a modification [7] or denied because of the servicer2019s error. For many homeowners, navigating what was supposed to have been a simple, straightforward program has proven a maddening ordeal [6].

HAMP has fallen dramatically short of the administration2019s initial goal to help three million to four 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 [8].

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 [9].

GMAC said it agreed to release its audits under the program because the company 201Cbelieves in honoring the spirit of the Freedom of Information Act process201D and 201Celected to be transparent on our work with the [modification] program,201D 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 didn2019t factor into the company2019s decision to allow the documents to be released.

ProPublica contacted all nine servicers that objected to the reports2019 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 2014 dubbed 201Cservicer incentive payments201D 2014 through the program. They are eligible for hundreds of millions more. The country2019s four largest banks 2014 Bank of America, JPMorgan Chase, Wells Fargo and Citigroup 2014are also the largest servicers of mortgage loans.

In its written response, Treasury2019s spokeswoman said it agreed to withhold the records in part because they could undermine 201Cfrank communications between mortgage servicers and compliance examiners201D and hurt the program2019s effectiveness. The department declined to provide either redacted versions or an index of the documents.

Early reviews 201Cuseless201D and flawed

Since the program2019s beginning, homeowner advocates have wondered where HAMP2019s watchdog was [10] 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 auditors2019 findings to make that decision.

It took several months for the unit to even get off the ground. In August 2009, Treasury rejected Freddie Mac2019s first reviews of servicers as inadequate [10] because they were 201Cinconsistent and incomplete201D and its staff was 201Cunqualified,201D according to a report by the TARP2019s special inspector general. Freddie Mac promised to improve. That process took several more months.

As a result, for the program2019s crucial first eight months, there was effectively no watchdog. Nationwide, servicers filed to pursue foreclosure on about two million loans during that time.

Treasury disputed the idea that there was no watchdog for those months, saying that auditors had performed 201Creadiness reviews201D of servicers as early as May 2009, one month after the program was begun. The documents obtained by ProPublica, however, show that Freddie Mac2019s auditing unit, called Making Home Affordable 2013 Compliance (MHA-C), didn2019t issue its first report for GMAC until early December 2009 [11].

That audit was a modest effort that involved collecting a sample of 323 loans handled by GMAC and determining whether they2019d 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 [12]. 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 [13].

The delays make those reviews 201Clargely useless to homeowners,201D said Thompson of the National Consumer Law Center. If a homeowner lost the house to foreclosure in July, it wouldn2019t 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 didn2019t order remedial steps. It only requested that GMAC not take 201Cfurther action.201D [14]

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 audits2019 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 [15], 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 201Crequired servicers to take steps to tighten controls201D and 201Cre-evaluate any borrowers who may have been potentially impacted.201D

In early 2010, around the same time that the auditing unit was issuing its first reports, auditors complained that servicers2019 lack of responsiveness to their requests was hampering their efforts. Getting the right documents from servicers was “a cumbersome process,” the head of Freddie Mac2019s 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 didn2019t understand the requests. Another manager in the unit, Vic O2019Laughlen, said servicers tended to respond with 201Cat best 50 percent of what we2019re expecting to see.201D

However uncooperative the banks and mortgage services may have been, Freddie Mac2019s auditing reports contain errors that call into question their reliability.

Every few months, the auditors examine a sample of the servicer2019s 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 program2019s rules or simply don2019t make sense.

For instance, the December 2009 review said that 35 of the 247 loans that auditors reviewed were denied because the homeowner was 201Cless than 60 days delinquent.201D [16] 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 they2019re current on their loans, as long as they can show they2019re 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, HAMP2019s end date [17]. That makes no sense, because the review took place in 2009. Treasury2019s 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 program2019s rules. For instance, auditors cited 201Cgrandfathered foreclosure201D [18] 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 couldn2019t 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 weren2019t 60 days delinquent.

But Treasury defended the questionable denials, and in so doing raised even more questions. For instance, the spokeswoman said HAMP 201Cdoes not specifically require servicers to evaluate loans that are less than 60 days delinquent.201D But Treasury2019s official guidance to servicers said such borrowers 201Cmust be screened.201D

201CIt makes you wonder if the Treasury even knows the rules for their own program,201D said the National Consumer Law Center2019s 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 servicers2019 inadequate document systems. Borrowers have long reported [6] 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 [19]. Because HAMP2019s 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 [20], Treasury said auditors did not contact homeowners to avoid giving them added stress. The panel rejected that reason, saying that contacting borrowers was 201Ccritical to assessing the accuracy of a servicer2019s determination.201D

Instead of talking with borrowers, auditors conduct on-site reviews of mortgage servicing companies, Treasury2019s spokeswoman said in her written response to ProPublica. Treasury believes that focusing 201Con servicer processes and internal controls is the most effective deployment of our compliance efforts,201D she wrote.

Detailed audit shows serious problems

It wasn2019t until July 2010 2014 16 months after HAMP was launched 2014 that the unit performed its first major audit of GMAC. The review included a visit to GMAC2019s 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. GMAC2019s practice was to begin the foreclosure process too quickly [21]: The program required the servicer to give the homeowner 30 days to respond to a trial modification offer, but GMAC2019s procedure was to wait only 20.

GMAC2019s Proia said no homeowners were 201Cnegatively impacted by this issue.201D

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 [22]. 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 homeowners2019 applications.

Asked about the frequent income miscalculations, GMAC2019s Proia said the 201Cissue was identified in the early stages of the program,201D that calculating the borrower2019s income is a 201Ccomplicated process,201D and that GMAC has improved since the mid-2010 review 2014 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 201Cincorrect income and expense calculations,201D [23] 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 Treasury2019s 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 [24]. When auditors found problems, servicers were asked to fix them.

The documents illustrate as much. In response to the auditors2019 findings, GMAC was required to develop an 201Caction plan.201D 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 [24], threatening 201Cmonetary penalties and sanctions201D in late 2009, then saying it lacked the power to enforce such penalties. Treasury finally departed from its cooperative approach in June, when it withheld incentive payments [5] 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 hasn2019t had much sting. Incentive payments were restored for two of the three companies when Treasury2019s most recent report [25] declared they2019d improved. Only Chase and Bank of America, the country2019s largest servicer, would continue to have their incentives withheld, Treasury said.

But while those incentives have slowed, they have not stopped, according to Treasury2019s monthly TARP reports [26]. Since June, when Treasury first announced it would withhold incentives, Bank of America has received $2.5 million in taxpayer incentives. While that2019s 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. 201CCurrent system limitations201D meant the Treasury couldn2019t withhold these payments, according to the Treasury spokeswoman. Treasury is working to fix the problem, she said.