Neil Barofsky, Congress’ special inspector general for the Troubled Asset Relief Program (TARP), makes no bones about his dissatisfaction and frustration with the Treasury’s management of the $700 billion purse.

Barofsky said the Treasury Department has misled the public and questioned the fairness of its payouts to the nation’s biggest banks in a report issued earlier this month.

In his most recent dissertation, Barofsky threatened to subpoena documents from the Treasury and White House to get to the bottom of exactly how TARP funds are being used.

He also offered up a dissection of the administration’s Making Home Affordable (MHA) program, prefaced with a rebuke that the Treasury has not adopted previous recommendations his office has made for the program.

Barofsky zeroed in on three specific suggestions that he says would “answer some of the criticisms of the program,” which has been allotted $50 billion of TARP funds.

First, the inspector general says, Treasury should keep track of everyone who participates in a mortgage modification transaction and keep the information in a central database.

“Treasury has refused to adopt this significant anti-fraud measure designed to detect insiders who are committing large-scale fraud,” Barofsky complained. “This represents a material deficiency in the MHA anti-fraud regime.”

Secondly, as another measure to prevent fraud, he recommends that servicers be required to compare the income reported by borrowers’ on the mortgage modification application with the income they claimed when they applied for the original mortgage.

And third, Barofsky wants the Treasury to defer paying mortgage servicers the $1,000 bonus incentives for carrying out the federal modification until after homeowners have made a minimum number of payments following the three-month trial period.

All in all, Barofsky says he’s made 41 recommendations to the administration that would improve TARP and all its sub-programs, of which only 18 have been executed and seven have been partially implemented.

Assistant Secretary for Financial Stability Herbert M. Allison, Jr.
Written Testimony
Congressional Oversight Panel

Housing – Updates and a Response to the October 9th Recommendations
You have asked that I address the findings and recommendations of the Congressional Oversight Panel in their recent October 9th report. We welcome the thoughts of the Congressional Oversight Panel on the nation’s housing crisis, and we thank you for your suggestions on how to improve the Making Home Affordable Program.
The Congressional Oversight Panel report correctly recognizes that the Home Affordable Modification Program (HAMP), is achieving its intended goal of providing struggling borrowers with more affordable modified monthly payments – it reports that HAMP is saving families an average of $500 a month on permanent modifications. I am pleased that on October 8, almost one month ahead of the November 1 benchmark set earlier this year, we reached a new milestone of more than 500,000 trial loan modifications underway.
As of September 30th, we have signed contracts with 63 servicers, including the five largest. Between loans covered by these servicers and loans owned or guaranteed by the GSEs, more than 85 percent of all residential mortgage debt in the country is now covered by the program. As of September 30th, more than 757,955 trial modifications have been offered under HAMP, and as of October 8th, more than 500,000 trial modifications are underway.

Today, I want to outline some of the recent steps that Treasury and the Administration have taken or will shortly be taking to improve the effectiveness of HAMP with the goal of strengthening the housing sector, helping millions of homeowners and laying the foundation for economic recovery and financial stability.
First, we are committed to helping eligible homeowners obtain a final modification if they are qualified for HAMP. We do not want eligible borrowers to fail the trial period because the document requirements are unnecessarily burdensome. We recently released guidance – Streamlined Borrower Documentation – that reduces the volume of paperwork needed to obtain a trial modification or final modification, and standardizes documentation across servicers. We worked with the Internal Revenue Service, for example, to to simplify the process of obtaining income tax return transcripts directly from the IRS, eliminating the need for borrowers to mail or fax bulky returns. The new standardized forms provide borrowers with more information about the modification process but in a format that is easy to understand. We hope and expect that the streamlined document revisions to HAMP will enable more borrowers to successfully complete the requirements of the trial period and enable them to obtain a permanent modification.
Second, we are developing a foreclosure alternatives program for HAMP, which will provide incentives for short sales and deeds-in lieu of foreclosure where borrowers are unable or unwilling to complete the HAMP modification process. We are aware that there are many borrowers whose modifications under HAMP will not be sufficient to keep them out of foreclosure; for example, borrowers who do not have sufficient income to support a modified payment. The Foreclosure Alternatives Program can help prevent costly foreclosures and minimizes the damage that foreclosures impose on borrowers, financial institutions and communities.
Third, we have established denial codes that require servicers to report the reason for modification denials in writing to Treasury. We will shortly require servicers to use those denial codes as a uniform basis for sending letters to borrowers who were evaluated for HAMP but denied a modification. In those letters, borrowers will be provided with a phone number to contact their servicer as well as the HOPE hotline, which has counselors who are trained to work with borrowers to help them understand reasons they may have been denied a modification and explain other modification or foreclosure prevention options that may be available to them.
Fourth, we have expanded the efforts of the federal government to combat mortgage rescue fraud and put scammers on notice that we will not stand by while they prey on homeowners seeking help under our program. On September 17, Secretary Geithner hosted Attorney General Eric Holder, Housing and Urban Development (HUD) Secretary Shaun Donovan, Federal Trade Commission (FTC) Chairman Jon Leibowitz, Financial Crimes Enforcement Network (FinCEN) Director Jim Freis and attorneys general from 12 states to discuss emerging trends and proactive strategies to combat fraud against consumers in the housing markets as well as best practices to bolster coordination across state and federal agencies.
In its October 9th report, the Congressional Oversight Panel recommended that Making Home Affordable address option ARM loans and negative equity, as well as unemployed borrowers. Let me briefly describe these issues.
Option ARMS
Some types of mortgage loans, like pay option ARMs, present unique challenges. The goal of HAMP is to reduce monthly payments to manageable levels, and place troubled borrowers into amortizing, fixed rate mortgages. Where borrowers on an option ARM are already having trouble paying the introductory low teaser rates – the relatively short initial fixed-rate periods when the option ARM bears an interest rate that is substantially below the “fully indexed” rate – it may be difficult to reduce the monthly payment and modify into an amortizing fixed rate loan. Despite these challenges, our current program permits borrowers with pay-option ARMs to use HAMP when they meet other eligibility criteria. In fact, the COP report showed that some borrowers with adjustable rate mortgages are getting modifications under HAMP.

Negative Equity
The Administration’s plan focuses on affordability because achieving an affordable payment is essential to keep at-risk homeowners in their homes. Data from past cycles suggest negative equity alone is unlikely to be sufficient to cause default, and though this cycle could be different, there is little evidence suggesting a dramatic change in behavior. However, (Making Home Affordable) MHA recognizes and addresses the problem of negative equity as well. HAMP can help homeowners with negative equity reduce their mortgage payments to affordable levels. Servicers will be required to evaluate borrowers for a Hope for Homeowners refinance at the same time they are evaluated for a Home Affordable Modification, and to offer the Hope for Homeowners refinance if the borrower qualifies. The Department of Housing and Urban Development recently issued a mortgagee letter and other materials to assist implementation of Hope for Homeowners. Greater use of an improved Hope for Homeowners program will help to reach borrowers with negative equity and allow them to regain a positive equity position.
HAMP also uses incentives to servicers and investors to reduce borrowers’ interest rates – or write down their principal, if the servicer chooses – to bring down the monthly payment to a level the borrower can afford. Additional incentives are available to borrowers to help them pay down principal more quickly. The Administration’s goal is to maximize program participation in order to provide an affordable and sustainable solution for as many struggling borrowers as possible.
Unemployment
We recognize unemployment is a significant problem contributing to the ongoing foreclosure crisis. Rising unemployment and other recessionary pressures have impaired the ability of many otherwise responsible families to stay current on their mortgage payments. Unemployed borrowers that will receive at least nine months of unemployment benefits are eligible for a modification under HAMP. The COP report showed that this is working – the report showed that unemployed borrowers are receiving modifications through HAMP. We continue to study ways to help unemployed homeowners and we remain committed to meeting the challenges of reducing foreclosures and helping people maintain their homes.
Improving Transparency
The Panel recommended in its October 9th report that Treasury should increase transparency of MHA – in eligibility, reasons for denial and other issues touching homeowners, and in disclosure of performance data. We agree that borrowers should be provided with clear explanations for loan modification denials. For that reason, we established the denial codes described above that require servicers to report the reason for modification denials to Treasury, and we intend to require servicers to use those denial codes as a basis for sending written letters to borrowers who were evaluated for HAMP but were denied a modification.
We also agree that transparency of the Net Present Value (NPV) model – a key component of the eligibility test – is important. We are increasing public access to the NPV white paper, which explains the methodology used in the NPV model. We are also working to increase transparency of the NPV model, so that there can be a wider understanding of how the model works among housing counselors and borrowers.
We are working with participating servicers to establish operational metrics to measure the performance of servicers in responding to borrowers, such as average borrower wait time for inbound borrower inquiries, and response time for completed applications. We plan to publish these metrics on a servicer-by-servicer basis in our monthly public reports.
Streamlining HAMP Processes
The Panel also recommended that Treasury should implement greater uniformity and streamline processes in MHA. As described above, we have recently released the streamlined documentation program, which standardizes and simplifies the documentation required for modifications.
In addition, within the next few weeks, the Treasury expects to implement internet capabilities that will allow borrowers to fill-in, download, and print these standardized documents to send to their servicer. As we continue to enhance the Making Home Affordable website, we look forward to providing borrowers with a centralized location through which they can access borrower documents, apply directly for a modification, and ultimately communicate with their servicer to track the status of their modification.
Making Program Enhancements to HAMP
The October 9th report recommended that Treasury should consider program enhancements to HAMP, such as localizing NPV models, and lowering the debt-to-income (DTI) eligibility test. Servicers are permitted to enter in their own variables for several elements of the NPV calculations. For this process, servicers rely on standardized home price valuation products and service providers that can accommodate housing data as granular as street-by-street pricing information.
Foremost among Treasury’s efforts to localize the NPV models has been the Home Price Decline Protection (HPDP) incentive payment. The HPDP payments provide lenders additional incentives for modifications where home price declines have been most severe and lenders fear these declines may persist. These incentives will encourage servicers to undertake more modifications in areas hard hit by home price declines.
Improving Servicer Accountability
The Panel also recommended that Treasury should ensure rigorous compliance and accountability with strong sanctions for non-compliant servicers. Freddie Mac, Treasury’s compliance agent for HAMP, began servicer reviews in July. Recognizing that many of the servicer’s processes are newly developed and most modifications are still in their trial periods, these reviews have focused on the servicer’s implementation activities, looking to identify process improvements at this early stage. As loans move into the official modification status and as servicers’ processes mature, Freddie Mac’s reviews will focus more on risk-based activities and compliance trend issues.
Freddie Mac also began a “second look” review process, where Freddie Mac will audit servicers to review a sample of HAMP modification applications that have been declined by the related servicers. This “second look” process began in August, and is designed to minimize the likelihood that borrower applications are overlooked or that applicants are inadvertently denied a modification. In addition, the second look program is examining servicer non-performing loan (NPL) portfolios to identify eligible borrowers that should have been solicited for a modification, but were not.
Following these reviews, Treasury will receive performance assessments of each servicer’s program compliance as prepared by Freddie Mac, and we plan to institute substantial penalties for non-compliance. These penalties may include withholding or reducing payments to servicers, requiring repayments of prior payments made to servicers with respect to affected loans, or requiring additional servicer oversight.
Furthermore, Treasury has recently developed a compliance committee for HAMP to review and understand servicers’ compliance results and determine appropriate remedies. The compliance committee’s actions range from requiring improperly rejected loans to be modified, to operational enhancements to monetary actions.
We recognize that any modification program seeking to avoid preventable foreclosures has limits, HAMP included. HAMP does not, nor was it ever intended to address every delinquent loan. For those who fail the NPV test, but fall within HAMP’s eligible population, Treasury is finalizing guidelines that would provide incentives for borrowers and servicers to pursue alternatives to foreclosure through a deed in lieu or short sale transaction.
We remain committed to helping American families during this crisis and will aggressively continue to build on our progress to date. Sustained recovery of our housing market, and the mitigation of foreclosures, is critical to lasting financial stability and promoting a broad economic recovery. Consequently, we appreciate your suggestions for improvement to HAMP and we look forward to working with you to help keep Americans in their homes, restore stability to the US housing market and ensure a sustained economic recovery.