Treasury to Penalize 3 Big Banks Over Mortgage Modifications

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Wells Fargo, Bank of America, and JP Morgan Chase need substantial improvement based on compliance reviews and program performance results

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As foreclosures continue to occur in very high numbers, the Treasury is pointing at several big banks for failing to comply with its mortgage modification program guidelines. Its latest scorecard on its Making Home Affordable Program (HAMP) shows lackluster compliance review results for the ten largest servicers. All need "moderate" to "substantial" improvement in their procedures, while the Treasury says none of them only need "minor" improvement. This helps to explain one reason why modifications have been slowing over the past six months, even while many homeowners continue to default.

Program Update

First, here's some history of the program's progress, updated through April:

hamp 2011-04.png

The fewest new trial modifications were provided in April so far, at 20,034. The number of modifications made permanent also declined to 28,867. In the meantime, the line for cancelled modifications continues to bend downward. This appears to indicate that servicers are doing a better job of making modifications permanent that have a higher likelihood of succeeding.

New Servicer Review

But the real news this month is the latest review of servicer compliance. Although servicers are not obligated by law to participate in HAMP, many -- especially those associated with the big banks -- agreed to do so. As a result, there is a contractual obligation in place that allows the Treasury to penalize the servicers that fail to follow the program's rules.

They aren't doing so well. Overall, the Treasury deemed none of them to be following the program's guidelines so well that they only need "minor" improvement. Some need "substantial" improvement, to the point where the Treasury has decided to begin penalizing them. In particular, it has begun withholding financial incentives from some servicers, including Wells Fargo, Bank of America, and JP Morgan Chase, according to a Treasury spokesperson.

The Treasury provided the results of its servicer assessments in three main categories.

Identifying and Contacting Homeowners

This aspect of the audit assesses whether the servicer identifies and communicates appropriately with potentially eligible homeowners. In this category, the Treasury performed second look reviews. They provide the percentage of loans for which they disagreed with the servicer's eligibility determination and the percentage of loans for which they were unable arrive at the servicer's determination. Here are the two charts:

hamp 2011-04 cht1.png

hamp 2011-04 cht2.png

The red line in each chart (and in the charts that will follow) identifies the benchmark that the Treasury has set to indicate that the servicer is performing adequately or needs only minor improvement. In the second chart, the IC-star score indicates the Internal Control grade for the category, provided by the Treasury.

In the second chart, Citi and Bank of America are particularly notable for the very high percentage of loans for which the review was unable to arrive at servicers' determinations. But you can see that quite a few servicers, including Citi, BOA, GMAC, JP Morgan, and Ocwen, need moderate to substantial improvement, having failed to meet the benchmarks.

Homeowner Evaluation and Assistance

This aspect of the audit assesses whether the servicer correctly evaluates eligibility, communicates decisions in a timely manner, and accurately executes the process. Here, the Treasury provides the percentage of loans for which the servicers' income calculation was more than 5% off from the auditors' calculation:

hamp 2011-04 cht3.png

By this measure, the servicers performed particularly poorly pretty much across the board. JPMorgan, Wells Fargo, Ocwen, and Bank of America all were found to have calculation errors on more than 20% of the loans audited. In terms of internal controls, Wells Fargo received just one star, indicating a need for substantial improvement.

Program Management, Reporting, and Governance

This aspect of the audit assesses whether the servicer has good management, processes, reporting, and information on HAMP. Here, Treasury provided the average percentage of the difference in calculated incentives from data discrepancies:

hamp 2011-04 cht4.png

By this measure, it appears that the servicers are doing pretty poorly as well. The standouts here include Bank of America, Wells Fargo, and Ocwen, all of which had an average calculation error of more than 10%. For internal controls in this category, only the Treasury judged just two servicers as having met its standards or needing just minor improvement.

Will the Penalties Make a Difference?

Although there are financial repercussions to these firms' failure to comply, the penalties are limited to the incentives that the firms are set to obtain from making modifications. So there are only several millions of dollars at stake for even the big servicers, since the total number of modifications is so low. The Treasury does not have the power to aggressively fine these institutions under the contract, just to withhold incentives if they aren't performing up to its expectations.

And to a giant bank like Bank of American or Wells Fargo, a few million dollars probably isn't going to result in a huge change in attitude towards or process for HAMP modifications. After all, big banks regularly have profits in the billions of dollars. But by publishing these results, the Treasury also hopes to use public perception as a weapon. Instead, however, the firms might just push back. Wells Fargo intends to formally dispute the Treasury's findings. So shame might not work to produce more HAMP modifications either.

There's also the question of what took so long for the Treasury to get tough with the servicers. HAMP has been sputtering pretty much since the start. It's clear that banks and servicers were never working as hard as they could to perform these modifications. According to the Treasury, penalties on incentives would not have made much of an impact earlier, because the numbers of permanent modifications were so small. Still, it might have been helpful to have published negative compliance reviews earlier, when HAMP processes were younger and still evolving. At this point, the servicers might be too set in their ways to make significant changes.

Image Credit: REUTERS/Carlos Barria

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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