Treasury to Penalize 3 Big Banks Over Mortgage Modifications

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.

Presented by

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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