Too slow, ineffective and unaccountable.

That's how the Troubled Asset Relief Program's Congressional Oversight Panel (COP) describes the Treasury in regard to its HAMP foreclosure prevention effort in a report (.pdf) released today. It follows another critical oversight report on the program issued last month by the Special Inspector General of TARP the with many of the same findings. While the COP places some hope in recent changes to HAMP, overall it's very displeased with the Treasury's progress thus far.

The COP report lists three main complaints:

Timeliness

The committee asserts that the Treasury isn't quick enough to determine necessary changes, institute them and generally stop foreclosures. It says that even Treasury's March revisions won't be felt until early 2011, by which time millions more Americans will have lost their homes.

Sustainability

Here, re-default is the worry. We're beginning to get a taste of that from March's HAMP report. But re-defaults have barely begun. COP is concerned that temporarily lowering mortgage interest rates to achieve smaller payments won't be enough. First, underwater homeowners may not find it worthwhile to modify if principal is left alone. Second, in five years when the mortgage's interest rate goes back up under the program's conditions, borrowers may find their home unaffordable again and re-default. COP writes:

The redefaults signal the worst form of failure of the HAMP program: billions of taxpayer dollars will have been spent to delay rather than prevent foreclosures.

Accountability

This echoes one of the SIGTARP concerns. COP wants the Treasury to measure itself on real success and clear goals -- not half-victories and moving targets. The committee also expresses concern about Treasury's oversight of servicers participating. COP calls for strict enforcement if HAMP rules aren't followed.

Will Banks Go Along?

Treasury's March changes really only address the sustainability criticism. If principal reductions do ramp up, then modifications will have a better chance of succeeding. That is, if banks go along.

Some banks are resisting principal reductions. In fact, two of the biggest players in the mortgage market -- JP Morgan and Wells Fargo -- are open about their dislike of this tactic for modifying mortgages. They said so at a committee hearing Tuesday before the House Financial Services Committee. The two other big banks, Citigroup and Bank of America were mum on the subject, though Bank of America did start a small program to begin principal reductions in March.

It's easy to understand why big banks fear principal reductions -- they will create big, immediate losses. According to its quarterly report (.pdf) issued today, JPMorgan lists $247 billon in mortgages and home equity loans on its balance sheet. Of that $79 billion are considered "impaired," bought through its Washington Mutual acquisition. The report indicates that the charge-off rate for non-impaired loans is running at 4.9%, while their delinquency rate is at 7.3%. Meanwhile, its impaired portfolio's delinquency rate is 28.5%. If JPM started writing down a lot of principal from its portfolio to modify loans, then some very large losses would result very quickly, given these ugly statistics.

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