Published March 10, 2011
The Administration has a new HAMP headache.
Conflicts of interest accusations have been leveled against a key player in the Treasury Dept.'s heavily criticized, $46 billion "Home Affordable Modification Program," or HAMP. The new headache could add fuel to a growing movement in Congress to repeal HAMP.
The Homeownership Preservation Foundation [HPF] provides free foreclosure counseling over a toll-free foreclosure prevention line.
HPF’s hotline number is on every HAMP denial notice sent to borrowers rejected by the federal modification program, and it also “appears on 4,927 government Web sites,” and “ is prominently featured" by "40 top lenders” in their mortgage operations, HPF tells Fox Business. The Administration launched HAMP with much fanfare in February 2009, vowing that it would stop foreclosures for three million to four million distressed homeowners.
The chairman of HPF is the former chief executive of the big subprime lender GMAC-Residential Capital (Rescap), Bruce Paradis, who headed the failed GMAC-Rescap for 13 years until his retirement in 2007. GMAC is now known as Ally Financial.
HPF has gotten a lot of money from mortgage industry players like Fannie Mae, American International Group (AIG), and the now defunct Countrywide Financial. Former Rescap officials and bank executives staff its upper ranks. HPF says it strenuously polices conflicts, and that having industry insiders actually benefits homeowners, since they know the ins and outs of the industry.
But how serious are these conflicts of interest charges? And is the story of HPF more nuanced—that is, is the HPF story of a piece with the government tossing sandbags of taxpayer money on expensive window dressing programs that creates a soggy economy by stopping market forces from resetting supply and demand, and amount to little more than a tiny dam that merely artifically delays the inexorable rush of a rising river of foreclosures?
GMAC-Rescap's Poor Subprime History
A look at GMAC-Rescap’s filings shows it originated more than $65 billion in rotten loans during the height of the bubble, from 2004 to 2007. During the financial collapse, GMAC-Rescap joined the ranks of other banks who blew their economic circuits and faced insolvency, which included Citigroup, Merrill Lynch, Bear Stearns and Countrywide Financial, all of whom backed radioactive subprime loans given to anyone who could fog a mirror.
GMAC-Rescap then got $17.2 billion in taxpayer money from Treasury’s Troubled Asset Relief Program, or TARP to refloat its operations. National Mortgage News ranked Residential Capital as the country’s fifth biggest mortgage servicer during the bubble years.
Taxpayers, Mortgage Lenders Back HPF
HPF has about $16 million in assets, according to its 2009 tax return. The nonprofit has received millions of dollars in financing not just from taxpayers and other government programs. HPF also relies heavily on funding from lenders and mortgage servicers who have a big say on the issue of defaulting loans and foreclosures, as souring mortgages and bank property seizures continue to act like blacksmith anvils on their bottom lines.
Since 2007, HPF got $6.5 million in taxpayer funding from the Dept. of Housing and Urban Development; $38 million from the National Foreclosure Mitigation Counseling Program, launched by Congress in 2007 with $475 million in taxpayer money; more than $4 million from Fannie Mae; $1 million from Countrywide Financial, now a part of Bank of America; $550,000 from Freddie Mac; $300,000 from the bailed out insurer American International Group; and $250,000 from BofA.
HPF also got tens of thousands dollars more from Ocwen Loan Servicing, Chase Manhattan Mortgage, and Washington Mutual.
Lenders in HPF's Ranks
Besides Paradis, another former Rescap execs sits on HPF’s board, and another former Rescap official is in HPF’s senior ranks. Three former bankers from Credit Suisse, U.S. Trust, Chase Manhattan Mortgage are on HPF’s board as well. Paradis does not get paid for his work at HPF, and the rest of the 10-member board do not get paid as well, a look at HPF’s tax returns shows.
HPF actually started as a unit of Rescap, the thinking being, the mortgage servicer needed to get to defaulting subprime borrowers first, before they reached foreclosure status.
But after Rescap found that borrowers were hesitant to talk about their finances directly with their loan servicer--as loan servicers routinely pushed for immediate payment--Rescap then won nonprofit status for the unit in 2003. It then began farming out its outreach services to government housing agencies.
Staying Neutral at HPF a Concern
Staying neutral between borrowers and lenders who back the nonprofit seems to be uppermost on the minds of HPF officials.
"Because we're supported by the industry, are we really working for the homeowner?" Paradis, the foundation's chairman, wondered aloud recently to the banking industry newspaper American Banker. Paradis added: "Maintaining this neutral ground is hard to do, but we work very hard to keep our advice neutral."
An HPF spokeswoman says what Paradis was really “trying to say is that it is our job to stay neutral.”
Movement in Congress to Repeal HAMP Grows
The HPF controversy could give impetus to a growing movement in Congress pushing legislation to repeal HAMP.
U.S. Senators Jim DeMint (R-S.C.), Bob Corker (R-Tenn.), both members of the Senate Banking Committee, and Sen. Tom Coburn (R-Okla.), a member of Senate Finance, yesterday introduced legislation to end Hamp. In the House, Rep. Jim Jordan, (R-Ohio) has sponsored a bill backed by three top Republicans.
The Congressmen say HAMP is a costly, abject government failure that has more to do with political atmospherics than mortgage modifications, only 500,000 permanent loan modifications done to date at great taxpayer cost, says Sen. Demint.
That's a fraction of the Administration’s stated goal of reaching up to four million. Meanwhile, the private sector has modified 9.8 million mortgages since 2007, says the Financial Services Roundtable. HAMP "has funneled millions of taxpayer dollars to big banks and Fannie Mae while taking struggling homeowners on a wild goose chase as foreclosures increase," says Sen. DeMint in a statement.
A Nuanced History of HAMP Problems
Neil Barofsky, the Special Inspector General for the Treasury’s Troubled Asset Relief Program, (Sigtarp) heatedly criticized HAMP in Congressional testimony on March 2, noting that HAMP's "failed trial modifications often leave borrowers with more principal outstanding on their homes," adding there is "near universal agreement that the program has failed to meet its goals."
Treasury initially put aside about $46 billion in TARP funds for HAMP, but to date it has spent about $12 billion on the program, with most of the funds going to servicers and homeowners, says the Congressional Budget Office.
Sen. Coburn says in a statement that HAMP "has done nothing but string alone homeowners and increase their hardship."
Some borrowers in HAMP have seen their credit scores worsen, and experts have noted that HAMP has stalled the housing recovery and has created an increasingly soggy economy that has not reset housing supply and demand. HAMP has delayed the process whereby distressed homeowners give up the homes they can't afford, forcing banks to quit the extend and pretend method and face up to their chaotically bad housing bets.
Also, under HAMP, more mortgage modifications have failed than been successful, Sen. DeMint notes. "Out of 1,466,500 temporary modifications, more than 792,500 have failed," the senator says in a statement, adding "That means HAMP has a failing rate of 54%."
Foreclosure Flood Keeps Rising
And still, the flood of foreclosures keeps rising. Banks repossessed more than 1 million homes in 2010, RealtyTrac says. About one in 45 U.S. households got a foreclosure filing last year, or a record high of 2.9 million homes. The Federal Reserve estimates there will be 2.25 million foreclosures this year, with about two million more in 2012.
HPF says it connects about 30,000 families a month with distressed borrowers to 900 specialists, agents and counselors, who give free advice. Besides foreclosure advice, the hotline also gives advice on foreclosure prevention scams, showing borrowers how they can spot fraudsters trying to collect upfront fees for fake loan modifications.
HPF says, based on its surveys, that an estimated 55% of those counseled said their mortgage servicer offered no assistance prior to their nonprofit housing counseling service.
A Treasury Dept. official tells Fox Business that “to date, the HPF hotline has handled 1.9 million inquiries about the ‘Making Home Affordable Program,’” adding that “947,210 of those were directed to a HUD-approved housing counselor for assistance,” noting just “six percent of those calls have been complaints.”
So, what’s with the HAMP failure, and the conflicts of interest at HPF?
The Heart of the Problem
A big worry about the poor performance of the federal HAMP program, according to a December report of the Congressional Oversight Panel [COP], is the reality that mortgage servicers typically make a good buck off of foreclosure proceedings, and so they have little incentive to participate in the program.
They want to get the house back from the delinquent borrower, get it on the market, and try to resell it, instead of living in suspended animation with a wasting asset, industry experts note.
More importantly, and self-evidently, the mortgage servicer also has a vested interest in not knocking down the mortgage principal of a loan.
And COP says this is a financial reality that holds true even if a borrower or lender benefits economically from a loan modification that cuts down the mortgage principal and keeps the borrower in the home.
As for the conflicts of interest of having a nonprofit staffed by lenders and run by a subprime mortgage executive, with backing from the lending industry?
HPF Says It's On the Stick About Conflicts
HPF strenuously argues that they have the barriers up to stop mortgage servicers from influencing the advice they give on the phone.
HPF tells Fox Business that it “provides quality control -- daily, monthly and weekly -- that examines the counseling sessions and asks questions such as: did the counselor establish the purpose of the call, listen actively, educate the homeowner about foreclosure options, set a positive tone, and provide the counselor’s direct telephone number?”
HPF adds: “All of these and 50 more criteria are focused on ensuring that the homeowner knows the counselor is on their side, seeking the best possible resolution of their problem.”
As for the fact that lenders have given a lot of money to back HPF, Colleen Hernandez, chief executive of HPF, says in a statement provided to Fox Business that: “Logic would suggest that funding for this service should come primarily from the investor, the party holding the risk in the transaction, since they stand to gain if foreclosure is avoided.”
Hernandez’s bio shows that she served for six years on the board of directors of the Federal Reserve Bank of Kansas City, chairing its Audit Committee for two years, and that Hernandez has 25 years of experience working with homeowners, “serving a charitable mission.”
Hernandez in her statement also goes on to refute the charges of conflicts of interest.
HPF Says Mortgage Industry Insiders Benefit Borrowers
“It is also reasonable to assume that a nonprofit organization heavily engaged in the mortgage industry would benefit from having mortgage industry leaders on its board of directors,” Hernandez says, adding, “The better the combined team of staff and board understands the current realities, the better they can work to the benefit of homeowners. There is only one fundamental guiding principle -- that HPF is offering advice that is in the best interest of the homeowner.”
Hernandez also notes that “The interesting reality is at that all parties in this transaction -- industry, government, HPF, and the consumer -- strongly prefer that this service be offered by an independent, neutral, nonprofit third party.”
And Hernandez says this: “While it may be counterintuitive to think industry would pay for the service and not guide its outcome, the reality is that the whole country knows that consumers don’t trust their lenders and thus consumers aren’t reaching out for help at a time when they desperately need help. They don’t know whom to trust. Banks know they cannot be that trusted third party. So they have worked actively with HPF, Treasury, the HOPE Now Alliance, and others to build consumers’ trust in HPF and the Homeowner’s HOPE Hotline.”
No Dispute Resolution Authority
However, both HAMP and HPF are voluntary programs. No government official can force a loan modification on any borrower, lender or servicer. Both HAMP and HPF “may be expensive window dressing,” a market analyst says.
Neither HAMP nor HPF have dispute resolution authority either, although a Treasury official tells Fox Business via email that the department just recently “issued new program directives as of February 1 that gives HPF, and other third-party advocates such as government offices and other HUD-approved housing counseling agencies, authority to seek resolution about a particular case.”
So bottom line here is, HPF, HAMP, Treasury or HUD cannot pressure servicers to modify loans.
Potentially hamstringing HAMP, too, was the Administration’s opposition to Congressional efforts to let bankruptcy judges cut mortgage debt, called "cram down" legislation, in negotiations between lenders and borrowers.
Also, getting borrowers to fill out the necessary financial documents for HAMP was one of the biggest problems slowing down the program, which HPF had hoped to ameliorate.