Seven in 10 homeowners who apply for help under the federal government’s signature mortgage aid program are rejected, according to a government report released Wednesday.
The program, called the Home Affordable Modification Program, is meant to help homeowners who are at risk of foreclosure stay in their homes by reducing their monthly mortgage. Since it began in 2009, 5.7 million homeowners have applied for assistance and 4 million have been rejected, according to data provided by the Treasury Department to the Special Inspector General for the Troubled Asset Relief Program.
Under HAMP, homeowners who are struggling to pay their mortgage apply for a modification that will lower their monthly bill. That application is reviewed by the mortgage servicer, who runs a standardized calculation to determine if they will receive more money from the homeowner at the current payment level, or with a reduced monthly payment. (Think about how much a lender would receive, in total, if a borrower paid a mortgage of $1,000 for three months and then stopped making payments and the house was foreclosed on, compared to a borrower making $600 payments until the loan was fully paid off.) If the servicer will get more money in the long run by collecting less each month, and the homeowner meets other guidelines -- such as that they live in the home and took the mortgage out before 2009 -- they are supposed to be approved under Treasury guidelines. Mortgage servicers are required to follow these guidelines.
To incentivize mortgage servicers to help homeowners, the Treasury Department pays them for each loan they modify. Both homeowners and lenders can get additional payments if the borrowers keeps up with the new, revised mortgage.
It was initially announced that $75 billion would be available to fund HAMP. The SIGTARP report notes that amount was later reduced to $29.8 billion, and because of the program’s high rejection rate, $18.5 billion remains unspent.
There’s never been a lack of demand for homeowner assistance. As the report points out, “most HAMP-eligible homeowners needed HAMP assistance when the nation was gripped by the foreclosure crisis.” A total of just under 6 million homes were foreclosed on in 2009 and 2010 alone.
And yet, 70 percent of HAMP applicants were rejected. Bank of America, Citi and JP Morgan, each have a mortgage application rate of about 80 percent.
The main reason applications are rejected, servicers say, is because of homeowner income or conduct. However, the report highlights "known problems with servicer misconduct" when it comes to documenting homeowner income and conduct.
In fact, mortgage servicers are prone to mistakes and miscalculations in exactly these areas, meaning “eligible homeowners may have been, and may continue to be, denied a chance to get into HAMP through no fault of their own.”
It is ultimately the Treasury Department’s responsibility to ensure mortgage servicers are complying with the program by providing eligible applicants with aid. "Treasury should hold servicers accountable for extensive delays, lost paperwork, and errors in calculating key eligibility factors," the report says.