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Treasury To Temporarily Penalize Mortgage Companies, Making Good On Old Threat

First Posted: 06/ 9/11

WASHINGTON -- The Treasury Department will temporarily withhold payments to the nation's three largest mortgage companies for failing to comply with the Obama administration's signature foreclosure-prevention effort, perhaps finally making good on a 19-month-old threat, officials announced Thursday.

Bank of America, Wells Fargo and JPMorgan Chase, which collectively service about half of all home loans, abused homeowners and violated the rules of the Making Home Affordable (MHA) program, Treasury said. The initiative aims to lower monthly payments, reduce loan balances or enable distressed borrowers to sell their homes before they're seized by awarding a series of incentive payments to banks, investors and homeowners when foreclosures are averted. Treasury is only withholding pay to the three banks.

The three were found to need "substantial improvement," the agency said in a statement. Cumulatively, they received $24 million in government incentive payments last month. Last quarter, the three financial behemoths collectively reported about $11.4 billion in net income. (Another firm came in for criticism, but it was spared the momentary financial penalty because its results were skewed due to an acquisition.)

The remaining six of the 10 largest mortgage companies that were audited were found to need "moderate improvement." None passed with flying colors.

Bank of America, the worst performer, was found to have poor internal controls for identifying and contacting homeowners. Its error rates were also more than four times Treasury's benchmark when calculating borrowers' income. JPMorgan improperly calculated the incomes of nearly a third of borrowers when it was trying to determine their eligibility for the program -- more than six times the limit. And Wells Fargo had poor processes for determining borrowers' eligibility. Its income error rates were also more than five times Treasury's max.

Treasury first identified potential mass non-compliance in November 2009, warning the participating companies that those failing to meet their obligations to homeowners under their contracts with the federal government "will be subject to consequences which could include monetary penalties and sanctions." The Obama administration spent the next year and a half defending itself against accusations levied by federal auditors, members of Congress and consumer groups that it was soft on the big banks' abusive behavior due to its reluctance to follow through on that threat.

But the punishment that has been so long in coming may prove to be short-lived: Treasury will return the money they're withholding from the three banks once they make the needed improvements.

"If they fix the problem, they will get the money," said Tim Massad, Treasury's acting assistant secretary for financial stability, during a conference call with reporters. He added that Treasury had conducted 400 compliance reviews. Massad declined to answer questions over why the administration waited 19 months to make good on its threat.

News that Treasury would temporarily withhold payments to the three companies was first reported by the Washington Post.

More homeowners have been kicked out of the program than are receiving assistance, Treasury data show. Nearly half of them either face foreclosure proceedings, are in foreclosure, or have lost their homes. The initiative will fail to keep President Barack Obama's promise of helping 3 million to 4 million homeowners avoid foreclosure, auditors have concluded.

Potentially "thousands" of troubled homeowners were denied opportunities to lower their monthly mortgage payments under the administration's program due to servicer errors and inadequate oversight by Treasury, according to a June 2010 audit by the Government Accountability Office (GAO).

"All this appears to be is that, after the servicers seemingly violated their agreements with Treasury with impunity, Treasury's sole response is to give them a temporary time-out before paying them in full," said Neil M. Barofsky, the former special inspector general for the Troubled Asset Relief Program. His critical reports on the bailout earned him plaudits in Congress for looking out for taxpayers, but enemies at Treasury, which administered the TARP.

"It further reaffirms Treasury's long-running toothless response to the servicers' disregard of their contract with Treasury, and by extension, the American taxpayer," added Barofsky, who now serves as a senior research scholar and fellow at New York University School of Law.

In statements, Bank of America said it's working to improve its results while JPMorgan said it disagrees with Treasury's conclusions. Wells Fargo went a step further, and said it is "formally disputing" the government's findings.

Like other companies, Wells has been in constant communication with Treasury and its auditors. Massad said government watchdogs have long been inside the companies' offices, keeping tabs on their activities. But Wells Fargo said Thursday's report "contradicts previous written assessments shared with us by the Treasury."

The withholding of incentives "mean very little to this company," said Teri A. Schrettenbrunner, a senior vice president at Wells Fargo's mortgage unit in Des Moines, Iowa. "We're really in this to get the housing market stabilized. It's in the best interest of everyone."

Most experts in and out of government agree that the MHA program has been a dismal failure. Home prices today are lower than when the initiative was launched. Home repossessions continue at a near-record pace. And Americans' equity in their homes is at a two-year low, Federal Reserve data show.

A substantial portion of them blame the Obama administration -- rather than the mortgage industry -- for its failure to police the mortgage companies, structure a program that dealt with the biggest drivers of default like negative equity and commit enough money.

Indeed, government auditors have long faulted Treasury for its lack of oversight.

An October 2009 report by the Congressional Oversight Panel, another federal watchdog created to keep tabs on the bailout, recommended that the administration develop "strong, appropriate sanctions to ensure that all participants follow program guidelines."

In its last report before disbanding, the panel noted that Treasury had yet to take any action.

"There's no way to help those who have already been harmed by this program," Barofsky said. "The damage has been done."

More than three of every four housing counselors surveyed by the GAO said borrowers had either a "negative" or "very negative" experience with the administration's primary initiative, the Home Affordable Modification Program, better known as HAMP. Just 9 percent described borrowers' overall experience as "positive" or "very positive," according to the May report.

The counselors' most popular recommendation to improve HAMP was for Treasury to enforce sanctions on mortgage companies for noncompliance.

"In many ways, Treasury's shameful enablement of servicer misconduct has contributed to this program's abysmal failure," Barofsky said.