TARP watchdog slams Obama foreclosure program

NEW YORK (CNNMoney.com) -- President Obama's foreclosure prevention program will likely fall far short of its goal and may even do more harm than good, a government watchdog said Tuesday.

The Special Inspector General for the Troubled Asset Relief Program said the Treasury Department set targets that weren't "meaningful," mismanaged the implementation of the program, and now risks a substantial number of "re-defaults," with many participants ultimately losing their homes anyway.

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The administration's $75 billion loan modification program may help as little as 1.5 to 2 million people, about half the number Obama said it would when he first unveiled the program in February 2009, the inspector general, Neil Barofsky, wrote in a report.

Recently, Treasury Department officials have come under fire for saying the initial goal applied only to offering trial modifications, as opposed to permanent help.

"Continuing to frame HAMP's success around the number of "offers" extended is simply not sufficient," Barofsky wrote, referring to the Home Affordable Modification Program.

Under HAMP, eligible troubled borrowers can have their monthly mortgage payments reduced to 31% of their pre-tax income. But first, homeowners are put into trial modifications to determine whether they can keep up with the lowered payments and to give loan servicers time to verify income and hardship.

Homeowners, servicers and mortgage investors are eligible for incentives, paid for with TARP funds, when the trial adjustments are converted to long-term modifications.

About 170,000 borrowers have received permanent modifications through February, according to the Treasury Department. Treasury officials, however, have emphasized that more than 1.3 million homeowners have received trial modification offers.

Responding to the report, Assistant Treasury Secretary Herbert Allison disputed many of Barofsky's findings, saying the program's success should not be based only on permanent modifications.

Barofsky also said administration officials did a poor job of rolling out the program. They launched the effort before fully developing it and the subsequent revisions caused confusion and delays. They also have failed to market the program properly, Barofsky said.

But one of the biggest implementation mistakes was allowing servicers to put homeowners into trial modifications before collecting the required documentation. This has created a large backlog of trial modifications, many of which will never become permanent, Barofsky said.

After the program got off to a slow start, administration officials came under intense pressure to speed assistance to troubled borrowers. So, the Treasury Department permitted servicers to enroll people in trial modifications without verifying income.

When the number of borrowers receiving permanent assistance lagged, the administration pressed servicers to convert more trial modifications to long-term help. But banks said they were having trouble collecting the needed paperwork from homeowners.

Officials in January changed the program's guidelines, requiring servicers to gather the paperwork before placing people into trial modifications.

The Treasury Department anticipates that 40% of homeowners in the program will ultimately re-default, prompting Barofsky to question the initiative's worth. The program is vulnerable to re-defaults because it does not take into account how much total debt borrowers have, including credit card and student loan debt, among other factors.

Barofsky urged administration officials to review the program and its goals, and offered several recommendations. These include: clarifying expectations for the program; reconsidering allowing servicers to use alternate forms of income verification, and working to minimize the risk of re-default.

"Absent a thorough review of HAMP and its goals, the program risks helping few, and for the rest, merely spreading out the foreclosure crisis over the course of several years, at significant taxpayer expense," Barofsky said.

In his response, Allison said the Treasury Department would try to be more precise in its objectives for the program and said that officials are continuously monitoring its operations and effectiveness.

But he stressed that permanent modifications are but one way to help struggling homeowners, noting servicers' own foreclosure prevention initiatives and alternatives such as short sales, where the servicer agrees to sell the home for less than the loan amount.

"The success of HAMP should be measured by how many eligible homeowners are able to avoid the pain and stigma of foreclosure by reducing their mortgage payments to affordable levels while either remaining in their homes or transitioning with dignity to more suitable housing," Allison said.