Tag Archives: TARP

Mortgage Servicing Since The Financial Crisis

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photo by Dan Brown

Standard & Poors issued a report, A Decade After The Financial Crisis, What’s The New Normal For Residential Mortgage Servicing? It provides a good overview of how this hidden infrastructure of the mortgage market is functioning after it emerged from the crucible of the subprime and foreclosure crises. It reads, in part,

Ten years after the start of the financial crisis, residential mortgage servicing is finally settling into a new sense of normal. Before the crisis, mortgage servicing was a fairly static business. Traditional prime servicers had low delinquency rates, regulatory requirements rarely changed, and servicing systems were focused on core functions such as payment processing, investor accounting, escrow management, and customer service. Subprime was a specific market with specialty servicers, which used high-touch collection practices rather than the low-touch model prime servicers used. Workout options for delinquent borrowers mainly included repayment plans or extensions. And though servicers completed some modifications, short sales, and deeds in lieu of foreclosure, these were exceptions to the normal course of business.

Today, residential mortgage servicing involves complex regulation, increased mandatory workout options, and multiple layers of internal control functions. Over the past 10 years servicers have had to not only modify their processes, but also hire more employees and enhance their technology infrastructure and internal controls to support those new processes. As a result, servicing mortgage loans has become less profitable, which has caused loan servicers to consolidate and has created a barrier to entry for new servicers. While the industry expects reduced regulatory requirements under the Trump administration and delinquency rates to continue to fall, we do not foresee servicers reverting to pre-crisis operational processes. Instead, we expect states to maintain, and in some cases enhance, their regulatory requirements to fill the gap for any lifted or reduced at the federal level. Additionally, most mortgage loan servicers have already invested in new processes and technology, and despite the cost to support these and adapt to any additional requirements, we do not expect them to strip back the controls that have become their new normal. (2/10, citation omitted)

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As The Economy Improves, Delinquency Rates Have Become More Stable

Total delinquency rates have only just begun returning to around pre-crisis levels as the economy–and borrowers’ abilities to make their mortgage payments–has improved (see charts 1 and 2). Lower delinquency rates can also be attributed to delinquent accounts moving through the default management process, either becoming reperforming loans after modifications or through liquidation. New regulatory requirements have also extended workout timelines for delinquent accounts. In 2010, one year after 90-plus delinquency rates hit a high point, the percentage of prime and subprime loans in foreclosure actually surpassed the percentage that were more than 90 days delinquent–a trend that continued until 2013 for prime loans and 2014 for subprime loans. But since the end of 2014, all delinquency buckets have remained fairly stable, with overall delinquency rates for prime loans down to slightly over 4% for 2016 from a peak of just over 8% in 2009. Overall delinquency rates for subprime loans have fluctuated more since the peak at 29% in 2009. (2/10)

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Modifications Now Make Up About Half Of Loan Workout Strategies

Government agencies and government-sponsored enterprises (Fannie Mae and Freddie Mac) developed new formal modification programs beginning in 2008 to address the rising delinquency and foreclosure rates. The largest of these programs was HAMP, launched in March 2009. While HAMP was required for banks accepting funds from the Troubled Asset Relief Program (TARP), all servicers were allowed to participate. These programs required that servicers exhaust all loss mitigation options before completing foreclosure. This requirement, and the fact that servicers started receiving incentives to complete modifications, spurred the increase in modifications. (4/10)

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Foreclosure Timelines Have Become Longer

As the number of loans in foreclosure rose during the financial crisis, the requirements associated with the foreclosure process grew. As a result, the time it took to complete the foreclosure process increased to almost 475 days in 2016 from more than 160 days in 2007–an increase of almost 200%. While this is not a weighted average and therefore not adjusted for states with smaller or larger foreclosure portfolios, which could skew the average, the data show longer timelines across all states. And even though the percentage of loans in foreclosure has decreased in recent years (to 1% and 9% by the end of 2016 for prime and subprime, respectively, from peaks of 3% in 2010 and 13% in 2011) the time it takes to complete a foreclosure has still not lessened (6/10)

Friday’s Government Reports Roundup

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  • The U.S. Government Accountability Office released “Troubled Asset Relief Program (TARP) Report,” showing the Treasury’s participation for TARP housing programs.
  • The Center on Budget and Policy Priorities released a report on SNAP Benefits, or what used to be known as food stamps, finding that between 500,000 and one million people will no longer received these benefits in 2016.
  • A report from Joseph A. Smith found that JPMorgan Chase has fulfilled its obligations under the required $4 billion 2013 Residential Mortgage-Backed Securities Settlement.

HAMP-ered Foreclosure Prevention

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The Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released a report, Treasury’s Opportunity to Increase HAMP’s Effectiveness by Reaching More Homeowners in States Underserved by HAMP. The Introduction opens,

TARP’s signature foreclosure prevention program, the Home Affordable Modification Program (“HAMP”), has struggled to reach the expected number of homeowners Treasury envisioned for the program. According to Treasury, TARP’s housing support programs were intended to “help bring relief to responsible homeowners struggling to make their mortgage payments, while preventing neighborhoods and communities from suffering the negative spillover effects of foreclosure.” Treasury announced that HAMP itself aimed “to help as many as three to four million financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term,.” The only long-term sustainable help provided through HAMP is a permanent mortgage modification, which become effective after the homeowner successfully completes a trial period plan. Through December 31, 2014, according to Treasury data, 1,514,687 homeowners have been able to get into a more affordable permanent HAMP modification (of which, 452,322 homeowners, or 29%, subsequently redefaulted on their HAMP modifications), while there have been 6,165,544 foreclosures nationwide over the same period based on CoreLogic data.” (1, footnotes omitted)

There is a lot of soul searching in this report about why HAMP has been so ineffective and the report offers tweaks to the program to improve it. But perhaps the problem is structural — a program like HAMP was never really in a position to make a bigger impact on the foreclosure crisis.

When compared to the federal government’s intervention during the Great Depression, HAMP seems too modest. President Roosevelt’s Home Owners’ Loan Corporation bought out mortgages from banks in bulk and then refinanced them on more attractive terms than the private sector offered. HAMP, on the other hand, has trouble getting homeowners to apply to the program in the first place.

Bottom line: HAMP is too retail and what we needed and need is something that could be done wholesale.

 

Homeowners Lost in the Shuffle

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The Special Inspector General of the Troubled Asset Relief Program (SIGTARP) issued a report, Homeowners Can Get Lost in the Shuffle And Suffer Harm When Their Servicer Transfers Their Mortgage But Not the HAMP Application or Modification, that highlights some of the structural problems in the servicing industry. The report notes, for instance, that, “Homeowner calls to SIGTARP’s Hotline about difficulties experienced in HAMP as a result of mortgages being transferred from one servicer to another have persisted throughout the life of the program and have escalated in the last year.” (1) This is just the most recent reminder that servicing transfers continue to be a major source of trouble for homeowners.

SIGTARP concludes,

Given the scale of the reported problems related to transfers to new servicers, and the potentially serious harm to struggling homeowners who need relief from HAMP, Treasury must be aggressive and swift in sending the message to servicers that Treasury will not tolerate harm to homeowners in HAMP from servicing transfers. HAMP is five years old, and servicers have had ample time to understand the rules and to follow them. Treasury should no longer tolerate a failure to follow HAMP rules. Treasury should report on violations publicly, and permanently withhold incentive payments from servicers that do not comply with HAMP rules on transfers. (12)
The problems in the servicer industry are structural, but it is far from clear that there are sufficient structural changes in the works to deal with them. This sad state of affairs will last far into the future unless thoughtful solutions are designed and implemented in the present. So, while it is important that SIGTARP draws attention to this problem, it is more important for other regulators like the Consumer Financial Protection Bureau and the Federal Housing Finance Agency to take up the cause and start implementing far-reaching solutions.

TARP’s Smallish Rogues Gallery

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The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) issued its Quarterly Report to Congress on July 30, 2014. There is a lot to digest in this 500+ page document, but I thought that readers of this blog might be interested in the rogues gallery found at Figure 1.3 on pages 54-56 (note that this is the pagination found in the document, which is different from the pdf’s pagination of the document). Figure 1.3 lists the 85 people sentenced to prison as a result of a SIGTARP investigation, the sentences they received, and their affiliations:

Many of the criminal schemes uncovered by SIGTARP had been ongoing for years, and involved millions of dollars and complicated conspiracies with multiple co-conspirators. On average, as a result of SIGTARP investigations, criminals convicted of crimes related to TARP’s banking programs have been sentenced to serve 77 months in prison. Criminals convicted for mortgage modification fraud schemes or other mortgage fraud related investigations by SIGTARP were sentenced to serve an average of 39 months in prison. Criminals investigated by SIGTARP and convicted of investment schemes such as Ponzi schemes and sales of fake TARP-backed securities were sentenced to serve an average of 88 months in prison. (53-54)

Hard to tell if that is many or only a few people being held accountable. But it is interesting to note that restitution and forfeiture from crimes related to TARP have so far “resulted in more than $5.11 billion in court orders for the return of money to victims or the Government.” (59) That comes out to roughly $60 million for each of the 85 prisoners and about $800,000 for each of the 77 months each of them was sentenced (on average) to prison. While these metrics are merely impressionistic, they certainly make me wonder if this report is right to being touting SIGTARP as an agent of accountability so much.