At a hearing last week, Rep. Debbie Wasserman-Schultz, a Democrat from Florida, told Treasury Secretary Tim Geithner that banks "jerk people around, they lead them on, they tell them they're going to work with them, they tell them to put in an application, and months go by."
Geithner seemed to agree that banks are not doing their part to help their customers.
"The banks in this country have done a huge amount of damage to basic trust and confidence, and they've got a long way to go to earn back that trust and confidence," he said.
Barofsky, who did not assess the banks' performance in his audit, said the government is partly to blame for the program's failures.
Treasury has revised the programs' guidelines repeatedly, "causing confusion and delay," Barofsky said, and Treasury has "inexplicably" not launched television ads to alert the public about the program.
Another issue is the program's low conversion rate in moving homeowners from temporary loan modifications to permanent ones. As of the end of February, Treasury reported a 32 percent conversion rate.
An agency official told Barofsky that only 50 percent to 66 percent of an estimated 3 million trial modifications would ultimately convert to permanent ones. That would mean as few as 1.5 million borrowers would ultimately receive permanent help from the program.
If the program's current pace of permanent modifications continues for the next few years, Barofsky said "that should inform the debate on whether HAMP is worth the considerable time and resources that are being expended or whether the program needs to be revamped."
Even if 1.5 million borrowers do ultimately receive permanent help, Barofsky said, "The program will not be a long-term success if large amounts of borrowers simply re-default and end up facing foreclosure anyway."
Treasury, he cited, has said that around 40 percent of all trial and permanent mortgage modifications will ultimately re-default during the program.
"It is up to the policy makers in the administration and Congress to determine whether it is worth spending tens of billions of dollars of taxpayer funds on a program that is designed at its outset to fail ultimately for 40 percent of the participants," Barofsky said.
In response to the audit, Treasury's TARP boss Herb Allison noted that Barofsky did not think the administration had been dishonest about the program's goals. But Allison did take issue with Barofsky's contention that permanent help is the only meaningful way to judge the plan's performance.
"We respectfully do not concur with the conclusion that helping homeowners actually avoid foreclosure 'can only occur with permanent modifications,'" Allison said in a letter to Barofsky.