Mortgage Modification Program's Definition of Success Called 'Essentially Meaningless'

WASHINGTON, March 23, 2010— -- The Obama administration's program to help struggling homeowners avoid foreclosure has posted "disappointing results" in part because its definition of success is "essentially meaningless," a watchdog said today in a new report obtained by ABC News.

In his audit on the administration's $75 billion Home Affordable Modification Program (HAMP), bailout watchdog Neil Barofsky blasted the Treasury Department for he said were the shortcomings of the program.

Specifically, Barofsky criticized the administration for focusing on the number of homeowners who receive temporary help.

When the program was unveiled last year, the administration said by the end of 2012 it would help 3 million to 4 million homeowners "avoid foreclosure" by "reducing monthly payments to sustainable levels." Treasury has stated that homeowners who have received offers for temporary mortgage modifications count towards this goal, a decision ripped by Barofsky.

"Defining success by how many offers are given can reasonably be received as essentially meaningless," Barofsky said in his report. "It is simply not a useful measure."

Under the program, Treasury provides incentives for banks to modify the mortgages of struggling homeowners. After an offer for a trial loan modification is extended to a borrower, the borrower can then move towards a permanent mortgage modification by continuing to make payments for three months.

To date, more than 1.3 million homeowners have received trial modification offers, but only 170,000 homeowners have received permanent modifications.

Mortgage Modification Program Criticized by Watchdog

"To be meaningful, Treasury's goal for HAMP must relate to how many people are helped to avoid foreclosure," Barofsky said. "Plainly, the goal that should be developed and tracked is how many permanent modifications HAMP generates that help homeowners avoid foreclosure and stay in their homes."

On Thursday morning Barofsky, the Special Inspector General for the Troubled Asset Relief Program, will testify before the House Oversight Committee. The panel's ranking member today accused Treasury of focusing on temporary help for homeowners -- not permanent help -- in order to create "a false image of success."

"There's a real problem with Treasury officials running this program who appear more concerned about creating a false image of success than actually helping troubled homeowners," said Rep. Darrell Issa, R-Calif. "The left, right and non-partisan watchdogs are all sounding the alarm that the administration's efforts to help troubled homeowners are misguided and ineffective. Sadly, most Americans seeking long-term help through HAMP to keep them in their homes will never qualify for permanent modifications and will actually be harmed for trying."

As ABC News reported last week, Issa and fellow GOP lawmaker Jim Jordan of Ohio have dubbed the program "a failure" and the administration dishonest.

Around 2.8 million homeowners received foreclosure filings last year and some estimates predict that this year's numbers could be even worse. One chief issue for the program's shortcomings has been the lackluster performance of banks, which have been accused of giving struggling homeowners the run-around in an attempt to avoid modifying loans.

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."

Mortgage Modification Program Criticized by Watchdog

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.