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United States Government Accountability Office

GAO

Report to Congressional Committees

June 2010

TROUBLED ASSET
RELIEF PROGRAM
Further Actions
Needed to Fully and
Equitably Implement
Foreclosure
Mitigation Programs

GAO-10-634

June 2010

TROUBLED ASSET RELIEF PROGRAM
Accountability Integrity Reliability

Highlights

Further Actions Needed to Fully and Equitably
Implement Foreclosure Mitigation Programs

Highlights of GAO-10-634, a report to
congressional committees

Why GAO Did This Study

What GAO Found

Congress created the Troubled
Asset Relief Program (TARP) to,
among other things, preserve
homeownership and protect home
values. In March 2009, the U.S.
Department of the Treasury
(Treasury) announced the Home
Affordable Modification Program
(HAMP) as its cornerstone effort to
achieve these goals. This report
examines (1) the extent to which
HAMP servicers have treated
borrowers consistently and (2) the
actions that Treasury has taken to
address the challenges of trial
modification conversions, negative
equity, redefaults, and program
stability. GAO obtained information
from 10 servicers that account for
71 percent of HAMP funds and
spoke with Treasury, Fannie Mae,
and Freddie Mac officials.

While one of Treasury’s stated goals for HAMP was to standardize the loan
modification process across the servicing industry, GAO found
inconsistencies in how servicers were treating borrowers under HAMP that
could lead to inequitable treatment of similarly situated borrowers. First,
because Treasury did not issue guidelines for soliciting borrowers for HAMP
until a year after announcing the program, servicers notified borrowers about
HAMP anywhere from 31 days to more than 60 days after a delinquency. Many
borrowers also complained that they did not receive timely responses to their
HAMP applications and had difficulty obtaining information about the
program. Treasury has recently issued guidelines on borrower
communications, and plans to monitor compliance with the guidelines.
Second, Treasury has emphasized the importance of reaching borrowers
before they are delinquent but has not issued guidelines for determining when
borrowers are in imminent danger of default. As a result, the 10 servicers that
GAO contacted reported 7 different sets of criteria for determining imminent
default. Third, while Treasury required servicers to have internal quality
assurance procedures to ensure compliance with HAMP requirements,
Treasury did not specify how loan files should be sampled for review or what
the reviews should contain. As a result, some servicers did not review trial
modifications or HAMP denials as part of their quality assurance procedures.
Fourth, Treasury has not specified which HAMP complaints should be
tracked, and several servicers track only certain types of complaints. Fifth,
Treasury has not clearly informed borrowers that the HOPE Hotline can be
used to raise concerns about servicers’ handling of HAMP loan modifications
and to challenge potentially incorrect denials, likely limiting the number of
borrowers who have used the hotline for these purposes. Finally, Treasury
does not have clear consequences for servicers that do not comply with
program requirements, potentially leading to inconsistencies in how instances
of noncompliance are handled.

What GAO Recommends
GAO recommends that Treasury
expeditiously move to establish (1)
specific imminent default criteria,
(2) additional guidance for
servicers’ quality assurance
programs, (3) requirements for
tracking HAMP complaints, (4)
communications to inform
borrowers to use the HOPE Hotline
if they have incorrectly been denied
HAMP, (5) consequences for
noncompliance with HAMP
requirements, (6) reporting of
principal forgiveness activity, (7)
performance measures and goals
for all HAMP-funded programs, and
(8) a prudent design for remaining
programs. Treasury plans to
provide the Congress a detailed
description of the actions it has
taken and intends to take regarding
GAO’s recommendations.
View GAO-10-634 or key components.
For more information, contact Mathew J.
Scirè at (202) 512-8678 or sciremj@gao.gov.

In March 2010, GAO reported that Treasury faced several additional
challenges as it continued to implement HAMP, including (1) converting trial
modifications to permanent status, (2) addressing the growing issue of
negative equity, (3) reducing redefaults among borrowers with modifications,
and (4) ensuring program stability and effective management. While Treasury
has taken some steps to address these challenges, it urgently needs to finalize
and implement remaining program components and ensure the transparency
and accountability of these efforts. First, Treasury has taken steps to increase
the number of conversions to permanent modifications, but conversion rates
continue to be low. As of the end of May 2010, servicers had converted only
347,000 temporary modifications (31 percent of the total eligible) to
permanent status. In addition, as servicers focused on conversions, the
number of new trial modifications declined. Roughly 30,000 trial modifications
were started in May 2010, down from nearly 63,000 in March 2010. Second,
Treasury also announced a principal forgiveness component for HAMP to
assist borrowers with negative equity; however, this program will be
United States Government Accountability Office

Highlights of GAO-10-634 (continued)

voluntary, and Treasury will need to quickly implement
reporting of when servicers consider principal
forgiveness but choose not to offer it. Such reporting
must provide sufficient program transparency and
address potential questions of whether borrowers are
treated equitably. Third, to help limit redefaults,
Treasury requires that borrowers with high total debt
agree to obtain counseling. In July 2009, GAO
recommended that Treasury monitor and assess the
effectiveness of this requirement. However, borrowers
continue to have high total debt-to-income ratios (64
percent) after HAMP modifications, underscoring the
importance of monitoring and assessing HAMP’s
counseling requirement. Finally, GAO has recommended
that Treasury give high priority to staffing the office
responsible for overseeing HAMP implementation and
evaluating staffing levels and competencies. However,
Treasury has reduced staffing levels in this office from
36 to 29 full-time positions. GAO believes that having
sufficient staff is critical to Treasury’s ability to design
and implement HAMP-funded programs quickly and
effectively. For example, Treasury has been slow to
implement its previously announced programs, including
its second-lien modification and foreclosure alternatives
programs. Because the number of foreclosures has
remained high, Treasury has announced additional
HAMP components that must be prudently designed and

implemented as expeditiously as possible (see table 1).
These include the previously discussed principal
reduction component of HAMP, a forbearance program
for unemployed borrowers, a new Federal Housing
Administration refinance program, and a program to
fund efforts to preserve homeownership and protect
home values in the 10 states hardest hit by the
foreclosure crisis.
Going forward, as Treasury continues to design and
implement new HAMP-funded programs, it will be
important to develop sufficient capacity—including
staffing resources—to plan and implement programs,
establish meaningful performance measures, and make
appropriate risk assessments. In particular, Treasury
needs to establish performance measures and goals for
all HAMP-funded programs so that Treasury officials and
others can effectively assess the design and outcomes of
these programs and Congress can provide effective
oversight. Treasury’s HAMP program is part of an
unprecedented response to a particularly difficult time in
our nation’s mortgage markets that has left many
homeowners struggling. As part of its ongoing oversight
of TARP, GAO will continue to monitor Treasury’s
implementation and management of HAMP and other
programs designed to help homeowners and their
communities.

Table 1: HAMP-Funded Programs
Program
HAMP First-Lien Modification

Program Description
First-lien loan modifications

Program Status
•
Announced in March 2009
•
Implemented in April 2009
•
109 servicers have signed agreements
•
More than 1.2 million trials started—340,000 active permanent
modifications, 468,000 active trials, 430,000 trial cancellations, and 6,400
permanent modification cancellations through May 2010
•
$132 million disbursed in incentive payments as of May 17, 2010
HAMP Second-Lien
Second-lien loan modifications for
•
Announced in March 2009
Modification
HAMP first-lien borrowers
•
Implemented in March 2010
•
7 servicers have signed agreements
•
No incentive payments have been made as of May 17, 2010
•
Expected cost and number of borrowers to be helped unknown
Home Affordable Foreclosure
Incentives for short sales or deeds•
Announced in March 2009
Alternatives
in-lieu of foreclosure
•
Implemented in April 2010
•
No incentive payments have been made as of May 17, 2010
•
Expected cost and number of borrowers to be helped unknown
Housing Finance Agency (HFA) Funding for state housing finance
•
Announced in February and March 2010
Hardest-Hit Fund
agencies in the 10 states hardest-hit •
Implementation date yet to be determined
by the foreclosure crisis
•
$2.1 billion designated for 10 state HFAs
•
Expected number of borrowers to be helped unknown
HAMP Principal Reduction
Principal reduction for HAMP•
Announced in March 2010
eligible borrowers with high loan-to- •
Estimated implementation by Fall 2010
value ratios
•
Expected cost and number of borrowers to be helped unknown
HAMP Unemployed Borrowers Temporary principal forbearance for •
Announced in March 2010
unemployed borrowers
•
Estimated implementation in July 2010
•
No expected TARP funds and number of borrowers to be helped unknown
Federal Housing Administration Principal reduction and loan
•
Announced in March 2010
(FHA) Refinance
refinancing into an FHA loan
•
Estimated implementation by Fall 2010
•
$14 billion designated, but number of borrowers to be helped unknown
Source: Treasury.

United States Government Accountability Office

Contents

Letter

1
Background
Servicers’ Solicitation and Evaluation of Borrowers for HAMP
Have Been Inconsistent, and More Treasury Action Is
Immediately Needed To Ensure Equitable Treatment of
Borrowers with Similar Circumstances
Treasury Has Taken Steps to Address Conversion, Negative Equity,
Redefault, and Program Stability but Needs to Expeditiously
Implement a Prudent Design for Remaining HAMP-Funded
Programs
Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

4

28
44
47
48

Appendix I

Scope and Methodology

52

Appendix II

Treasury’s Actions in Response to GAO’s July 2009
HAMP Recommendations

54

Appendix III

Comments from the Department of the Treasury

55

Appendix IV

GAO Contacts and Staff Acknowledgments

58

Table 1: HAMP-Funded Programs

13

14

Table

Figures
Figure 1: National Default and Foreclosure Trends, Calendar Years
1979–2010
Figure 2: Steps in the Escalation Process Available to Borrowers
through the HOPE Hotline
Figure 3: Conversion Rates and Nonconversion Reasons for 10
HAMP Servicers, through December 31, 2009

Page i

5
25
29

GAO-10-634 HAMP Implementation Status

Figure 4: GSE and Non-GSE HAMP Trial and Permanent
Modifications Made Each Month

31

Abbreviations
2MP
FHA
GPRA
GSE
HAFA
HAMP
HARP
HERA
HFA
HPDP
HPO
HUD
MHA
MHA-C
NPV
OCC
OFS
OTS
SIGTARP
TARP

Second-Lien Modification Program
Federal Housing Administration
Government Performance and Results Act of 1993
government-sponsored enterprise
Home Affordable Foreclosure Alternatives Program
Home Affordable Modification Program
Home Affordable Refinance Program
Housing and Economic Recovery Act of 2008
Housing Finance Agency
Home Price Decline Protection
Homeownership Preservation Office
Department of Housing and Urban Development
Making Home Affordable
Making Home Affordable-Compliance
net present value
Office of the Comptroller of the Currency
Office of Financial Stability
Office of Thrift Supervision
Office of the Special Inspector General for TARP
Troubled Asset Relief Program

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Page ii

GAO-10-634 HAMP Implementation Status

United States Government Accountability Office
Washington, DC 20548

June 24, 2010
Congressional Committees
In response to the recent financial crisis, the federal government has been
seeking ways to help stem the wave of foreclosures and defaults that has
affected not only homeowners who have lost or are in danger of losing
their homes, but also neighborhoods, local businesses, lenders, and
investors. On October 3, 2008, the President signed into law the
Emergency Economic Stabilization Act of 2008 (the act) which, among
other things, called for the Department of the Treasury (Treasury) to
stabilize the financial markets, preserve homeownership, and protect
home values. 1 The act authorized Treasury to establish the $700 billion
Troubled Asset Relief Program (TARP), which initially focused on
stabilizing financial markets and increasing lending to businesses and
consumers. 2 Treasury initially intended to purchase troubled mortgages
and mortgage-related assets and to use its ownership position to influence
loan servicers and achieve more aggressive mortgage modification
standards. However, within 2 weeks of the act’s passage, Treasury
determined it needed to move more quickly to stabilize financial markets
and announced it would use $250 billion of TARP funds to inject capital
directly into qualified financial institutions by purchasing equity in them.
On February 18, 2009, Treasury announced the Home Affordability and
Stability Plan, which contained the framework for a mortgage
modification plan that later became the Home Affordable Modification
Program (HAMP). HAMP would use up to $50 billion in TARP funds to
help at-risk homeowners avoid potential foreclosure by modifying their
mortgages to reduce their monthly mortgage payments.
Under HAMP, Treasury’s Office of Financial Stability (OFS) provides
financial incentives to servicers, borrowers, and mortgage holders (or
investors for loans that have been securitized and sold in the secondary
market) to modify loans that are not owned or guaranteed by Fannie Mae

1

Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201 et seq.

2

The Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22, Div. A, 123 Stat.
1632 (2009), amended the act to reduce the maximum allowable amount of outstanding
troubled assets under the act by almost $1.3 billion, from $700 billion to $698.741 billion.

Page 1

GAO-10-634 HAMP Implementation Status

or Freddie Mac. 3 Treasury shares the cost of reducing monthly payments
on first-lien mortgages with mortgage holders or investors. The initial
descriptions of HAMP also identified a number of subprograms—for
example, to modify or pay off second-lien loans for borrowers whose first
mortgages were modified under HAMP and to provide incentives to target
specific groups of homeowners and geographic areas that were especially
hard hit by foreclosures. More recently, in March 2010 Treasury
announced additional HAMP-funded programs to assist unemployed
borrowers and borrowers who were “underwater”—that is, those who
owed more on their mortgages than the value of their homes. Further,
Treasury announced that up to $14 billion of the original $50 billion in
TARP funds allocated for HAMP would be put toward a refinancing
program that would allow borrowers to receive principal reductions and
refinance into loans insured by the Federal Housing Administration (FHA).
Additionally, Treasury has designated $2.1 billion of the $50 billion to be
provided to 10 states under the Housing Finance Agency (HFA) Innovation
Fund for the Hardest-Hit Housing Markets (HFA Hardest-Hit Fund) with
the expectation that the states will use this money to develop innovative
programs that meet the act’s goals of preserving homeownership and
protecting home values. To date, most of the subprograms have yet to be
implemented.
The act also requires GAO to conduct ongoing oversight of actions taken
under TARP and to report at least every 60 days on TARP activities and
performance. 4 Under this statutory mandate, we are continuing to report

3

Fannie Mae and Freddie Mac—the government-sponsored enterprises (GSEs)—are
private, federally chartered companies created by Congress to, among other things, provide
liquidity to home mortgage markets by purchasing mortgage loans, thus enabling lenders to
make additional loans. To be eligible for purchase by the GSEs, loans (and borrowers
receiving the loans) must meet specified requirements. In September 2008, Fannie Mae and
Freddie Mac were placed into federal government conservatorship. For the purposes of the
report, we refer to mortgages securitized by the GSEs as guaranteed by the GSEs.
Securitization is a process by which the GSEs purchase loans that mortgage lenders
originate and put these loans into mortgage securities that are sold in global capital
markets. The GSEs then guarantee the mortgage security, which means that when a
borrower stops making payments on a loan included in the mortgage security, the GSE will
step in and makes those payments to the security’s investors.
4

GAO is required to report at least every 60 days on findings resulting from, among other
things, oversight of TARP’s performance in meeting the purposes of the act, the financial
condition and internal controls of TARP, the characteristics of both asset purchases and
the disposition of assets acquired, TARP’s efficiency in using the funds appropriated for the
program’s operation, and TARP’s compliance with applicable laws and regulations. 12
U.S.C. § 5226(a).

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GAO-10-634 HAMP Implementation Status

on Treasury’s use of TARP funds to preserve homeownership and protect
home values. In July 2009, we reported on Treasury’s design and initial
implementation of HAMP, making a range of recommendations designed
to improve HAMP’s transparency and accountability. 5 In March 2010, we
testified on continued HAMP implementation challenges that threatened
the successful implementation of the program. This 60-day report expands
on our March 2010 testimony and examines (1) the extent to which
servicers have been treating borrowers consistently under HAMP and the
actions that Treasury and its financial agents have taken to ensure
consistent treatment of borrowers, and (2) the actions that Treasury has
taken to address the challenges involved in converting trial modifications
to permanent modifications, limiting potential foreclosures among
borrowers with negative equity, reducing the likelihood of redefault
among borrowers with permanent modifications, and ensuring program
stability and effective program management.
To examine these questions, we spoke with and obtained information from
10 HAMP servicers of various sizes that collectively had been designated
71 percent of the TARP funds allocated to participating servicers to date
and visited 6 of them. In addition, we reviewed the HAMP program
documentation that Treasury issued, including supplemental directives for
the first-lien program and announcements of new HAMP-funded
homeowner assistance programs. We obtained and analyzed information
from Treasury on servicer HAMP loan modification activity. Our work
focused on non-GSE HAMP activity using TARP funds, but the information
obtained from Treasury did not always break out GSE and non-GSE
activity. We also spoke with officials at Treasury and its financial agents—
Fannie Mae and Freddie Mac—to understand their rationale for program
changes, their efforts to ensure compliance with HAMP guidelines, and
their processes for resolving HAMP complaints. In addition, we spoke to
the administrators of the HOPE Hotline and representatives of
NeighborWorks, which funds a large network of housing counselors, to

5

See appendix II for more information on our July 2009 report recommendations and
Treasury’s corresponding actions to date.

Page 3

GAO-10-634 HAMP Implementation Status

learn more about the process for resolving HAMP-related complaints. 6 We
also met with a trade association that represents both investors and
servicers, and an organization representing a national coalition of
community investment organizations. Finally, we reviewed the
Government Performance and Results Act of 1993 (GPRA), and the
Standards for Internal Control in the Federal Government to determine the
key elements needed to ensure program stability and adequate program
management. 7 We coordinated our work with other oversight entities that
TARP created—the Congressional Oversight Panel, the Office of the
Special Inspector General for TARP (SIGTARP), and the Financial
Stability Oversight Board.
We conducted this performance audit from August 2009 through June 2010
in San Francisco, Santa Ana, and Simi Valley, California; Littleton,
Colorado; West Palm Beach, Florida; Waterloo, Iowa; Boston,
Massachusetts; and Washington, D.C., in accordance with generally
accepted government auditing standards. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our
audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on the audit
objectives.

Background

National default and foreclosure rates rose sharply from calendar year
2005 through 2009 to the highest level in at least 29 years (fig. 1). Default
rates declined slightly from the fourth quarter of 2009 to the first quarter of
2010 but, at 4.91 percent, were still more than six times higher than they
were at the start of 2005. Foreclosure start rates—the percentage of loans

6
NeighborWorks America is an organization chartered by Congress that has been
appropriated $475 million in federal funds to operate the National Foreclosure Mitigation
Counseling Program. Consolidated Appropriations Act of 2008, Pub. L. No. 110-161, Div. I,
Title III, 121 Stat. 1844, 2441 (2007) ($180 million); Economic Recovery Act of 2008, Pub. L.
No. 110-289, Div. B, Title III, § 2305, 122 Stat. 2654, 2859 (2008) ($180 million); Omnibus
Appropriations Act of 2009, Pub. L. No. 111-8, Div. I, Title III, 123 Stat. 524, 982 (2009) ($50
million); and Consolidated Appropriations Act, 2010, Pub. L. No. 111-117, Div. A, Title III,
123 Stat. 3034, 3108 (2009) ($65 million). Counseling from an agency approved by the
Department of Housing and Urban Development typically includes advice on defaults,
foreclosures, and credit issues.
7
Government Performance and Results Act of 1993, Pub. L. No. 103-62, 107 Stat. 285 (1993),
and GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C.: November 1999).

Page 4

GAO-10-634 HAMP Implementation Status

that entered the foreclosure process each quarter—grew nearly three-fold
in the 5-year period from 0.42 percent to 1.23 percent in the first quarter of
2010. Put another way, more than half a million mortgages entered the
foreclosure process in the first quarter of 2010, compared with about
165,000 in the first quarter of 2005. Finally, foreclosure inventory—the
number of houses for which the lender has initiated foreclosure
proceedings but has not yet sold the properties—rose more than 325
percent from the first quarter of 2005 to the first quarter of 2010,
increasing from 1.08 percent to 4.63 percent, with most of that growth
occurring after the second quarter of 2007. As a result, as of the end of the
first quarter of 2010, more than 2 million loans were in the foreclosure
inventory.
Figure 1: National Default and Foreclosure Trends, Calendar Years 1979–2010
Q1 1979–Q1 2010

Q2 2005–Q1 2010

Percentage

Percentage

6

6

5

5

4

4

3

3

2

2

1

1

0

0

Default

Foreclosure starts

Foreclosure inventory

20
10

09
20

08
20

07
20

20
06

20
05

19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10

Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4

Periods of economic recession

Source: GAO analysis of MBA data, National Bureau of Economic Research.

As we reported in December 2008, Treasury has established an Office of
Homeownership Preservation within OFS to address the issues of

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GAO-10-634 HAMP Implementation Status

preserving homeownership and protecting home values. 8 On February 18,
2009, Treasury announced the broad outline of a three-pronged effort to
help homeowners avoid foreclosure and provided additional program
descriptions on March 4, 2009; April 28, 2009; and May 14, 2009:
•

The Home Affordable Refinance Program (HARP), which provides a
refinancing vehicle for homeowners who are current on their mortgage
payments with mortgages held or guaranteed by Fannie Mae and Freddie
Mac, interest rates higher than the prevailing market rates, and loan-tovalue ratios of between 80 and 105. 9 Using the prevailing interest rates in
February 2009, Treasury estimated that between four and five million
borrowers could refinance their mortgages through this program. No
TARP funds will be used to refinance these loans. Instead, Fannie Mae or
Freddie Mac, as the owner or guarantor of the loan, purchased or
guaranteed the refinanced mortgages. The program has resulted in
relatively few refinances—between February 2009 and March 2010, fewer
than 292,000 borrowers were refinanced through this program. In March
2010, the program’s end date was extended from June 10, 2010, to June 30,
2011.

•

An increased funding commitment from Treasury for preferred stock
purchases from Fannie Mae and Freddie Mac to strengthen confidence in
the two government-sponsored enterprises (GSE) and help support low
mortgage rates. The preferred stock purchase agreements, authorized by
the Housing and Economic Recovery Act of 2008 (HERA), were amended
in May 2009 to increase Treasury’s commitment to each GSE from $100
billion to $200 billion. On December 24, 2009, the preferred stock purchase
agreements were again amended with the provision that the $200 billion
cap increase as necessary. The increased funding commitment would be
made under HERA and would not require the use of TARP funds. Through
March 2010, the cumulative reduction in the net worth of the two GSEs
required them to draw $111 billion from the Treasury under the senior
preferred stock purchase agreements. In May 2010, the Federal Housing
Finance Agency requested an additional $10.6 billion in Treasury
assistance for Freddie Mac and an additional $8.4 billion for Fannie Mae.

8

GAO, Troubled Asset Relief Program: Additional Actions Needed to Better Ensure
Integrity, Accountability, and Transparency, GAO-09-161 (Washington, D.C.: Dec. 2,
2008).

9

On July 1, 2009, the Federal Housing Finance Agency announced that the maximum loanto-value rate had been increased to 125 percent.

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GAO-10-634 HAMP Implementation Status

•

HAMP, which was designed to commit up to $75 billion of GSE and TARP
funds to offer loan modifications to up to three to four million borrowers
who were struggling to pay their mortgages. According to Treasury
officials, HAMP would use up to $50 billion of TARP funds, primarily to
encourage the modification of non-GSE mortgages that financial
institutions owned and held in their portfolios (whole loans) and
mortgages held in private label securitization trusts. 10 Fannie Mae and
Freddie Mac together are expected to provide up to an additional $25
billion to encourage servicers and borrowers to modify loans owned or
guaranteed by the two GSEs. 11
As outlined in the March 4, 2009, program guidelines, HAMP’s eligibility
requirements for first-lien modifications stipulate that:

•

the property must be owner-occupied and the borrower’s primary
residence (the program excludes vacant and investor-owned properties);

•

the property must be a single-family property (one to four units) with a
maximum unpaid principal balance on the unmodified first-lien mortgage
that is equal to or less than $729,750 (for a one-unit property); 12

•

the loan must have been originated on or before January 1, 2009;

•

the borrower must complete a HAMP Hardship Affidavit documenting a
financial hardship; and

10
Loans held in private-label securitization trusts include loans not securitized by Fannie
Mae, Freddie Mac, nor insured or guaranteed by the Department of Housing and Urban
Development’s FHA, the Department of Veterans Affairs, or rural housing loans. The $50
billion will be used for loan modifications and other activities.
11

Any funds provided by Treasury to the GSEs under the preferred stock purchase
agreements will, like TARP programs, be funded through the issuance of public debt.
Treasury will also issue public debt to cover any losses that the GSEs incur because of the
additional $25 billion they provide, as long as the GSEs have liabilities that exceed assets.

12

Unpaid principal balance limits (prior to modification) are $729,750 for a one-unit
building; $934,200 for a two-unit building; $1,129,250 for a three-unit building; and
$1,403,400 for a four-unit building.

Page 7

GAO-10-634 HAMP Implementation Status

•

the first-lien mortgage payment must be more than 31 percent of the
homeowner’s gross monthly income. 13
The HAMP first-lien modification program has four main features:
1. Cost sharing. Mortgage holders and investors will be required to take
the first loss in reducing the borrower’s monthly payments to no more
than 38 percent of the borrower’s income. For non-GSE loans,
Treasury will then use TARP funds to match further reductions on a
dollar-for-dollar basis, down to the target of 31 percent of the
borrower’s gross monthly income. The modified monthly payment is
fixed for 5 years or until the loan is paid off, whichever is earlier, as
long as the borrower remains in good standing with the program. After
5 years, investors no longer receive payments for cost sharing, and the
borrowers’ interest rate may increase by 1 percent a year to a cap of
the Freddie Mac rate for 30-year fixed rate loans as of the date that the
modification agreement was prepared, and the borrower’s payments
would increase to accommodate the increase in interest rate. The
interest rate and monthly payments are then fixed for the remainder of
the loan.
2. Standardized net present value (NPV) model. The NPV model
compares expected cash flows from a modified loan to the same loan
with no modification, based on certain assumptions. If the expected
investor cash flow with a modification is greater than the expected
cash flow without a modification, the loan servicer is required to
modify the loan. According to Treasury, the NPV model increases
mortgage investors’ confidence that modifications under HAMP are in
their best financial interests and helps ensure that borrowers are
treated consistently under the program by providing a transparent and
externally derived objective standard for all loan servicers to follow.
3. Standardized waterfall. Servicers must follow a sequential
modification process to reduce payments as close to 31 percent of
gross monthly income as possible. Servicers must first capitalize
accrued interest and certain expenses paid to third parties and add this
amount to the loan balance (principal) amount. Next, interest rates
must be reduced in increments of one-eighth percent until the 31
percent debt-to-income target is reached, but servicers may not reduce

13

The mortgage, or front-end, debt-to-income ratio under the HAMP first-lien component is
the percentage of a borrower’s income comprising mortgage principal, interest, taxes,
insurance, and either condominium, cooperative, or homeowners’ association dues.

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interest rates below 2 percent. If the interest rate reduction does not
result in a debt-to-income ratio of 31 percent, servicers must then
extend the maturity and/or amortization period of the loan in 1-month
increments up to 40 years. Finally, if the debt-to-income ratio is still
over 31 percent, the servicer must forbear, or defer, principal until the
payment is reduced to the 31-percent target. Servicers may also forgive
mortgage principal at any step of the process to achieve the target
monthly payment ratio of 31 percent, provided that principal reduction
is allowed by the investor. 14
4. Incentive payment structure. Treasury will use HAMP funds to
provide both one-time and ongoing (“pay-for-success”) incentives for
up to 5 years to non-GSE loan servicers, mortgage investors, and
borrowers to increase the likelihood that the program will produce
successful modifications over the long term and help cover the
servicers’ and investors’ costs of modifying a loan.
Borrowers must also demonstrate their ability to pay the modified amount
by successfully completing a trial period of at least 90 days before the loan
is permanently modified and any government payments are made under
HAMP. Treasury has entered into agreements with Fannie Mae and
Freddie Mac to act as its financial agents for HAMP. Fannie Mae, as the
HAMP program administrator, is responsible for developing and
administering program operations including registering servicers and
executing participation agreements with and collecting data from them. A
separate division within Freddie Mac, the Making Home AffordableCompliance (MHA-C) team is the HAMP compliance agent, and is
responsible for assessing servicer compliance with non-GSE program
guidelines, including conducting onsite and remote servicer reviews and
audits.

Status of HAMP First-Lien
Modification Program

As of mid-June 2010, 109 active servicers had signed HAMP Servicer
Participation Agreements to modify first-lien mortgages not owned or
guaranteed by Fannie Mae and Freddie Mac. 15 Roughly $39.9 billion in

14

The principal forbearance amount is noninterest bearing and nonamortizing and cannot
accrue interest under the HAMP guidelines or be amortized over the loan term. Rather, the
amount of principal forbearance will result in a balloon payment fully due and payable
upon the borrower’s transfer of the property, payoff of the interest bearing unpaid principal
balance, or maturity of the mortgage loan.

15

The GSEs have directed all of their approximately 2,000 servicers to implement parallel
HAMP programs on first-lien mortgages owned or guaranteed by the GSEs.

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TARP funds has been committed to these servicers for modification of
non-GSE loans. Based on the HAMP Servicer Performance Report through
May 2010, more than 1.5 million HAMP trial modifications had been
offered to borrowers of GSE and non-GSE loans, and more than 1.2 million
of these had begun HAMP trial modifications. 16 Of the trial modifications
begun, approximately 468,000 were in active trial modifications, roughly
340,000 were in active permanent modifications, roughly 430,000 trial
modifications had been canceled, and roughly 6,400 permanent
modifications had been canceled. As of May 17, 2010, more than $132
million in TARP funds had been disbursed to HAMP servicers.
Borrowers who received permanent first-lien HAMP modifications had
high levels of total debt and high loan-to-value ratios. Through the end of
May 2010, borrowers receiving permanent HAMP modifications had a
median back-end debt ratio (the ratio of total monthly debts to gross
monthly income) of roughly 80 percent prior to loan modification. The
median reduction in monthly mortgage payments as a result of HAMP was
roughly $514, which reduced these borrowers’ median back-end debt-toincome ratio to 64 percent. In addition, according to Fannie Mae, through
mid-April 2010, many borrowers continued to be underwater after a HAMP
modification, with an average loan-to-value ratio more than 150 percent.

Recently Announced
HAMP-Funded Programs

In addition to first-lien modifications, in March 2010 Treasury issued
revised guidelines for the second-lien modification program under HAMP
(2MP), as well as the Home Affordable Foreclosures Alternatives Program
(HAFA). However, Treasury has not stated how much of the $50 billion in
TARP funds these two programs are expected to use. 2MP provides
incentives to investors, servicers, and borrowers for the modification of
second liens if the first lien has been modified under HAMP. Under 2MP,
servicers who sign agreements to participate in the program must modify,
partially extinguish, or fully extinguish second liens where the first lien
has been modified under HAMP. As of June 2010, seven servicers had
signed up for 2MP, and at least one of these servicers has initiated trial
modifications for second liens. According to Treasury, four of these seven
servicers hold more than 50 percent of all second liens. Regarding HAFA,
as of April 5, 2010, non-GSE servicers could also begin offering foreclosure

16

Roughly 42 percent of borrowers who were either in trial or permanent modifications as
of April 17, 2010, had non-GSE loans and therefore fell under the TARP-funded portion of
HAMP.

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alternatives, such as short sales and deeds-in-lieu, in cases where the
servicer was unable to approve the borrower for HAMP, the borrower did
not accept a HAMP trial modification, or the borrower defaulted on a
HAMP modification. The program provides incentive payments to
investors, servicers, and borrowers for completing these foreclosure
alternatives in lieu of foreclosure. 17
In March 2010, Treasury announced four additional HAMP-funded
programs—one for principal reduction under HAMP, one for temporary
forbearance for unemployed borrowers, an FHA refinancing program and
the HFA Hardest-Hit Fund. Principal reduction and temporary forbearance
for unemployed borrowers could be implemented in the summer of 2010,
and the FHA refinancing program in the fall, but implementation of the
HFA Hardest-Hit Fund programs will vary by state.
•

The principal reduction program under HAMP will require servicers to
consider principal reduction for HAMP-eligible borrowers with loan-tovalue ratios greater than 115 percent. Treasury has not yet finalized the
potential amount of TARP funds that will be spent on this HAMP program
or the number of borrowers expected to receive principal reductions.
Initial program guidelines were issued in June 2010 and the program is
expected to be effective for participating HAMP servicers in the fall of
2010.

•

Under the plan for temporary forbearance for unemployed borrowers,
which will be effective July 1, 2010, servicers will be required to consider
unemployed borrowers for a forbearance plan to reduce mortgage
payments to an affordable level for the lesser of 3 months or upon
notification that the borrower has become reemployed. To be considered,
unemployed borrowers must request forbearance before falling behind on
three monthly mortgage payments. The servicers must offer forbearance if
the borrower’s monthly mortgage payments exceed 31 percent of monthly
gross income, including unemployment benefits. Treasury has not
established how many borrowers are likely to be helped with this feature.

17

Under a deed-in-lieu of foreclosure, the homeowner voluntarily conveys all ownership
interest in the home to the lender as an alternative to foreclosure proceedings. In a short
sale, a house is sold by the homeowner through a real estate agency or other means, rather
than through foreclosure, and the proceeds of the sale are less than what the homeowner
still owes on the mortgage. The lender must give permission to such a transaction and can
agree to forgive the shortfall between the loan balance and the net sales proceeds. Under
HAFA, accepting a deed-in-lieu must satisfy the borrower’s entire mortgage obligation in
addition to releasing the lien on the subject property.

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Once the borrower has found employment, or 30 days before the
forbearance period has expired, the servicer must evaluate the borrower
for eligibility for a HAMP first-lien modification. According to Treasury,
there will be no HAMP incentive payments made for these forbearance
plans, so the program will not require TARP funds. Missed payments
during the forbearance period are capitalized, and servicers may not
collect late fees during the forbearance period. According to Treasury,
representatives of investors and the four largest servicers, some servicers
are already offering similar forbearance programs to unemployed
borrowers.
•

The new FHA refinance program will be designated a maximum of $14
billion of the $50 billion originally intended for HAMP and will be a
voluntary program for servicers. However, if servicers choose this option,
they must reduce borrowers’ original first-lien principal by at least 10
percent, and the resulting ratio of all mortgage debt, including junior liens,
to the value of the house can be no greater than 115 percent. The principal
balance of the refinanced first-lien loan cannot exceed 97.75 percent of the
home’s value. The borrower must be current on existing mortgage
payments to qualify and have a credit score of at least 500. The terms and
uses of the $14 billion have yet to be specified.

•

The HFA Hardest-Hit Fund designated $2.1 billion out of the $50 billion
originally intended for HAMP to 10 state housing finance agencies to
develop more localized programs to preserve homeownership and protect
home values. As of mid-May 2010, Treasury was in the process of
reviewing program proposals submitted by the first five housing finance
agencies that received funding and expected to receive proposals from the
second five state agencies on June 1, 2010. However, according to initial
proposals, some program efforts may require significant implementation
periods. For example, one state agency reported that some of its program
features may not be available until 5 months after Treasury approves the
program.
As shown in table 1, the implementation dates for a number of the HAMPfunded homeowner assistance programs have not yet been specified, and
Treasury has not announced how many borrowers the programs are
expected to help. With the exception of the HFA Hardest-Hit Fund, the
cutoff date for borrowers to be accepted into any of the HAMP-funded
programs is December 31, 2012, and disbursements of TARP funds may
continue until December 2017. The cutoff date and last possible
disbursement for the HFA Hardest-Hit Fund has yet to be determined.

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Table 1: HAMP-Funded Programs
Program

Program description

Program status

HAMP First-Lien
Modification

First-lien loan modifications

•
•
•
•

•

HAMP Second-Lien
Modification

Second-lien loan modifications for
HAMP first-lien borrowers

•
•
•
•
•

Home Affordable
Foreclosure Alternatives

Incentives for short sales or deeds-inlieu of foreclosure

•
•
•
•

HFA Hardest-Hit Fund

Funding for state housing finance
agencies in the 10 states hardest-hit by
the foreclosure crisis

•
•
•
•

HAMP Principal
Reduction

Principal reduction for HAMP-eligible
borrowers with high loan-to-value ratios

•
•
•

HAMP Unemployed
Borrowers

Temporary principal forbearance for
unemployed borrowers

•
•
•

FHA Refinance

Principal reduction and loan refinancing
into an FHA loan

•
•
•

Announced in March 2009
Implemented in April 2009
109 servicers have signed agreements
More than 1.2 million trials started—340,000 active
permanent modifications, 468,000 active trials, 430,000 trial
cancellations, and 6,400 permanent modification
cancellations through May 2010
More than $132 million disbursed in incentive payments as
of May 17, 2010
Announced in March 2009
Implemented in March 2010
7 servicers have signed agreements
No incentive payments have been made as of May 17, 2010
Expected cost and number of borrowers to be helped
unknown
Announced in March 2009
Implemented in April 2010
No incentive payments have been made as of May 17, 2010
Expected cost and number of borrowers to be helped
unknown
Announced in February and March 2010
Implementation date yet to be determined
$2.1 billion designated for 10 state HFAs
Expected number of borrowers to be helped unknown
Announced in March 2010
Estimated implementation by Fall 2010
Expected cost and number of borrowers to be helped
unknown
Announced in March 2010
Estimated implementation in July 2010
No expected TARP funds and number of borrowers to be
helped unknown
Announced in March 2010
Estimated implementation in Fall 2010
$14 billion designated, but number of borrowers to be
helped unknown

Source: Treasury.

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Servicers’ Solicitation
and Evaluation of
Borrowers for HAMP
Have Been
Inconsistent, and
More Treasury Action
Is Immediately
Needed To Ensure
Equitable Treatment
of Borrowers with
Similar
Circumstances

Although one of Treasury’s stated goals for HAMP is to standardize the
loan modification process across the servicing industry, we identified
several areas of inconsistencies in how servicers treat borrowers under
HAMP. These areas of inconsistency could lead to inequitable treatment of
similarly situated borrowers, and borrowers in similar circumstances
could have different outcomes. First, we found that servicers differed in
when and how they solicited borrowers for HAMP, and numerous
borrowers had complained that they did not receive timely responses to
their HAMP applications or had difficulty getting information from their
servicers about the program. Until March 2010, a year into the program,
Treasury had only minimal requirements for soliciting borrowers for
HAMP and had yet to finalize comprehensive measures that addressed
servicers’ performance in this area. Further, Treasury had not issued
specific guidelines for servicers on how to determine whether borrowers
current on their mortgage payments were in imminent danger of default or
for conducting internal quality assurance reviews. Treasury also had not
provided servicers with specific requirements detailing how servicers
should handle and track borrowers’ complaints about HAMP. As a result,
some servicers that we contacted did not systematically track all HAMP
complaints or their resolutions, and borrowers may not have been aware
that an independent escalation process existed to handle complaints about
servicers or to challenge HAMP eligibility denial determinations. Lastly,
Treasury had not yet determined specific remedies for servicer
noncompliance with HAMP program requirements—a key enforcement
mechanism for ensuring that servicers treated borrowers equitably under
HAMP.

Treasury Has Taken Steps
to Improve Servicer
Communications with
Borrowers about HAMP
but Issues Remain

For the first year of the HAMP first-lien program, Treasury’s key guidance
on its requirements for the initial outreach to or solicitation of borrowers
for participation in HAMP stated that servicers should follow their existing
practices for soliciting borrowers. The 10 servicers we contacted reported
varying practices, with a few soliciting borrowers who were 31 days
delinquent on payments and some others not soliciting borrowers until
borrowers were at least 60 days delinquent on payments. However, even
when servicers said their practice was to solicit borrowers who were 60
days past due, they very often did not. The proportion of borrowers who
were 60 days delinquent on their mortgages and who were solicited for
HAMP ranged from 16 to 95 percent. On average, the 10 servicers we

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contacted solicited approximately 60 percent of such borrowers. 18 Some
servicers explained that they did not solicit certain borrowers because, for
example, the borrowers did not meet basic eligibility criteria or because
the investors for that particular pool of mortgage-backed securities did not
allow HAMP modifications. However, as of December 2009, the MHA-C
group within Freddie Mac, the compliance agent for HAMP, identified four
servicers through their onsite Management Compliance Audits that could
not always provide evidence that borrowers who were potentially eligible
for HAMP had been solicited.
In March 2010, more than a year after the program was first announced,
Treasury issued additional guidelines governing solicitation efforts.
Effective June 2010, servicers must prescreen all first-lien loans with two
or more mortgage payments are due and unpaid to determine if the loans
meet the basic HAMP eligibility criteria (e.g. the home is an owneroccupied, primary residence and a single family one-to-four unit property;
the loan originated before January 1, 2009; and the loan balance is within
specified limits). Servicers must make a “reasonable effort” to solicit for
HAMP any borrower who passes this prescreening—that is, servicers must
make a minimum of four telephone calls to the borrower’s last known
phone number at different times of the day and send two written notices,
by different means, to the borrower’s last known address within 30 days.
Because these are new requirements, we could not determine how
effective they might be in standardizing solicitation practices, but
standardizing solicitation requirements may help ensure that all potentially
eligible borrowers are notified about HAMP in a timely manner.
Moreover, it appears that some borrowers had problems reaching their
servicers and obtaining information on the status of their applications and
on HAMP in general. For example, between the end of June 2009 and midApril 2010, approximately 27,000 of the more than 48,000 borrower
complaints to the HOPE Hotline—a 24-hour telephone line that provides
borrowers with free foreclosure prevention information and counseling—
were about this issue. The most common complaints involved the
difficulty of reaching servicers or not hearing back from them in a timely
manner after submitting documentation. During our visits to six HAMP
servicers, we observed a small sample of phone calls between borrowers

18

Servicers reported the number of non-GSE borrowers who were 60 days delinquent at the
time they signed a servicer participation agreement for HAMP, and the percentage of these
borrowers that had been solicited as of December 31, 2009.

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and their servicers, several of which involved complaints about the
difficulty of contacting servicers about HAMP. For example, four out of
the nine calls we observed at one of the large HAMP servicers involved
complaints related to servicers’ communications with borrowers. These
included complaints that the servicer had lost documentation and that the
borrower was not able to speak with a representative knowledgeable
about the status of the HAMP application.
In October 2009 and in March 2010 Treasury implemented guidelines
attempting to address some of these issues. Guidelines issued in October
2009 mandated that servicers acknowledge in writing the receipt of
borrowers’ initial HAMP application packages within 10 business days and
that they include in their responses a description of their evaluation
process and timeline for processing paperwork. Additionally, in March
2010, servicers were required to include a toll-free number in all
communications with borrowers, which would allow them to reach a
representative capable of providing specific details about the HAMP
modification process. In April 2010, the Congressional Oversight Panel
recommended that Treasury monitor program participants and enforce the
new borrower outreach and communication standards and timelines to
increase program transparency. 19 Treasury plans to include the new
program requirements in MHA-C’s compliance reviews of HAMP servicers,
and it will be important for Treasury to review findings from these reviews
to determine whether these requirements do improve servicers’
communications with borrowers and fully address differences among
servicers in soliciting borrowers for HAMP.
Treasury first drafted metrics to assess HAMP servicers’ performance in
communicating with borrowers in October 2009, but these metrics have
not yet been finalized. In December 2009, Treasury requested that nine of
the largest HAMP servicers provide information on a revised version of
these metrics, and Treasury officials told us they were using the results of
this request to further revise the metrics to ensure consistent and
comparable responses. 20 According to Treasury, the preliminary metrics
include measures such as the average speed for answering loss mitigation
calls and the number of attempts made to contact each borrower who is in

19

Congressional Oversight Panel, April Oversight Report: Evaluating Progress on TARP
Foreclosure Mitigation Programs (Washington, D.C., Apr. 14, 2010).

20

According to Treasury officials, 1 servicer among the top 10 servicers was inadvertently
left out of the survey.

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the initial stages of foreclosure. Preliminary results showed
inconsistencies among servicers’ responses that could indicate differences
either in how servicers were interpreting the questions or in how they
treated borrowers. In our July 2009 report, we noted that Treasury lacked
finalized performance measures for HAMP. 21 Since then, the Congressional
Oversight Panel and SIGTARP have recommended that Treasury collect
additional program data and publicly report on the metrics to ensure
transparency and evaluate program success. 22 Treasury officials told us
they would continue to work with servicers on their responses to these
metrics to finalize them and establish a common reporting standard.
Treasury plans to collect these metrics for the eight largest HAMP
servicers and publicly disclose the results in July 2010. Without
establishing key performance metrics and reporting of individual servicer
performance with respect to those metrics, Treasury cannot achieve full
transparency and accountability for the HAMP first-lien modification
program results and progress.

Servicers May Be
Inconsistently Treating
Similarly Situated
Borrowers for HAMP Due
to Treasury’s Lack of
Guidance on Determining
Imminent Default and
Conducting Quality
Assurance Reviews

While Treasury’s goal is to create uniform, clear, and consistent guidance
for loan modifications across the servicing industry, as we noted in March
2010, Treasury has not provided specific guidance on how to determine
whether borrowers are in imminent danger of default. 23 As also noted in
SIGTARP’s March 2010 report on HAMP, this lack of consistent and clear
standards could mean that servicers are inconsistently applying criteria in
this area and thereby inequitably treating borrowers across the program. 24
According to HAMP guidelines, borrowers who are current or less than 60
days delinquent on their mortgage payments but in imminent danger of
defaulting may be eligible for HAMP modifications, and Treasury has
emphasized the importance of reaching borrowers before they are

21

GAO, Troubled Asset Relief Program: Treasury Actions Needed to Make the Home
Affordable Modification Program More Transparent and Accountable, GAO-09-837
(Washington, D.C.: July 2009).

22

Congressional Oversight Panel, April 2010, and Office of the Special Inspector General for
the Troubled Asset Relief Program, Factors Affecting Implementation of the Home
Affordable Modification Program, SIGTARP-10-005 (Washington, D.C., Mar. 25, 2010).

23

GAO, Troubled Asset Relief Program: Home Affordable Modification Program
Continues to Face Implementation Challenges, GAO-10-556T (Washington, D.C.: March
2010).

24

Office of the Special Inspector General for the Troubled Asset Relief Program, March
2010.

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delinquent. In particular, Treasury instituted additional incentives to
servicers and investors for modifying loans for such borrowers. According
to Treasury, 22.9 percent of all trial modifications started as of May 2010
were in this category. Treasury stated that it did not create such guidelines
when developing HAMP because it was focused primarily on delinquent
borrowers. However, Fannie Mae and Freddie Mac have had standardized
imminent default criteria since late April 2009 for modifications of loans
owned or guaranteed by the GSEs, and in January 2010 (with an effective
date of March 1, 2010) further aligned these guidelines to provide greater
consistency between the two GSEs. 25 Treasury officials have stated that
they plan to monitor the impact of servicers’ implementation of the new
GSE imminent default guidance over the next few months. Treasury then
plans to determine whether it will adopt similar criteria for non-GSE loans.
As a result of the lack of specific guidance, we found seven different sets
of criteria for determining imminent default among the 10 servicers we
contacted. The seven sets of criteria that we found varied in both the types
of information the servicers considered and in the thresholds they set for
factors such as income and cash reserves. Two servicers considered
borrowers who met the basic HAMP eligibility requirements (greater than
31 percent monthly mortgage debt-to-income ratio, one-to-four unit single
family residence, etc.) in imminent default and the servicers did not
impose any additional criteria on them. Three servicers aligned their
imminent default criteria for their non-GSE portfolios with the imminent
default criteria that the GSEs required for their loans prior to March 1,
2010. In addition to the basic HAMP eligibility requirements, these criteria
require borrowers to have cash reserves of no more than 3 months of
housing payments (including monthly principal, interest, property tax,
insurance, and either condominium, cooperative, or homeowners’
association payments) and a ratio of disposable net income to monthly
housing payments (debt coverage ratio) of less than 120 percent. One
servicer had begun using the new GSE criteria that sets a new maximum
cash reserves limit of $25,000 and does not have debt coverage ratio
requirements for its non-GSE loans. The remaining four servicers included
various additional considerations among their criteria, including:

25

In order to identify borrowers in imminent default, Freddie Mac has created the Imminent
Default Indicator™, a statistical model that predicts the likelihood of default or serious
delinquency for mortgage loans that are current or less than 60 days delinquent. On March
1, 2010, and June 1, 2010, this tool and maximum borrower cash reserves of $25,000
became the primary imminent default criteria for Freddie Mac and Fannie Mae loans,
respectively.

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•

a sliding income scale for the borrower’s mortgage debt-to-income ratio;

•

an increase in expenses or decrease in income that is more than a certain
percentage of income;

•

a loan-to-value ratio that is above a certain percentage; and

•

a “hardship” situation lasting longer than 12 months.
These differences in criteria may result in one borrower being approved
for HAMP, and another with the same financial situation and loan terms
being denied by a different servicer. In addition, if a servicer has few or no
additional imminent default criteria, the servicer may be offering HAMP
modifications to borrowers who may not actually be at true risk of
defaulting on their loan. However, if a servicer has very stringent criteria,
it may be denying HAMP modifications to borrowers who will ultimately
default on their loans because of unaffordable monthly mortgage
payments.
To account for differences in servicers’ loan portfolios, Treasury
specifically allows some differences in how servicers evaluate borrowers
for HAMP that could result in inconsistent outcomes for borrowers. For
example, servicers may add a risk premium of up to 2.5 percent to the
Freddie Mac rate for 30-year fixed mortgages when inputting the discount
rate to the NPV model used in evaluating eligibility for HAMP. The NPV
model compares the net present value of expected cash flows to the
investor from a loan that receives a HAMP modification with the expected
cash flows of the same loan with no modification (also considering the
likelihood that the loan would end in foreclosure). If the estimated cash
flow with a modification is “positive” (i.e., equal to or more than the
estimated cash flow of the unmodified loan), the loan servicer is required
to make the HAMP modification. The higher the risk premium a servicer
chooses, the fewer the number of loans that are likely to pass the NPV
model, because expected future cash flows would have less value.
Servicers must apply one risk premium to all loans held in their portfolio
and one to loans serviced for other investors. Treasury noted that it chose
to allow this variation because mortgage holders and investors could have
different opportunity costs of capital and different interpretations of risk.
Of the 10 servicers we interviewed, 3 servicers (2 large and 1 mediumsized servicers) added the full 2.5 percent risk premium allowable, while
the other 7 servicers did not add an additional risk premium. According to
our analysis of Treasury data, as of April 17, 2010, 11 servicers used a risk
premium, most of them the full 2.5 percent.

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Of concern, MHA-C, through its compliance audits, found that 15 of the
largest 20 participating servicers did not comply with various aspects of
the program guidelines in their implementation of the NPV model. This
lack of compliance likely resulted in differences in how borrowers were
evaluated, and could have resulted in the inequitable treatment of similarly
situated borrowers. Servicers have two options for implementation of the
NPV model. Either they may use the Treasury version of the NPV model
housed on a Web portal hosted by Fannie Mae in its capacity as Treasury’s
financial agent, or they may recode the NPV model to run it on their own
internal systems. Among seven servicers that had recoded the NPV model
to run it on their own internal systems, MHA-C found that the servicers
had failed to hold certain data constant when rerunning the NPV model for
borrowers they were evaluating for a permanent HAMP modification.
HAMP guidelines state that only income-related inputs or incorrect data
can be changed during a second NPV model run. But because these
servicers often linked the NPV model with their servicing system, values
for inputs such as property values and credit scores were erroneously
updated during the rerunning of the NPV model. In these cases, MHA-C
required the servicer to make the appropriate fixes so that their in-house
models were consistent with the Treasury model. Until such fixes were
made, MHA-C required the servicers to refrain from denying permanent
modifications because of negative NPV results unless these results were
validated by the Treasury version of the NPV model housed on the Fannie
Mae Web portal with the appropriate data values. In addition, MHA-C has
required these servicers to proactively resolicit any borrowers who were
incorrectly denied a permanent HAMP modification due to the NPV errors.
Eight servicers that exclusively use the Fannie Mae Web portal had similar
problems with their NPV inputs when rerunning the NPV model while
evaluating borrowers for a permanent modification. In these cases,
servicers have been required to reanalyze loans that were affected by the
error and outline a corrective action plan. Although MHA-C notified almost
all of the 15 servicers of these errors in February 2010, some of the
servicers are still in the process of analyzing which borrowers were
affected, and MHA-C is monitoring the servicers’ progress in these
analyses and has instructed servicers not to conduct foreclosure sales
until remediation activities are complete. According to Treasury, the
number of borrowers who were denied because of a servicer’s NPV errors
could range from a handful to thousands, depending on the size of the
servicer and the extent of the error.
In addition, servicers themselves have identified process errors that led to
inconsistencies in how they were evaluating borrowers for HAMP through

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their quality assurance reviews. We reviewed quality assurance reports
from the 10 servicers we interviewed and found that the error rates for the
calculation of borrower income were well above the servicers’ own
established error thresholds, often set at 3 to 5 percent. In fact, half of
these servicers reported at least a 20-percent error rate for the loan
modifications sampled during the most recent review provided to us.
Without accurate income calculations, similarly situated borrowers
applying for HAMP may be inequitably evaluated for the program and may
be inappropriately deemed eligible or ineligible for the program. Some
servicers also found other types of errors, such as failing to include
condominium association dues in the monthly target housing payment;
charging borrowers fees prohibited by HAMP guidelines—for example, for
property valuation; and not reducing the monthly mortgage payment for
the HAMP modification to 31 percent or less of the borrower’s gross
monthly income. As a result of these audit findings, servicers implemented
process improvements and corrective actions. Some of the servicers
resolicited borrowers who were incorrectly turned down for HAMP, while
others implemented additional controls to their evaluation processes, such
as additional reviews and enhanced technology systems to aid in the
income calculation process. Most of the servicers implemented additional
training for staff in the specific areas in which errors were found. For
example, one servicer held training on calculating rental income and
income for self-employed borrowers, since these types of income
calculations accounted for a large portion of errors.
However, a lack of specific guidelines has also led to significant variations
in servicers’ quality assurance programs for HAMP. According to the
Standards for Internal Control in the Federal Government, the scope of
internal program evaluations should be appropriate and reflect the
associated risks. 26 Treasury guidance requires servicers to develop and
execute internal quality assurance programs to ensure compliance with
HAMP, but its guidelines are not sufficiently specific to ensure that
servicers are mitigating all of the potential program risks. For example,
potential program risks include improper offers of permanent and trial
HAMP modifications, as well as improper denials of both permanent and
trial modifications. However, while Treasury’s guidelines state that
servicers must include either a statistically based sample (with a 95
percent confidence level) or a 10-percent stratified sample of loans
modified, drawn within 30 to 45 days of the final modification, Treasury

26

GAO/AIMD-00-21.3.1.

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GAO-10-634 HAMP Implementation Status

does not specify whether trial and permanent modifications should be
sampled separately or whether denied modifications should be sampled at
all. According to Treasury, MHA-C has suggested to servicers that their
quality assurance procedures should include evaluations of the whole
HAMP population, including those in trial modifications and those denied
HAMP, but servicers receive this feedback only after MHA-C completes its
compliance reviews. Only 4 of the 10 servicers we interviewed separately
sampled active trial modifications, approved permanent modifications,
denied trial modifications, and denied permanent modifications, a
methodology that allowed them to review statistically significant samples
within each of these categories. Three of the servicers we interviewed did
not review a representative sample of approved trial modifications, and
two of the servicers did not review a representative sample of denied
modifications. In addition, one servicer we interviewed did not sample its
HAMP modifications separately from its proprietary modifications and
therefore reviewed too few HAMP modifications to result in HAMPspecific findings.
Treasury guidelines also do not specify required areas of review, and we
found variations in the content of servicers’ quality assurance reviews. For
example, while most servicers we interviewed recalculated borrowers’
income for the loans that they sampled as part of their quality assurance
procedures, half of the servicers did not review the inputs for the NPV
model despite the key role that the model plays in determining whether or
not a borrower qualifies for HAMP. In addition, while 8 of the 10 servicers
we interviewed performed some type of quality assurance review on
denied HAMP modifications, one of these servicers focused its reviews
only on whether denial letters were sent to the borrowers and not on
whether the borrowers were appropriately denied HAMP. As part of its
HAMP compliance procedures, MHA-C has outlined more specific
expectations for what servicers should include in their internal quality
assurance reviews, but these expectations are not published or shared
with servicers prior to their MHA-C compliance reviews. Without more
specific guidance in this area from Treasury, some servicers may continue
to have less robust quality assurance procedures and thereby risk not
identifying practices that may lead to inequitable treatment of borrowers
or harm taxpayers through greater potential for fraud or waste in the
program.

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GAO-10-634 HAMP Implementation Status

Servicers Had Different
Processes for Handling
HAMP Complaints and
Treasury Had Not Clearly
Communicated to
Borrowers about or
Ensured the Effectiveness
of the Process for
Challenging HAMP
Eligibility Determinations

Treasury has directed HAMP servicers to have procedures and systems in
place to respond to HAMP inquiries and complaints and to ensure fair and
timely resolutions. However, some servicers were not systematically
tracking HAMP complaints or their resolutions, making it difficult for
Treasury to determine whether this requirement was being met. For
example, according to Treasury, a compliance review conducted by MHAC in the fall of 2009 cited a servicer for not tracking, monitoring, or
reporting HAMP-specific complaints. In the absence of an effective
tracking system, the compliance agent could not determine whether the
complaints had been resolved. Similarly, several of the servicers we
interviewed indicated that they tracked resolutions only to certain types of
complaints. For instance, several servicers told us that they tracked only
written HAMP complaints and handled these written complaints
differently depending on the addressee. Without tracking all complaints, it
is not possible for any internal or external review to determine whether
complaints had been properly handled.
Fannie Mae, in its role as the administrator for HAMP, has contracted with
the HOPE Hotline to handle incoming borrower calls about HAMP.
Borrowers may obtain information about the program and assess their
preliminary eligibility, or discuss their individual situations, which may
include complaints about their servicer or about potentially incorrect
denials. Borrowers calling the hotline with a HAMP complaint can be
transferred to a housing counseling agency approved by the Department of
Housing and Urban Development (HUD), and when the complaint pertains
to a borrower assertion that they have been wrongfully denied a
modification or that their servicer has not applied program guidelines
appropriately, the borrower is transferred to the Making Home Affordable
(MHA) Escalation Team, which is housed within a HUD-approved
counseling agency. If additional intervention is needed, the counselor is to
“escalate” the complaint to the housing counseling agency’s management
(fig. 2). As of mid-April 2010, more than 37,000 borrower complaints had
been escalated to the MHA Escalation Team, and an unknown number had
been escalated to the housing counseling agency’s management. Through
mid-April 2010, more than 4,000 calls to the HOPE Hotline were about
potentially incorrect denials for a HAMP modification. According to
Fannie Mae, between January and April 2010 the housing counseling
agency that handles HOPE Hotline escalations resolved 99 percent of its
complaints within 4 days.
Complaints that the counseling agency’s management cannot resolve are
referred to an escalation team within Fannie Mae known as the HAMP
Solution Center, which also handles escalations on behalf of borrowers

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GAO-10-634 HAMP Implementation Status

referred by housing counselors and government agencies outside of the
HOPE hotline. As of April 1, 2010, more than 3,700 complaints had been
escalated to this team. Of these escalated complaints, nearly 2,900 had
been resolved, with 19 percent of the resolved escalations resulting in the
initiation of a trial or permanent modification and approximately 35
percent in a determination of ineligibility. An additional 17 percent were
referred back to the servicers or the HOPE Hotline, and the remaining 29
percent had other outcomes—for example, some were referred to other
loss mitigation alternatives, and no action was taken on others. Fannie
Mae has set a goal of 7 business days for the HAMP Solution Center to
resolve complaints, but as of mid-April 2010, the average resolution time
was 23 days.

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GAO-10-634 HAMP Implementation Status

Figure 2: Steps in the Escalation Process Available to Borrowers through the HOPE
Hotline

3
HAMP
Solution Center
(run by Fannie Mae)

int

Compla

2
Borrower

Housing
counselor management
(within the counseling group)

int

Compla

Borrower calls the
HOPE Hotline and
speaks with a
counselor from a
HUD-approved
counseling agency

int

Compla

During each
level of
escalation, the
advocate
communicates
the borrower’s
complaint to
the servicer
and works
with the
servicer to
attempt to
resolve the
complaint, but
performs no
independent
evaluation of the
borrower.

BANK

Servicer

1
MHA Escalation
Team counselor

Source: GAO (analysis); Art Explosion (images).

It is unclear whether the HOPE Hotline and escalation processes are
effective mechanisms for resolving concerns about potentially incorrect
HAMP denials. At each level of the escalation process, the party handling
the complaint works with the servicer and the borrower (or borrower
advocate) to obtain information or actions that would resolve it. Neither
the MHA Escalation Team counselor nor HAMP Solution Center staff
review the borrower’s application or loan file; rather, further reviews of
borrowers are to be conducted by the servicers. According to Treasury, it
would be difficult to obtain borrower’s loan files because they are so large.
Instead, Treasury officials told us that they were working toward
providing MHA Escalation Team counselors and HAMP Solution Center

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GAO-10-634 HAMP Implementation Status

staff with access to some information from the loan files, such as whether
the investor would allow the loan to be modified under HAMP, that could
be used during the escalation process. In addition, Fannie Mae has set up a
quality assurance process for housing counselors who handle MHA
escalations that includes monitoring and scoring of counselors’ calls with
borrowers. Although this quality assurance process evaluates the way
counselors resolve borrowers’ concerns, it is not clear how the evaluators
could determine whether the resolutions were correct, since the
evaluators also lack access to the borrowers’ loan files. As a result,
servicers maintain discretion in determining how to resolve borrowers’
concerns about potentially incorrect HAMP denials. Further calling into
question the effectiveness of the escalation process, in its April 2010 report
on HAMP, the Congressional Oversight Panel raised additional concerns
about the effectiveness of the HOPE Hotline by stating that it is unclear
whether the HUD-approved housing counseling agencies that work with
the HOPE Hotline have sufficient capacity or adequate training to properly
handle borrower requests for assistance. 27
While the HOPE Hotline escalation process is the primary means for
borrowers to raise concerns about their servicer’s handling of their HAMP
applications and potentially incorrect denials, Treasury has not explicitly
informed borrowers that the hotline can be used for these purposes. For
example, the Making Home Affordable Web site states only that the HOPE
Hotline provides help with the program and no-cost access to counselors
at a HUD-approved housing counseling agency. Treasury also requires that
servicers provide information in their denial letters about the HOPE
Hotline, with an explanation that the borrower can seek assistance at no
charge from a counselor at a HUD-approved housing counseling agency
and can request assistance in understanding the denial notice. Neither of
these communication mechanisms fully informs borrowers that they can
call the HOPE Hotline to voice concerns about their servicer’s
performance or decisions and therefore may limit the number of
borrowers who use the hotline for these purposes. For example, as of midApril 2010, less than 2 percent of the more than 48,000 calls to the hotline
were from borrowers who felt they had wrongfully been denied under the
Making Home Affordable program, which could include HAMP.

27

Congressional Oversight Panel, April 2010.

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GAO-10-634 HAMP Implementation Status

Treasury has Taken Steps
to Address Servicers’
Compliance with HAMP
Requirements but Has Not
Clearly Stated the
Consequences for
Noncompliance

Treasury has taken some steps to ensure that servicers comply with HAMP
program requirements, including those related to the treatment of
borrowers, but has yet to establish specific consequences or penalties for
noncompliance with HAMP guidelines. We first reported in July 2009 that
Treasury had not yet formalized a policy to assess remedies for
noncompliance among servicers. 28 The HAMP servicer participation
agreement describes actions that Fannie Mae, as program administrator
(at Treasury’s direction), may take if a servicer fails to perform or comply
with any of its material obligations under the program, but does not lay
out the specific conditions under which these actions should be taken. In
October 2009, Treasury established the HAMP Compliance Committee to
monitor the performance and activities of servicers based on information
gathered by Fannie Mae, MHA-C, and others. According to Treasury, the
compliance committee—comprised of staff from Treasury, Fannie Mae,
and MHA-C—has drafted a policy to establish consequences for servicer
noncompliance with HAMP program requirements. Treasury officials told
us that the policy was initially approved in October 2009, but following an
internal review the compliance committee determined that it needed more
experience with servicers’ performance before finalizing the policy. The
committee is still redrafting the policy, and Treasury expects that it will be
internally reviewed again in June 2010. Until the policy is finalized, the
committee has instructed MHA-C to report all issues of servicer
noncompliance to the committee which then evaluates these issues on a
case-by-case basis, leaving open opportunities for inconsistencies in how
incidences of noncompliance are remedied. According to Treasury, no
financial remedies have been issued to date, though Treasury has required
MHA-C to perform more targeted reviews, as well as directed MHA-C to
require some servicers to take action to correct areas of noncompliance.
In its April report on HAMP, the Congressional Oversight Panel
recommended that Treasury ensure compliance through established
enforcement mechanisms that provide a clear message of the
consequences for servicer actions to increase program accountability. 29
Without standardized remedies for noncompliance, Treasury risks
inconsistent treatment of servicer noncompliance and lacks transparency
with respect to the severity of the steps it will take for specific types of
noncompliance.

28

GAO-09-837.

29

Congressional Oversight Panel, April 2010.

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GAO-10-634 HAMP Implementation Status

Treasury Has Taken
Steps to Address
Conversion, Negative
Equity, Redefault, and
Program Stability but
Needs to
Expeditiously
Implement a Prudent
Design for Remaining
HAMP-Funded
Programs

In our testimony on March 25, 2010, we noted that Treasury faced several
additional challenges as it continues to implement HAMP. These
challenges include (1) converting trial modifications to permanent status,
(2) addressing the growing issue of negative equity, (3) reducing redefaults
among borrowers with modifications, and (4) ensuring program stability
and effective program management. 30 While Treasury has taken some
steps to address these challenges, such as announcing a principal
reduction program under HAMP and finalizing the second-lien
modification program, it needs to expeditiously finalize and implement
remaining programs in a manner that ensures transparency and
accountability. Our review of HAMP suggests that potential concerns exist
in the areas of program stability and adequacy of program management as
Treasury continues to add or revise HAMP-funded programs.

Treasury Has Reached Out
to Servicers and Simplified
Program Requirements to
Increase the Number of
Permanent Modifications,
but Conversion Rates
Remain Low

HAMP servicers reported a wide range of conversion rates and gave a
variety of reasons to explain why trial modifications were not converting
to permanent modifications. Through the end of May 2010, servicers
reported conversion rates ranging from 11 percent to 86 percent.
Furthermore, a few servicers reported that more than half of their active
trial modifications had been in the trial period for more than 6 months.
The 10 servicers we contacted reported conversion rates ranging from 1
percent to 57 percent for non-GSE HAMP modifications that had been in
trial periods for 3 or more months as of December 31, 2009 (fig. 3). Of
these 10 servicers, the 3 we contacted that required borrowers to provide
full documentation of their income before starting trial modifications
reported the highest conversion rates (38 percent to 57 percent). The
seven servicers that used stated income to determine eligibility for trial
modifications had conversion rates ranging from 1 percent to 18 percent.
We asked these servicers for the percentages of nonconversions that had
resulted from incomplete or problematic documentation, missed trial
period payments, or having to wait for a servicer to take action to
complete the conversion. Several of the servicers reported that these
scenarios were responsible for fewer than half of their nonconversions
(fig. 3). Not surprisingly, the servicers that used verified income reported

30

GAO-10-556T.

Page 28

GAO-10-634 HAMP Implementation Status

lower rates of nonconversions because of incomplete or problematic
documentation (1 percent to 14 percent) compared with the servicers that
used stated income (4 percent to 58 percent). Servicers also reported a
wide range of nonconversions that could be attributed to missed payments
during trial modifications—roughly 2 percent to more than 70 percent.
However, 9 of the 10 servicers reported that these types of nonconversions
accounted for less than a quarter of the total, and the highest percentage
(71 percent) was reported by a servicer that primarily serviced subprime
loans. Finally, some servicers reported having borrowers who had
submitted all documentation and made all trial payments but were waiting
on action from the servicer to receive permanent modifications. For
example, one servicer reported that nearly a third of borrowers who had
been in trial modifications for at least 3 months, but had not been
converted to permanent modifications, were in this situation.
Figure 3: Conversion Rates and Nonconversion Reasons for 10 HAMP Servicers, through December 31, 2009
Reasons for nonconversions
Servicer
(type of
validation)

Incomplete or
problematic
documentation

Conversion rate

Missed
trial payments

Waiting on
servicer action

Other reasona

Total

Servicer 1 (verified)

55 %

13 %

11 %

0%

76 %

100 %

Servicer 2 (verified)

57

14

71

0

15

100

Servicer 3 (verified)

38

1

9

19

71

100

Servicer 4 (stated)

2

Servicer 5 (stated)

1

4

3

4

89

100

Servicer 6 (stated)

6

13

2

16

69

100

Servicer 7 (stated)b

10

41

7

5

47

100

Servicer 8 (stated)

7

50

3

32

15

100

Servicer 9 (stated)

5

58

16

26

0

100

Servicer 10 (stated)

18

16

23

2

59

100

Did not report

n/a

Source: GAO analysis of data from 10 HAMP servicers.
a

Servicers indicated various other reasons for nonconversions, such as borrowers’ inability to pass
the NPV model when evaluated for a permanent modification and a resetting of the trial period if the
servicer found a difference in stated and verified income of more than 25 percent at the time of
conversion.

b

Stated for borrowers at least 60 days delinquent, verified for imminent default borrowers.

In November 2009, Treasury launched a conversion campaign and revised
the first-lien HAMP guidelines in an effort to address the challenges

Page 29

GAO-10-634 HAMP Implementation Status

associated with converting trial modifications to permanent modifications.
The conversion campaign included a temporary review period lasting
through January 31, 2010, that did not allow servicers to cancel trial
modifications for any reason other than failure to meet HAMP property
requirements (for example, if the property was not owner-occupied). In
addition, Treasury required the eight largest servicers to submit
conversion action plans that included strategies such as having people
knock on doors to collect missing documentation from borrowers, having
call center staff follow up on trial payments, and developing call scripts to
include a description of incentives available to borrowers after completion
of the trial period. Treasury also formed “SWAT” teams comprised of
Treasury and Fannie Mae staff to visit large servicers’ offices and offer onsite assistance with conversions. During the conversion campaign, the
number of new conversions each month increased from roughly 26,000 in
November to roughly 35,000 in December and roughly 50,000 in January.
To address the specific challenge of obtaining complete documentation
from borrowers, Treasury has made several changes to streamline and
improve documentation requirements. In October 2009, Treasury
announced a streamlining of required documentation that, among other
things, allows borrowers to use a standard application form that
incorporates income, expense, and hardship information. Treasury further
simplified the documentation requirement in January 2010 when it
announced that pay stubs used to verify income no longer needed to be
consecutive, provided the pay stubs included year-to-date income and the
servicer judged that the borrower’s income had been accurately
established. While the streamlining of documentation could make it easier
for certain borrowers to provide all required documentation, therefore
improving conversion rates, it could also increase the risk of fraud or
abuse in the program. Also in January 2010, Treasury announced that
beginning in mid-April, servicers would be required to evaluate borrowers
for trial modifications based on fully documented income. While using
fully documented income will potentially be a significant change for some
servicers, particularly given Treasury’s July 2009 statement that servicers
should evaluate borrowers for trial modifications based on stated income,
it could help improve conversion rates. As we have seen, among the 10
servicers we spoke with, the 3 already requiring full documentation up
front generally reported higher conversion rates.
However, converting trial modifications continues to be a challenge. As of
the end of May 2010, Treasury data showed that only 31 percent of trial
modifications started at least 3 months prior, and therefore potentially
eligible for conversion, had converted to a permanent modification. In

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GAO-10-634 HAMP Implementation Status

fact, the total number of permanent modifications started through May
2010 was less than the total number of trial modifications canceled during
the same time period (roughly 347,000 versus 430,000). Furthermore, as
servicers focus on conversions and began the transition to evaluating
borrowers using verified income, the number of trial modifications begun
has decreased significantly. In May 2010, roughly 30,000 trial modifications
were started, compared with nearly 63,000 in March 2010 (fig. 4). As of the
end of May 2010, Treasury reported that there were roughly 1.7 million
estimated eligible 60-day delinquent borrowers. According to Treasury
officials, Treasury is not planning on taking any additional steps to address
nonconversions because the agency’s current focus is on clearing the
backlog of trial modifications awaiting conversion decisions. The officials
noted that servicers had committed to clearing their backlogs by the end
of June 2010. Going forward, Treasury anticipates that the requirement for
up-front documentation will reduce the challenge of converting trial
modifications to permanent modifications.
Figure 4: GSE and Non-GSE HAMP Trial and Permanent Modifications Made Each Month
Modifications in thousands
200
Start of Treasury's
Conversion Campaign

Treasury announces goal of
500,000 trials by November 1, 2009
150

Trial modifications started
100

50

Permanent modifications started
0
May
and prior

June

July

August

September

October

November

2009

December

January

February

March

April

May

2010
Source: GAO analysis of Treasury data.

Borrowers may not convert to permanent modifications for several
reasons, including ineligibility for HAMP and failure to make the required
trial modification payments. Some borrowers who do not receive
permanent modifications may be eligible for other non-HAMP loan
modification programs that servicers offer or for alternatives to
foreclosure such as those offered under the HAFA program. For example,

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GAO-10-634 HAMP Implementation Status

Treasury reported that through April 2010, among the top eight HAMP
servicers, nearly half of borrowers who had trial modifications canceled
received non-HAMP loan modifications.

Recent Program
Announcements Aim to
Address Negative Equity,
but Programs May Lack
Transparency

The proportion of homeowners who owe more than the value of their
homes continues to be high in many states and, as we reported in July
2009, HAMP as initially designed may not address the growing number of
foreclosures among borrowers with negative equity (“underwater”
borrowers). According to data reported by CoreLogic, a company that
collects and analyzes U.S. real estate and mortgage data, more than 11.2
million (24 percent) of borrowers across the country had negative equity
at the end of the first quarter of 2010. 31 In addition, of borrowers with loanto-value ratios greater than 150 percent, more than 14 percent had
received a notice of default—the first step in the public recording of
default—compared with roughly 2 percent of those with at least some
equity in their homes. As we have seen, according to Fannie Mae,
borrowers have loan-to-value ratios of roughly 150 percent, on average,
after a HAMP modification. While HAMP’s initial design focused on
bringing mortgage payments to an affordable level, severe levels of
negative equity and expectations that house prices will continue to decline
may lead some borrowers to choose to default on their mortgage
payments even if the payments are affordable or could be modified to
affordable levels.
In an effort to help address the challenge of negative equity, in March 2010
Treasury announced a principal reduction program under HAMP.
According to the initial program guidelines issued in June 2010, the
principal reduction HAMP program will allow some underwater
homeowners to reduce the balance owed on their mortgage in steps over 3
years, if they remain current on their payments. Servicers will be required
to run both the standard NPV test and an alternative that considers
principal reduction and to compare the results. Under the alternative
approach, servicers will assess the NPV of a modification that starts by
forbearing the principal balance to 115 percent of the home’s value, or to
an amount necessary to bring the borrower’s payments to 31 percent of
income, whichever requires less principal reduction.

31

CoreLogic, New Corelogic Data Shows Decline In Negative Equity, Media Alert (May 10,
2010).

Page 32

GAO-10-634 HAMP Implementation Status

If forbearing principal to 115 percent of the home’s value does not reduce
monthly payments to 31 percent of income, the servicer will follow
HAMP’s standard procedures for modifying loans—lowering the interest
rate, extending the term of the loan, forbearing additional principal, or a
combination of these steps in this order. If the NPV under this approach is
higher than it is for a modification without principal forbearance, the
servicer will have the option—but will not be required—to forgive
principal. Servicers will initially treat the reduced principal amount as
forbearance and will forgive the forborne amount in three equal steps over
3 years, as long as the homeowner remains in good standing. Investors will
receive incentives for reducing principal, and the incentive amounts vary
based on the delinquency level of the borrower and the current loan-tovalue ratio. Servicers will be required to establish written policies detailing
when principal reduction will be offered, and, according to Treasury,
MHA-C will review these policies to ensure that similarly situated
borrowers are treated equitably with respect to principal reduction.
Some program details continue to be unspecified. In particular, the
alternative NPV model has not yet been specified, and it is unclear how it
will evaluate the impact of principal reduction, including the changes in
the likely redefault rate of borrowers receiving principal reductions.
According to Treasury, the alternative NPV model will be ready in
September or October 2010. In addition, although the original program
announcement stated that servicers would be required to retroactively
consider borrowers for principal forgiveness who had already received a
trial or permanent modification, it is unclear whether and how servicers
will be required to do this. According to Treasury, additional guidance
addressing this issue will be issued in July 2010. Servicers will be required
to start evaluating borrowers for principal reduction on the later of
October 1, 2010, or the implementation date of the new version of the NPV
model, though servicers could begin offering principal reduction and
receiving incentives as of June 3, 2010. Due to the continued severity of
the foreclosure crisis and negative equity problem, Treasury will need to
expeditiously finalize all program details.
While this program could help some borrowers whose loans are greater
than 115 percent of the home’s value, servicers could vary in when they
choose to offer principal reduction. In some cases, servicers may
reasonably refuse to reduce principal, even when the NPV using principal
reduction is higher than the NPV without using it. For example, servicers
may have contractual agreements with investors that prohibit principal
reduction. According to Treasury, principal reduction is not mandatory
because HAMP is a voluntary program and the HAMP Servicer

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GAO-10-634 HAMP Implementation Status

Participation Agreement allows servicers to opt out of material program
changes made after the agreement was signed. In addition, the
Congressional Oversight Panel reported in April 2010 that allowing
servicers to choose whether to offer principal reduction could help limit
moral hazard. 32 Specifically, if borrowers do not know whether their
servicers will forgive principal, they will not be motivated to change their
behavior in order to receive it. According to Treasury, servicers will be
required to report to Treasury the NPV outcomes with and without
principal reduction, as well as whether the borrower was offered it.
Further, Treasury officials noted that beginning in late 2010 or early 2011,
public reports on servicer performance will include information such as
the proportion of borrowers who were offered principal reduction.
Because servicers will have significant discretion in whether and when to
offer principal reduction under this program, Treasury will need to ensure
that public reporting of servicer activity related to principal forgiveness
provides sufficient program transparency and addresses potential
questions of whether similarly situated borrowers are being treated fairly
and consistently.
Households with second-lien mortgages are more likely to be underwater
than those without second-lien mortgages. According to CoreLogic, in the
first quarter of 2010, 38 percent of borrowers with junior liens such as
second-lien mortgages were underwater, compared with 19 percent of
borrowers with only first-lien mortgages. Offering relief on second-lien
mortgages is therefore an important factor in addressing the challenge of
underwater borrowers. According to the initial guidelines for the principal
reduction program, second-lien holders must agree to reduce principal on
the second lien mortgage in the same proportion as the principal reduction
on the first lien mortgage. Separately, under the guidelines for 2MP,
incentives are offered for the extinguishment or partial extinguishment of
second liens.
In addition, Treasury announced a new FHA refinancing program, which is
expected to be implemented by the fall of 2010 and will allow lenders to
refinance underwater first-lien loans into FHA-insured loans if the
borrower is current on mortgage payments. This program has been
designated up to $14 billion in funds that were originally intended for
HAMP and, as with the principal reduction program under HAMP, will be
voluntary for servicers. According to initial program descriptions,

32

Congressional Oversight Panel, April 2010.

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GAO-10-634 HAMP Implementation Status

investors must agree to a principal write-down on the original first-lien
loans of at least 10 percent and the combined loan-to-value ratio, which
includes both first and junior liens, cannot be greater than 115 percent
after the refinancing (97.75 percent for the first lien only). The new FHA
refinance option is available only to homeowners who are current on an
existing first-lien mortgage that is not insured by FHA. Eligible underwater
loans are refinanced into FHA loans on FHA terms based on full
documentation, income ratios, and complete underwriting. Total debt
including all forms of household debt cannot be greater than
approximately 50 percent except for some borrowers with especially
strong credit histories.
Investors we spoke with supported principal reduction in conjunction with
an FHA refinance, because even though they would suffer a loss on the
reduction, they would not bear the risk of the borrower redefaulting, as
the loan would then be FHA-insured and out of their pools. However, they
also noted that the program might reach only a limited number of
borrowers as it would only help borrowers who are current on existing
first-lien mortgage payments, underwater, and have mortgage payments
that could be reduced to 31 percent of income with a loan-to-value ratio
for the new loan no greater than 97.75 percent of the appraised value of
the home. Treasury has stated that FHA will publish quarterly data on
numbers of loans refinanced in this way, including average percentages for
loans that are written down and amounts of principal that are reduced.
However, Treasury has not yet specified what servicers will be required to
report for borrowers considered for the program, including those
considered for, but not offered, the refinance. Also, though Treasury has
designated up to $14 billion for this program, it has not specified how
these funds will be used or the number of borrowers likely to be helped by
this program.
Finally, Treasury has designated $2.1 billion in HAMP funds for the HFA
Hardest-Hit Fund, providing 10 states with the opportunity to design
programs to prevent foreclosure and improve housing market stability,
potentially including programs to address negative equity. As of May 11,
2010, Treasury had not yet approved any programs under this fund, so the
extent to which the programs will address negative equity remains to be
seen. The first five states were required to submit proposals on April 16,
2010, and according to Treasury, it is evaluating them to determine
whether they meet the act’s requirements and support its goals of
preserving homeownership and protecting housing market stability.
However, according to initial proposals, some program efforts may require
significant implementation periods. For example, one state reported that

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some of its program features might not be available until 5 months after
Treasury approved the program. To promote transparency, each state HFA
will be required to establish monitoring mechanisms and to implement a
system of internal controls that minimize the risk of fraud, mitigate
conflicts of interest, and maximize operational efficiency and
effectiveness. In addition, HFAs will report data to Treasury on a periodic
basis, including the metrics that are used to measure program
effectiveness against stated objectives. According to Treasury, all program
designs will be posted online, along with metrics measuring performance
of each HFA program. Treasury has stated that the principal reduction
program under HAMP, the FHA refinance program, and the HFA HardestHit Fund will be the primary efforts to address the challenge of negative
equity, and no new programs are expected.

Treasury Has Not Fully
Implemented Measures to
Limit Redefault

Limited information is available on redefaults on permanent modifications
to date, largely because few trials have become permanent. Treasury’s
expectations of the number of redefaults may be changing, although
Treasury has not specified the number of successful permanent HAMP
modifications it expects. Through the end of May 2010, 6,233 of the 346,816
permanent modifications had redefaulted and 124 loans had been paid off.
Treasury has begun to publish the debt levels of those receiving
permanent HAMP modifications. As we have seen, as of the end of May
2010, these borrowers had a median total debt-to-income ratio of roughly
64 percent after the HAMP modification. 33 In April 2010, the Congressional
Oversight Panel noted that with such high debt levels, a small disruption in
income or increase in expenses could result in many redefaults. 34 Treasury
said that it would examine redefault rates after borrowers had been in
HAMP permanent modifications for longer than 3 months.
As we reported in July 2009, the redefault rates Treasury anticipated at the
inception of HAMP were consistent with the Office of the Comptroller of
the Currency’s (OCC) and the Office of Thrift Supervision’s (OTS) analyses
of loan modifications, as well as with the Federal Deposit Insurance
Corporation’s estimates for the IndyMac loan modification program. 35 At

33

According to Treasury, the information is determined at the time of the HAMP
application.

34

Congressional Oversight Panel, April 2010.

35

GAO-09-837.

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the time, OCC and OTS reported that about 52 percent of modifications
redefaulted after 12 months, and IndyMac estimated a redefault rate of 40
percent. However, more recently Treasury officials told us that the
redefault rate could be higher for a typical HAMP modification, noting that
borrowers entering the HAMP program to date had low credit scores and
high loan-to-value ratios relative to those in other modification programs,
further increasing the risk of redefault. As noted, Treasury has not publicly
disclosed its redefault estimates or the number of successful permanent
modifications it expects.
In December 2008, we noted that limiting the likelihood of redefault would
be a significant challenge as Treasury began its efforts to establish a loan
modification program, and Treasury continues to struggle with this
challenge. 36 As we pointed out, Treasury’s primary effort to limit redefaults
under the HAMP first-lien program was to require that borrowers with
high total debt agree to obtain counseling. 37 However, it is unclear how
many borrowers have actually received this counseling, and Treasury does
not plan either to monitor whether borrowers actually obtain counseling
or to assess the requirement’s effectiveness in limiting redefaults.
According to Fannie Mae, the HOPE Hotline had received 104,253 calls
about this counseling through April 4, 2010, but Fannie Mae did not track
whether these borrowers actually obtained counseling. However, the best
available information shows that few borrowers have obtained such
counseling to date. Specifically, according to NeighborWorks, whose
National Foreclosure Mitigation Counseling network consists of roughly
1,700 entities that must be either HUD-approved counseling agencies or
state housing finance agencies, as of March 2010 it had only funded about
2,700 HAMP counseling sessions for borrowers with high total debt. 38 This
further underscores the importance of monitoring and assessing HAMP’s
counseling requirement, as we recommended in July 2009.
In March 2010, Treasury issued revised guidelines for the HAMP secondlien program, 2MP, which, to the extent that it reduces borrowers’ total
debt, could help limit redefaults on first-lien modifications. However,

36

GAO, Troubled Asset Relief Program: Status of Efforts to Address Defaults and
Foreclosures on Home Mortgages, GAO-09-231T (Washington, D.C.: December 2008).

37

GAO-09-837.

38

Although there are additional HUD-approved counseling agencies that do not receive
National Foreclosure Mitigation Counseling funds which may provide this kind of HAMP
counseling, HUD’s database does not track this information.

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although a second-lien modification program was initially announced at
the inception of HAMP, Treasury has yet to issue estimates of the number
of borrowers that the program could help. Treasury officials noted that
they would examine the redefault rates of borrowers receiving 2MP
modifications. As of June 2010, seven servicers have signed agreements to
modify or extinguish second liens under HAMP. However, Treasury will
not begin making incentive payments or tracking modifications under 2MP
until the fall of 2010. Until recently, servicers may not have been able to
identify whether borrowers of second liens in their portfolios have been
modified by the first-lien servicer if they do not also service the first lien.
First liens must be in HAMP trial periods before second liens begin trial
modifications, so in order to modify a second lien, a servicer must first
know whether the corresponding first lien has been modified. Treasury
developed a database to match first and second liens, which, according to
Treasury, was ready in May 2010.
Under 2MP, non-GSE servicers can receive up-front and pay-for-success
incentive payments, borrowers can receive pay-for-performance
incentives, and investors can receive payment reduction cost-share
incentives. When a borrower’s first lien is modified under HAMP, a
participating second-lien servicer must offer to modify the borrower’s
second lien. The modification steps for 2MP are similar to those for HAMP
first-lien modifications. As with first liens, servicers first capitalize accrued
interest and servicing advances, then reduce the interest rate, then extend
the term of the mortgage, and finally, forbear or forgive principal.
However, with second liens, the interest rate is generally reduced to 1
percent; the term is extended to match, at a minimum, the term of the
HAMP-modified first lien; and the principal forbearance or forgiveness is
expected to be proportional to the amount of principal forbearance or
reduction on the first lien. Servicers are not required to reduce principal
under 2MP, unless principal was forgiven on the first lien, but may offer
principal reduction and will receive additional incentives for doing so. The
incentive amount for reducing second liens varies depending on the
combined loan-to-value ratio, or the ratio of the first and second liens to
the value of the home.
The terms of the first-lien modification will be used to determine the terms
of the second-lien modification, and no additional evaluation is done to
determine eligibility for 2MP. The second-lien servicer relies on the
information the borrower provides for the first-lien loan modification. In
particular, the second-lien servicer is not required to perform an additional
NPV model of the related second-lien mortgage, since it can be reasonably
concluded that the combined modifications will result in a positive NPV

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outcome if the first lien was NPV positive. According to Treasury, because
the HAMP-modified first-lien mortgage is delinquent or facing imminent
default, the servicer may reasonably conclude that the borrower is in
imminent danger of defaulting on the second lien. Further, Treasury has
stated that postforeclosure recoveries on second liens are likely to be
minimal if the first lien is delinquent or at risk of default, so it is
reasonable for servicers to conclude that modifications of second liens are
likely to result in higher expected cash flows than foreclosure.

Implementation of Other
HAMP-Funded
Homeowner Assistance
Programs Could Benefit
from Lessons Learned
from Initial HAMP Design
and Implementation
Challenges

While servicers were performing loan modifications prior to HAMP, HAMP
is a new, complex, and large-scale program that places a significant
amount of taxpayer dollars at risk. We have previously reported that
Treasury faced challenges in implementing first-lien modifications,
including finalizing program guidelines and establishing a comprehensive
system of internal controls. Since then, Treasury has announced several
new programs and program features. Going forward, in designing and
implementing the programs, Treasury could benefit from lessons learned
from the initial design and implementation of HAMP. In particular, it will
be important for Treasury to expeditiously develop and implement these
programs while also developing sufficient program planning and
implementation capacity, meaningful performance measures, and
appropriate risk assessments in accordance with standards for effective
program management. In its April 2010 report, the Congressional
Oversight Panel likewise noted that Treasury’s response has lagged behind
the pace of the crisis and underscored the need for Treasury to get its new
initiatives up and running quickly and to ensure program accountability. 39
We will continue to monitor Treasury’s implementation and management
of HAMP-funded programs as part of our ongoing oversight of TARP to
ensure that new programs are appropriately designed and operating as
intended.
•

Program planning and implementation capacity. In July 2009, we
recommended that Treasury finalize a comprehensive system of internal
control for HAMP. 40 According to GAO’s Standards for Internal Control in
the Federal Government, effective internal controls include activities to
ensure the appropriate planning and implementation of government

39

Congressional Oversight Panel, April 2010.

40

GAO-09-837.

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programs. 41 Effective program planning includes having complete policies,
guidelines, and procedures in place prior to program implementation. As
we noted in March 2010, servicers told us that they faced significant
challenges implementing HAMP first-lien modifications because of
numerous changes to program guidance. For example, Treasury’s new
requirement that servicers evaluate borrowers for trial modifications using
verified rather than stated income will likely mean that some servicers will
need to alter their policies and processes, as well as retrain staff. Treasury
officials told us that it did not anticipate any new programs or significant
changes to HAMP going forward. Nonetheless, to avoid potential
implementation challenges with the newly announced programs Treasury
must balance the need to fully establish guidelines and reporting
requirements in advance of implementation by servicers while
implementing these programs as quickly as possible.
In addition, GAO’s Internal Control Management and Evaluation Tool,
which is based on GAO’s Standards for Internal Control in the Federal
Government, states that program managers must identify and define tasks
required to accomplish particular jobs and fill all necessary positions. 42 In
July 2009, we recommended that Treasury place a high priority on fully
staffing vacancies in the Homeownership Preservation Office (HPO) and
evaluating staffing levels and competencies. However, Treasury has
reduced staffing levels in HPO from 36 to 29 full-time positions without
formally assessing staffing levels or determining whether HPO staff have
the necessary skills to govern the program effectively. Treasury officials
told us that it was in the process of approving two additional positions for
administering the HFA Hardest-Hit Fund. In addition, they noted that the
responsibilities of the policy development staff in HPO would be largely
concluded after the final policy documents were issued, and these staff
would then be able to support program implementation. However, as of
May 14, 2010, Treasury still had not conducted a workforce assessment of
HPO, despite the office’s additional administrative responsibilities for the
recently announced FHA refinancing program, and ongoing HAMP
implementation, including first- and second-lien modifications, HAFA,
principal reductions, and forbearance for unemployed borrowers. We
noted in July 2009 that having enough staff with appropriate skills was
essential to governing HAMP effectively, and we continue to believe that it

41

GAO/AIMD-00-21.3.1.

42

GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington,
D.C.: August 2001).

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will be an important factor in Treasury’s ability to design and implement
the new HAMP-funded programs both quickly and effectively.
According to Treasury, its financial agents—Fannie Mae and MHA-C—are
developing a two-stage approach to assessing the capacity and readiness
of the top 25 HAMP servicers to implement the recently announced
programs. First, servicers will conduct a self-assessment of their readiness
using a HAMP checklist. According to Treasury, the self-assessment will
be provided to Fannie Mae for review, and Fannie Mae will provide further
training, additional guidance, and other support as needed. Treasury
officials told us that the second stage would involve on-site walk-throughs
conducted by MHA-C that will consist of discussions with management,
reviews of documentation such as project plans and testing results, and an
end-to-end walk-through of processes. Treasury officials told us that as of
the end of April 2010, 21 servicers had been sent a self-assessment on
capacity to implement HAFA, and that as of May 2010 on-site readiness
reviews for HAFA and 2MP had begun. However, Treasury has not
specified a time frame for the completion of either of the two stages of
readiness assessment for the other recently announced HAMP-funded
programs.
•

Meaningful performance measures. We reported in July 2009 that
Treasury must establish specific and relevant performance measures that
will enable it to evaluate the program’s success against stated goals in
order to hold itself and servicers accountable for these TARP-funded
programs. As noted in GPRA, meaningful and useful performance
measures should focus on program outcomes and provide a basis for
comparing actual program results with performance goals. 43 However,
Treasury did not develop performance measures before implementing the
first-lien modifications. According to Treasury, revised performance
measures were drafted in March 2010, a year after program
implementation. Performance measures include process measures such as
the number of servicers participating in the program, as well as outcome
measures such as average debt-to-income ratios (pre- and
postmodification) and redefault rates. Treasury had not yet developed
expected performance measures for 2MP, or the recently announced
principal reduction, forbearance for unemployed borrowers, or FHA
refinance programs as of May 14, 2010.

43

Government Performance Results Act of 1993, supra.

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To ensure clear standards for accountability for the newly announced
programs, Treasury will need to establish specific outcomes-based
performance measures at the outset of the programs. For example, to
assess the success of the HAMP principal reduction and FHA refinance
programs, Treasury will need to develop measures and goals to assess the
extent to which these programs are helping borrowers with negative
equity and limiting foreclosures among this population—Treasury’s stated
goals for the program. Similarly, early development of meaningful
performance measures and goals could help Treasury evaluate the extent
to which the 3-month forbearance program is helping unemployed
borrowers avoid foreclosure. Such measures could be used to determine
whether program parameters, including the amount of time allowed for
borrowers to find new employment, are appropriate and sufficient for
ensuring program success. As noted by both the Congressional Oversight
Panel and SIGTARP, it will be imperative for Treasury to clearly define
performance measures for HAMP to ensure program accountability. 44
Furthermore, Treasury has yet to develop benchmarks, or goals, for
specific performance measures. According to Treasury, draft first-lien
performance measures include metrics such as conversion and redefault
rates. But in the absence of predefined goals to indicate what Treasury
considers acceptable conversion and redefault rates, assessing the results
of these measures will be difficult. Likewise, as Treasury develops
performance measures for the recently announced HAMP-funded
programs, it must also establish benchmarks for them.
•

Appropriate risk assessments. Also in our July 2009 report, we noted
that while some processes and internal controls had been developed
during the early stages of HAMP’s implementation, many more controls
needed to be finalized as the program progressed to ensure that taxpayer
dollars were safeguarded, program objectives achieved, and program
requirements met. The adequacy of Treasury’s internal controls for HAMP
continues to be an area of concern as Treasury refines the first-lien
program and adds new HAMP programs. According to GAO’s Standards
for Internal Control in the Federal Government, there are five key
components or standards for effective internal control: (1) the control
environment, (2) risk assessment, (3) control activities, (4) information
and communications, and (5) monitoring. 45 The internal control standards

44

Congressional Oversight Panel, April 2010 and Special Inspector General for TARP, March
2010.
45

GAO/AIMD-00-21.3.1.

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state that agencies must identify the risks that could impede the success of
the newly announced programs and determine appropriate methods of
mitigating these risks. After risks have been identified, the agency should
undertake a thorough and complete analysis of the possible effects of the
risks that includes an assessment of how likely the risks are to materialize.
Finally, agencies should determine how best to manage or mitigate risk
and what specific actions they should take.
Treasury, in conjunction with Fannie Mae as the HAMP program
administrator, has developed risk control matrixes that identify various
risks associated with the first-lien modification process, such as potential
inaccuracies in accruals of incentive payments or data reporting, and the
controls they have developed to mitigate the identified risk. However,
other programmatic risks may exist that Treasury has not addressed. For
example, as noted above, Treasury requires that borrowers demonstrate a
hardship to qualify for HAMP but does not require servicers to verify the
hardship. For example, if the borrower indicates that the household has
experienced a decrease in income, the servicer is not required to obtain
documentation on past income to compare to current income. As a result,
taxpayer funds may be used to support modifications of borrowers who
have not in fact experienced a hardship. Furthermore, in December 2008
we noted that one of the key challenges for loan modification programs
was mitigating the risk of moral hazard—the possibility that borrowers
might choose to default when they otherwise would not in order to benefit
from the loan modification. 46 Requiring borrowers to demonstrate
hardship is one means of mitigating this risk, but by not requiring servicers
to verify the hardship, Treasury has not fully realized the potential benefits
of this control.
Our prior work looking at the implementation of the first-lien program
underscores the importance of fully identifying and assessing the potential
risks associated with the newly announced HAMP-funded homeowner
assistance efforts. Further, Treasury needs to develop appropriate controls
to mitigate those risks prior to the implementation date for the newly
announced HAMP programs. For example, moral hazard is of particular
concern for the programs that include principal reduction. Treasury has
built some features into HAMP to manage the risk of moral hazard, such as
requiring a positive NPV model in order to have principal reduced,
something that borrowers cannot easily calculate in advance. Further, the

46

GAO-09-231T.

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principal reduction is initially treated as forbearance and forgiven in three
equal steps over 3 years as long as the homeowner remains current on
payments. Under the FHA refinance program, borrowers must be current
on their mortgage payments to qualify, eliminating the risk that they will
default on their mortgages when they otherwise would not in order to
qualify for this program. However, the issue of moral hazard is one that
will require Treasury’s continued attention to ensure that the safeguards
that are put in place sufficiently limit this risk. The adequacy of Treasury’s
risk assessments and control activities for the newly announced HAMPfunded programs is an area that we plan to monitor and report on as part
of our ongoing oversight of Treasury’s use of TARP funds to preserve
homeownership and protect property values.

Conclusions

Treasury’s HAMP program is part of an unprecedented response to a
particularly difficult time in our nation’s mortgage markets. The
Emergency Economic Stabilization Act called for Treasury to, among
other things, preserve homeownership and protect home values, and
HAMP continues to be Treasury’s cornerstone effort for doing this.
However, more than a year after Treasury’s initial announcement of HAMP
and the program’s goal of bringing consistency to foreclosure mitigation,
servicers continue to treat borrowers seeking to avoid foreclosures
inconsistently in part because of a lack of specific guidelines from
Treasury. In particular, Treasury did not specify requirements for soliciting
potentially eligible borrowers for HAMP during the first year of the
program, even though outreach is important in the early phases of
program implementation. While Treasury has recently issued more
specific requirements on communicating with borrowers, it is continuing
to finalize measures of servicer performance in this area. In addition, while
Treasury’s stated goals are to standardize the loan modification process
and reach borrowers before they are delinquent on their loans, Treasury’s
lack of guidelines on how servicers should determine whether borrowers
who are current in their payments but may be in imminent danger of
default has led to significant differences in how servicers are evaluating
these borrowers for HAMP. By specifying clear and specific guidelines,
such as those implemented by the GSEs for their HAMP modifications,
Treasury could better ensure that similarly situated borrowers receive
equitable treatment under HAMP. Furthermore, Treasury has not fully
specified parameters for servicers’ internal quality assurance programs for
HAMP and therefore is not maximizing the potential for servicers’ quality
assurance procedures to ensure equitable treatment of borrowers. With
greater specificity from Treasury on how to categorize loans for sampling
and what servicers should be evaluating in their reviews, servicers would

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be more likely to have robust HAMP quality assurance programs. Finally,
although Treasury drafted a policy that established consequences for
servicer noncompliance with HAMP requirements in October 2009, as of
May 2010 it had not yet finalized the policy. As a result, Treasury lacks
transparency and risks inconsistency in how it enforces HAMP servicer
requirements.
Treasury requires servicers to have procedures and systems in place to
respond to HAMP complaints and utilizes the HOPE Hotline to escalate
borrowers’ concerns about servicers’ handling of HAMP applications and
potentially incorrect denials. However, because Treasury has not specified
requirements on the types of complaints that servicers should track, some
servicers are tracking only certain types of complaints such as those
addressed to a company executive. Without consistent tracking of HAMP
complaints, Treasury cannot determine with certainty whether servicers
are ensuring fair and timely resolutions of HAMP complaints. Treasury has
set up the HOPE Hotline escalation process as the primary means for
borrowers to raise concerns about their servicer’s performance on the
HAMP loan modification request and potentially incorrect denials. But
whether this is an effective mechanism to resolve such concerns remains
unclear because neither MHA Escalation Team counselors, their quality
assurance reviewers, nor HAMP Solution Center staff independently
review borrowers’ applications or loan files. As a result, discretion over
how to resolve borrowers’ concerns about potentially incorrect HAMP
denials largely remains with the servicers. Therefore, Treasury needs to
monitor the effectiveness of this escalation mechanism, particularly to
resolve potentially incorrect denials, and make improvements to this
mechanism or replace it as appropriate. In addition, Treasury has not
taken steps to specifically inform borrowers that the hotline can be used
to escalate concerns about servicers’ handling of HAMP applications and
potentially incorrect denials. As a result, borrowers facing foreclosure
who have been told by their servicers that they do not qualify for a HAMP
loan modification may feel that they cannot challenge the servicer’s
determination and may lose their homes to foreclosures that might have
been prevented.
As we noted in our March 2010 testimony, Treasury faces several
challenges in implementing HAMP going forward, including converting
trial modifications to permanent modifications, addressing the growing
number of foreclosures among borrowers with negative equity, limiting
redefaults among borrowers who receive HAMP modifications, and
ensuring adequate program stability and management. While Treasury has
taken some steps toward addressing these challenges, the multitude of

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problems facing U.S. mortgage markets call for swift and deliberate action,
and it remains to be seen how effective Treasury’s efforts will be. For
example, to address the challenge of converting trial modifications to
permanent modifications, Treasury launched a conversion campaign,
streamlined required documentation, and switched to verified income
documentation to start a trial. In addition, in March 2010 Treasury
announced several potentially substantial new HAMP-funded efforts, but it
did not say how many borrowers these programs were intended to reach
or discuss the specifics of these programs. In particular, Treasury
announced a principal reduction program under HAMP that could help
borrowers with negative equity. However, Treasury has stated that
principal reduction will be voluntary for servicers and will need to ensure
that future public reporting of this program ensures program transparency
and addresses potential questions about whether all borrowers are being
treated fairly.
In our July 2009 report, we made a number of recommendations to
improve HAMP’s effectiveness, transparency, and accountability. For
example, we recommended that Treasury consider methods of monitoring
whether borrowers who receive HAMP modifications and continue to have
high total household debt (more than 55 percent of their income) obtain
the required HUD-approved housing counseling. While Treasury has told
us that monitoring borrower compliance with the counseling requirement
would be too burdensome, we continue to believe that it is important that
Treasury determine whether consumers are actually receiving counseling
and whether the counseling requirement is having its intended effect of
limiting redefaults. In addition, we recommended that Treasury place a
high priority on fully staffing HPO and noted that having enough staff with
appropriate skills was essential to governing HAMP effectively. However,
Treasury has since reduced the number of HPO staff without formally
assessing staffing needs. We believe that having sufficient staff is critical
to Treasury’s ability to design and implement HAMP-funded programs
both quickly and effectively. We also recommended that Treasury finalize
a comprehensive system of internal controls for HAMP that will continue
to be important as Treasury implements new HAMP-funded programs.
Finally, as Treasury continues with first-lien modifications, and
implements 2MP, HAFA, and the newly announced programs, it will be
important to adhere to standards for effective program management and
to establish sufficient program planning and implementation capacity,
meaningful performance measures, and appropriate risk assessments. As
we, the Congressional Oversight Panel, and SIGTARP have previously
noted, establishing key performance metrics and reporting on individual

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servicers’ performance with respect to those metrics are critical to the
program’s transparency and accountability. Additionally, without
preestablished performance measures and goals, Treasury will not be able
to effectively assess the outcomes of the newly announced programs.
Given the magnitude of the investment of public funds in HAMP, it will be
imperative that Treasury take the steps needed to expeditiously implement
a prudent design for the remaining HAMP-funded programs. We will
continue to monitor Treasury’s implementation and management of
HAMP-funded programs as part of our ongoing oversight of TARP to
ensure that such programs are appropriately designed and operating as
intended.

Recommendations for
Executive Action

As part of its efforts to continue improving the transparency and
accountability of HAMP, we recommend that the Secretary of the Treasury
take actions to expeditiously:

•

establish clear and specific criteria for determining whether a borrower is
in imminent default to ensure greater consistency across servicers;

•

develop additional guidance for servicers on their quality assurance
programs for HAMP, including greater specificity on how to categorize
loans for sampling and what servicers should be evaluating in their
reviews;

•

specify which complaints servicers should track to ensure consistency and
to facilitate program oversight and compliance;

•

more clearly inform borrowers that the HOPE Hotline may also be used if
they are having difficulty with their HAMP application or servicer or feel
that they have been incorrectly denied HAMP, monitor the effectiveness of
the HOPE Hotline as an escalation process for handling borrower
concerns about potentially incorrect HAMP denials, and develop an
improved escalation mechanism if the HOPE Hotline is not sufficiently
effective;

•

finalize and issue consequences for servicer noncompliance with HAMP
requirements as soon as possible;

•

report activity under the principal reduction program, including the extent
to which servicers determined that principal reduction was beneficial to
investors but did not offer it, to ensure transparency in the implementation
of this program feature across servicers;

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•

•

Agency Comments
and Our Evaluation

finalize and implement benchmarks for performance measures under the
first-lien modification program, as well as develop measures and
benchmarks for the recently announced HAMP-funded homeowner
assistance programs; and
implement a prudent design for remaining HAMP-funded programs.

We provided a draft of this report to Treasury for its review and comment.
We received written comments from the Assistant Secretary for Financial
Stability that are reprinted in appendix III. We also received technical
comments from Treasury that we incorporated into the report as
appropriate. In its written comments, Treasury stated that it would review
our final report and provide Congress with a detailed description of the
actions that Treasury had taken and intended to take regarding the
recommendations in the report. Treasury also stated that while GAO notes
the progress Treasury has made in implementing HAMP, it believed that
the draft report did not sufficiently take into the account the scope and
complexity of the challenges Treasury faced when it developed and
implemented a modification initiative, the scale of which had never been
previously attempted. We acknowledge that the HAMP program is part of
an unprecedented response to a particularly difficult time in our nation’s
mortgage markets. As noted by Treasury when it first announced the
HAMP framework in February 2009, the deep contraction in the economy
and the housing market had devastating consequences for homeowners
and communities throughout the country. However, more than a year after
Treasury first announced HAMP, the number of permanent modifications
has been limited and key HAMP program components have not been fully
implemented. Treasury noted in its written comments that the servicing
industry did not have the capacity or infrastructure needed to implement a
national loan modification program such as HAMP. This issue of servicer
capacity to successfully implement HAMP was one that we raised in our
July 2009 report as needing Treasury’s attention and remains a concern as
Treasury implements the additional programs and components it has
announced to supplement the HAMP first-lien modification program.
While Treasury has taken some steps to address the challenges we and
others have previously identified, the continuing problems in the U.S.
mortgage markets call for swift and deliberate action. Given the challenges
involved and the magnitude of public funds invested—up to $50 billion in
TARP funds and $25 billion in GSE funds—it remains to be seen how
effective Treasury’s efforts will be. As part of our ongoing monitoring of
Treasury’s implementation of TARP, we will continue to monitor

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GAO-10-634 HAMP Implementation Status

Treasury’s progress in implementing these and other planned initiatives in
future reports.

We are sending copies of this report to the Congressional Oversight Panel,
Financial Stability Oversight Board, Special Inspector General for TARP,
interested congressional committees and members, Treasury, the federal
banking regulators, and others. This report is also available at no charge
on the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact
Richard J. Hillman at (202) 512-8678 or hillmanr@gao.gov, Thomas J.
McCool at (202) 512-2642 or mccoolt@gao.gov, or Mathew J. Scirè at (202)
512-8678 or sciremj@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in appendix IV.

Gene L. Dodaro
Acting Comptroller General of the United States

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GAO-10-634 HAMP Implementation Status

List of Committees
The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United States Senate
The Honorable Christopher J. Dodd
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate
The Honorable Kent Conrad
Chairman
The Honorable Judd Gregg
Ranking Member
Committee on the Budget
United States Senate
The Honorable Max Baucus
Chairman
The Honorable Charles E. Grassley
Ranking Member
Committee on Finance
United States Senate
The Honorable David R. Obey
Chairman
The Honorable Jerry Lewis
Ranking Member
Committee on Appropriations
House of Representatives
The Honorable John M. Spratt, Jr.
Chairman
The Honorable Paul Ryan
Ranking Member
Committee on the Budget
House of Representatives

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The Honorable Barney Frank
Chairman
The Honorable Spencer Bachus
Ranking Member
Committee on Financial Services
House of Representatives
The Honorable Sander M. Levin
Acting Chairman
The Honorable Dave Camp
Ranking Member
Committee on Ways and Means
House of Representatives

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GAO-10-634 HAMP Implementation Status

Appendix I: Scope and Methodology

Appendix I: Scope and Methodology

To examine servicers’ treatment of borrowers under the Home Affordable
Modification Program (HAMP), between November 2009 and March 2010,
we spoke with and obtained information from 10 HAMP servicers of
various sizes that collectively represented 71 percent of the Troubled
Asset Relief Program (TARP) funds allocated to participating servicers,
visiting 6 of them. The six servicers we visited were: Aurora Loan Services,
LLC; Bank of America, NA; Carrington Mortgage Services, LLC; GMAC
Mortgage, Inc.; Ocwen Financial Corporation, Inc.; and Wells Fargo Bank,
NA. The four additional servicers we spoke with and obtained data from
were: CitiMortgage, Inc.; J.P. Morgan Chase Bank, NA; Saxon Mortgage
Services, Inc.; and Select Portfolio Servicing. For each of these 10
servicers, we reviewed their HAMP policies, procedures, and quality
assurance reports; and interviewed management and quality assurance
staff. We also requested and reviewed data about these servicers’
solicitations of borrowers for HAMP between when they began
participating in the program and December 31, 2009. We determined that
these data were reliable for the purposes of our report. In addition, for the
servicers we visited, we observed a sample of HAMP-related phone calls
between borrowers and their servicers. We also reviewed HAMP program
documentation issued by the Department of the Treasury (Treasury),
including the supplemental directives related to first-lien modifications
and servicer communications with borrowers, press releases detailing
aspects and goals of the program, and draft operational metrics. We
obtained and analyzed information from Treasury on servicers’ HAMP loan
modification activity. Our work focused on non-GSE HAMP activity using
TARP funds, but the information obtained from Treasury did not always
break out GSE and non-GSE activity. We also spoke with officials at
Treasury and its financial agents—Fannie Mae and Making Home
Affordable-Compliance—to understand their rationale for program
changes, what they were doing to ensure compliance with HAMP
guidelines, and their processes for resolving HAMP complaints. In
addition, we reviewed data on the content and resolution of these
complaints. To understand the characteristics of borrowers in the
program, we analyzed data from IR/2, the HAMP database managed by
Fannie Mae to track the status of HAMP modifications, and we determined
that these data were reliable for the purposes used in our report. To learn
more about the process for and resolution of HAMP-related complaints,
we spoke to the administrators of the HOPE Hotline and representatives
of NeighborWorks, a national nonprofit organization created by Congress
to provide foreclosure prevention and other community revitalization
assistance to the more than 230 community-based organizations in its
network. We also met with a trade association that represents both

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GAO-10-634 HAMP Implementation Status

Appendix I: Scope and Methodology

investors and servicers, and an organization representing a national
coalition of community investment organizations.
To examine actions Treasury has taken to address the challenges of (1)
converting trial modifications to permanent modifications, (2) addressing
potential foreclosures among borrowers with negative equity, (3) limiting
the likelihood of redefault among borrowers with permanent
modifications, and (4) ensuring program stability and effective program
management, we reviewed the program announcements of current and
upcoming HAMP-funded homeowner assistance programs to determine
the extent to which they address these challenges. We also spoke with
Treasury officials to understand the goals of these programs, and the steps
Treasury has taken to ensure program stability and adequate program
management in light of these programs. In addition, we requested and
reviewed data from Treasury and servicers relevant to each challenge.
Specifically, we requested information from the 10 HAMP servicers
described above on the number of borrowers who had been in trial
modifications for at least 3 months, as of December 31, 2009, and of these,
the number that had converted to permanent modifications. We also
reviewed Treasury reports on conversion rates and documentation related
to Treasury’s conversion campaign. To understand the extent to which
borrowers may be facing negative equity, we reviewed data from American
Core Logic for the first quarter of 2010. Finally, we reviewed the
Government Performance and Results Act and the Standards for Internal
Control in the Federal Government to determine the key elements needed
to ensure program stability and adequate program management. 1 We
coordinated our work with other oversight entities that TARP created—
the Congressional Oversight Panel, the Office of the Special Inspector
General for TARP, and the Financial Stability Oversight Board.

1
Government Performance and Results Act of 1993, Pub. L. No. 103-62, 107 Stat. 285 (1993),
and GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C.: November 1999).

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Appendix II: Treasury’s Actions in Response
to GAO’s July 2009 HAMP Recommendations

Appendix II: Treasury’s Actions in Response
to GAO’s July 2009 HAMP Recommendations

GAO recommendation

Treasury actions to date
According to Treasury, it considered options for monitoring what
Consider methods of monitoring whether borrowers with total •
proportion of borrowers is obtaining counseling, but determined
household debt of more than 55 percent of their income who
that it would be too burdensome to implement.
have been told that they must obtain housing counseling do
so, and assessing how this counseling affects the
•
Treasury does not plan to assess the effectiveness of counseling
performance of modified loans to see if the requirement is
in limiting redefaults because it believes that the benefits of
having its intended effect of limiting redefaults.
counseling on the performance of loan modifications is well
documented and the assessment of the benefits to HAMP
borrowers is not needed.
•
On July 31, 2009, Treasury announced detailed guidance on
Reevaluate the basis and design of the Home Price Decline
HPDP that included changes to the program’s design that,
Protection (HPDP) program to ensure that HAMP funds are
according to Treasury, improve the targeting of incentive
being used efficiently to maximize the number of borrowers
payments to mortgages that are at greater risk because of home
who are helped under HAMP and to maximize overall benefits
price declines.
of utilizing taxpayer dollars.
•
Treasury does not plan to limit HPDP incentives to modifications
that would otherwise not be made without the incentives, due to
concerns about potential manipulation of inputs by servicers to
maximize incentive payments and the additional burden of rerunning the net present value model for many loans.
•
According to Treasury, on a quarterly basis it is updating its
Institute a system to routinely review and update key
projections on the number of TARP-funded first-lien modifications
assumptions and projections about the housing market and
expected when it revises the amount of TARP funds allocated to
the behavior of mortgage-holders, borrowers, and servicers
each servicer under HAMP.
that underlie Treasury’s projection of the number of borrowers
whose loans are likely to be modified under HAMP and revise •
Treasury is gathering data on servicer performance in HAMP and
the projection as necessary in order to assess the program’s
housing market conditions in order to improve and build upon the
effectiveness and structure.
assumptions underlying its projections about mortgage market
behavior.
Place a high priority on fully staffing vacant positions in the
Homeownership Preservation Office (HPO)—including filling
the position of Chief Homeownership Preservation Officer with
a permanent placement—and evaluate HPO’s staffing levels
and competencies to determine whether they are sufficient
and appropriate to effectively fulfill its HAMP governance
responsibilities.

•

Expeditiously finalize a comprehensive system of internal
control over HAMP, including policies, procedures, and
guidance for program activities, to ensure that the interests of
both the government and taxpayer are protected and that the
program objectives and requirements are being met once loan
modifications and incentive payments begin.

•

Expeditiously develop a means of systematically assessing
servicers’ capacity to meet program requirements during
program admission so that Treasury can understand and
address any risks associated with individual servicers’ abilities
to fulfill program requirements, including those related to data
reporting and collection.

•

•
•

•

A permanent Chief Homeownership Preservation Officer was
hired on November 9, 2009.
According to Treasury, staffing levels for HPO have been revised
from 36 full-time equivalent positions to 29.
According to Treasury, as of April 2010, HPO had filled 27 of the
total of 29 full time positions.
According to Treasury, it will work with Fannie Mae and Freddie
Mac to build and refine the internal controls within these financial
agents’ operations as new programs are implemented.
Treasury expects to finalize a list of remedies for servicers not in
compliance with HAMP guidelines by June 2010.
According to Treasury, a servicer self-evaluation form, which
provides information on the servicer’s capacity to implement
HAMP, has been implemented beginning with servicers who
started signing Servicer Participation Agreements in December
2009.

Source: GAO and analysis of Treasury information.

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Appendix III: Comments from the Department
of the Treasury

Appendix III: Comments from the
Department of the Treasury

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GAO-10-634 HAMP Implementation Status

Appendix III: Comments from the Department
of the Treasury

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GAO-10-634 HAMP Implementation Status

Appendix III: Comments from the Department
of the Treasury

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GAO-10-634 HAMP Implementation Status

Appendix IV: GAO Contacts and Staff
Acknowledgments

Appendix IV: GAO Contacts and Staff
Acknowledgments
GAO Contacts

Mathew J. Scirè (202) 512-8678 or sciremj@gao.gov
Thomas J. McCool (202) 512-2642 or mccoolt@gao.gov
Richard Hillman (202) 512-8678 or hillmanr@gao.gov

Staff
Acknowledgments

In addition to the contacts named above, Lynda Downing, Harry Medina,
John Karikari (Lead Assistant Directors); Tania Calhoun; Emily Chalmers;
William Chatlos; Heather Latta; Rachel DeMarcus; Karine McClosky; Marc
Molino; Mary Osorno; Jared Sippel; Winnie Tsen; and Jim Vitarello made
important contributions to this report.

(250499)

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