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United States Government Accountability Office

GAO

Report to Congressional Committees

July 2009

TROUBLED ASSET
RELIEF PROGRAM
Treasury Actions
Needed to Make the
Home Affordable
Modification Program
More Transparent and
Accountable

GAO-09-837

July 2009

TROUBLED ASSET RELIEF PROGRAM
Accountability Integrity Reliability

Highlights
Highlights of GAO-09-837, a report to
congressional committees

Treasury Actions Needed to Make the Home
Affordable Modification Program More Transparent
and Accountable

Why GAO Did This Study

What GAO Found

GAO’s sixth report on the Troubled
Asset Relief Program (TARP)
focuses on the Department of the
Treasury’s (Treasury) efforts to
establish its Home Affordable
Modification Program (HAMP).
This 60-day report examines (1) the
design of HAMP’s program features
with respect to maximizing
assistance to struggling
homeowners, (2) the analytical
basis for Treasury’s estimate of the
number of loans that are likely to
be successfully modified using
TARP funds under HAMP, and (3)
the status of Treasury’s efforts to
implement operational procedures
and internal controls for HAMP.
For this work, GAO reviewed
documentation from Treasury and
its financial agents and met with
officials from Treasury, its financial
agents, and other organizations.

Under HAMP, Treasury will use up to $50 billion in TARP funds to (1) modify
the first-lien mortgages of homeowners in danger of foreclosure, (2)
encourage the modification of mortgages in areas experiencing serious
declines in property values, (3) reduce or pay off second-lien mortgages for
homeowners with loans modified under HAMP, (4) arrange deeds-in-lieu or
short sales as alternatives to foreclosure; and (5) provide incentive payments
to encourage refinancing under the HOPE for Homeowners program. The
first-lien mortgage modification effort is the largest and most developed part
of HAMP, and Treasury and its financial agents are establishing the
operational infrastructure for this effort. However, one of the requirements
under the first-lien program—that borrowers with high levels of household
debt agree to obtain counseling—may not fully meet Treasury’s goals.
Specifically, Treasury does not plan to systematically monitor whether
borrowers who are told they must obtain counseling actually receive it, in
part, because it does not wish to deny a loan modification to borrowers that
have demonstrated they are able to make modified payments. Also Treasury
does not plan to assess the effectiveness of its counseling requirement in
limiting redefaults. The other four HAMP subprograms had been announced
but were not fully designed or operational. Treasury announced the $10 billion
Home Price Decline Protection (HPDP) program, which is intended to
encourage investors to modify mortgages in areas experiencing steep declines
in home prices. But, Treasury officials told us that they had not yet developed
estimates of the number of modifications that would result from the HPDP,
and said that in some cases, the HPDP payments would go to some loan
modifications that would likely have been made without this incentive.
Because none of the expenditures under HPDP would be recouped, it is
crucial that Treasury ensure that funds are spent only when needed to
encourage modifications that would not be made without this incentive.

What GAO Recommends
GAO recommends that the
Secretary of the Treasury; (1)
consider methods for monitoring
compliance with and the
effectiveness of its counseling
requirement; (2) reevaluate the
basis and design for HPDP; (3)
regularly update assumptions and
projections underlying the
estimated number of borrowers
likely to be helped by HAMP; (4)
staff vacant positions within HPO,
and evaluate its staffing levels and
competencies; (5) finalize a
comprehensive system of internal
control over HAMP; and (6)
systematically assess servicer’s
capacity to meet HAMP’s
requirements during program
admission. Treasury stated it would
consider GAO’s recommendations
as it moved forward.
View GAO-09-837 or key components.
For more information, contact Mathew J.
Scirè at (202) 512-8678 or sciremj@gao.gov.

Treasury’s estimate of the number of borrowers who would likely be helped
under its HAMP loan modification program reflects uncertainty created by
data gaps and the need to make numerous assumptions, and this projection
may be overstated. In addition, Treasury has not specified its plans for
systematically updating key assumptions and calculations. Treasury
announced that up to 3 to 4 million borrowers who were at risk of default and
foreclosure could be offered a loan modification under HAMP. But Treasury’s
projection of a participation rate of 65 percent of the target group—borrowers
who were at least 60 days delinquent in their loans or in imminent danger of
default—which is based roughly on a 90 percent servicer representation rate
and a 70 percent borrower response rate, may be high. The loan modification
program most similar to HAMP—FDIC’s IndyMac Bank program—has a peak
borrower response rate of only 50 percent. Additionally, servicer participation
in HAMP has not yet reached the 90 percent coverage rate projected by
Treasury, and borrowers cannot participate unless their servicers do. Also,
not all homeowners offered a loan modification will remain current on their
modified mortgages—further reducing the number of homeowners that may
United States Government Accountability Office

Highlights of GAO-09-837 (continued)

avoid foreclosure through the HAMP program. Lastly, Treasury did not provide detailed information and
documentation essential to adequately support its assumptions. The lack of adequate documentation and specification
of the assumptions makes it difficult to assess the reliability of Treasury’s estimates and, going forward, may hinder
efforts to evaluate how well the program is meeting its objectives.
Treasury has taken a number of important steps toward implementing operational procedures and internal controls for
HAMP but has not finalized all of the associated processes and is not systematically evaluating servicers’ capacity
during program admission. Treasury officials have developed and continue to refine key operational procedures and
internal controls, including establishing an organizational structure for overseeing HAMP, delegating implementation
authorities and responsibilities to its financial agents, and drafting work flows for processes such as those associated
with the payment of incentives. As of July 20, 2009, about 180,000 borrowers have entered into trial modifications but
HAMP incentive payments will not be made until July 27 at the earliest—pending successful completion of the 90-day
trial periods (see timeline below of major HAMP events). While Treasury has delegated some administrative and
oversight responsibilities to its financial agents, such as program administration and compliance responsibilities, it has
retained authority for overall HAMP implementation, led by the Homeownership Preservation Office (HPO) with
support from other Treasury offices. However, HPO continues to have a large number of unfilled positions. Treasury
has also begun to develop performance measures for HAMP, but many of the specifics of these measures, such as how
success will be defined, have yet to be determined. In addition, Treasury and its financial agents do not have systematic
processes or controls in place to consistently evaluate the capacity of servicers to fulfill specific HAMP requirements
during the program admittance process. Yet concerns have been raised by Treasury, the Congressional Oversight Panel,
and federal banking regulators about servicers’ capacity to fulfill program requirements and implement HAMP. Because
servicers are not fully evaluated during the admittance process, Treasury is unable to adequately identify, assess, and
address any potential risks that may prevent them from fulfilling program requirements. But, unlike other TARP
programs, such as the Capital Purchase Program, HAMP expenditures—which are projected to be up to $50 billion—
are not investments that will be partially or fully repaid, but rather, expenditures that, once made, will not be recouped.
For this reason, a system of effective internal control over program expenditures is of critical importance.
Timeline of Major HAMP Events from February 18, 2009, through July 27, 2009

United States Government Accountability Office

Contents

Letter

1
Scope and Methodology
Background
Treasury Has Not Fully Developed All HAMP Subprograms, and the
Initial Design of At Least Two Aspects of HAMP Limits Its
Potential to Help Homeowners
Treasury’s Projection of the Number of Loans That Could Be
Modified under HAMP Was Based on Uncertainties in Key
Assumptions and May Be Overstated
Treasury Has Developed but Not Finalized the Oversight Structure
for HAMP, and Is Not Systematically Evaluating Servicers’
Capacity during Program Admission
Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

37
47
50
51

List of Servicers That Have Signed HAMP
Participation Agreements, as of July 14, 2009

55

Appendix II

Comments from the Department of the Treasury

56

Appendix III

Contacts and Staff Acknowledgments

59

Appendix I

Related GAO Products

2
5

11

29

60

Tables
Table 1: Projected Cost and Number of Borrowers Targeted for
Assistance Using TARP Funds under HAMP, as of July 14,
2009
Table 2: Summary of HAMP Payments Using TARP Funds on FirstLien Modifications

Page i

14
19

GAO-09-837 Troubled Asset Relief Program

Figures
Figure 1: Default and Foreclosure Inventory Rates through the
First Quarter of 2009
Figure 2: Foreclosure Inventory Rates by State, as of March 31,
2009
Figure 3: Timeline of Major HAMP Events from February 18, 2009,
through July 27, 2009
Figure 4: Rates of Home Foreclosure, Negative Equity, and
Unemployment by State
Figure 5: Treasury’s Projections of Homeowner Participation in
HAMP, Reflecting Uncertainties Due to Data Gaps and
Necessary Assumptions, 2009-2012

Page ii

5
6
12
27

35

GAO-09-837 Troubled Asset Relief Program

Abbreviations
COP
FDIC
FHA
FHFA
FSOB
GSE
HAMP
HERA
HPDP
HPO
HUD
LTV
MHA
NPV
OCC
OFS
OTS
SIGTARP
TARP
VA

Congressional Oversight Panel
Federal Deposit Insurance Corporation
Federal Housing Administration
Federal Housing Finance Agency
Financial Stability Oversight Board
government-sponsored enterprise
Home Affordable Modification Program
Housing and Economic Recovery Act of 2008
Home Price Decline Protection
Homeownership Preservation Office
Department of Housing and Urban Development
loan-to-value
Making Home Affordable
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
Department of Veterans Affairs

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Page iii

GAO-09-837 Troubled Asset Relief Program

United States Government Accountability Office
Washington, DC 20548

July 23, 2009
Congressional Committees
Dramatic increases in home mortgage defaults and foreclosures have
imposed significant costs on borrowers, lenders, mortgage investors and
neighborhoods; and have been a key contributor to the current financial
crisis. On October 3, 2008, the President signed into law the Emergency
Economic Stabilization Act (the act), which authorized the Department of
the Treasury (Treasury) to establish the $700 billion Troubled Asset Relief
Program (TARP). 1 Treasury’s initial focus in implementing TARP was to
attempt to stabilize the financial markets and increase lending to
businesses and consumers. However, the authorities granted to Treasury
under the act also are to be used to, among other things, preserve
homeownership and protect home values—two of the act’s stated
purposes—and to maximize assistance for homeowners with respect to
foreclosure mitigation efforts. On February 18, 2009, Treasury announced
a framework for a program that would, among other things, help at-risk
homeowners avoid potential foreclosure by using up to $50 billion of
TARP funds to reduce their monthly mortgage payments.
Under the Home Affordable Modification Program (HAMP), Treasury’s
Office of Financial Stability (OFS) will share the cost of reducing monthly
payments on first-lien mortgages with mortgage holders/investors and
provide financial incentives to servicers, borrowers, and mortgage
holders/investors for loans modified under the program. HAMP also
includes other subprograms, such as one that would provide incentives to
modify or pay off second-lien loans of borrowers whose first mortgages
were modified under HAMP. However, some observers have questioned
the number of homeowners that HAMP, as it is currently structured, will
help, and Treasury’s own estimates do not resolve this issue. Additionally,
we have noted in prior reports that developing a comprehensive system of
internal controls for TARP has been an ongoing challenge, in part because

1

Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201 et seq. The act
originally authorized Treasury to purchase or guarantee up to $700 billion in troubled
assets. 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.

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GAO-09-837 Troubled Asset Relief Program

of the rapid evolution of TARP and its activities, which includes HAMP. 2
As a result, Treasury runs the risk of implementing a homeownership
preservation program that does not yet have proper controls to protect
taxpayers’ interests and ensure that HAMP objectives are met.
The act requires that GAO report at least every 60 days on the activities
and performance of TARP. 3 This 60-day report (1) reviews the design of
HAMP’s program features with respect to maximizing assistance to
struggling homeowners, (2) examines the analytical basis for Treasury’s
estimate of the number of loans that are likely to be successfully modified
using TARP funds under HAMP, and (3) evaluates Treasury’s progress in
implementing operational procedures and internal controls for HAMP.

Scope and
Methodology

To review the design of HAMP’s first-lien modification features with
respect to maximizing assistance to struggling homeowners, we reviewed
the act and program guidance provided by Treasury on the HAMP Web site
and interviewed officials at Treasury and Fannie Mae. To describe the
steps Treasury has taken to implement the program and to discuss HAMP
features, we reviewed publicly available documents—including official
program guidelines—and discussed these with Treasury officials. Because
Treasury told us that features of the Federal Deposit Insurance
Corporation’s (FDIC) loan modification program at IndyMac Federal Bank
formed the basis for some of the HAMP features, we reviewed documents
provided by FDIC and discussed these with FDIC officials. We also
interviewed NeighborWorks officials to understand how its housing
counseling network has been providing counseling to HAMP borrowers
with high total household debt and its plans to track these borrowers. To
evaluate the initial framework of the Home Price Decline Protection
(HPDP) subprogram, we reviewed Treasury documents describing HPDP
and its methods for determining incentive payments and interviewed

2

See GAO, Troubled Asset Relief Program: Additional Actions Needed to Better Ensure
Integrity, Accountability, and Transparency, GAO-09-161 (Washington, D.C.: Dec. 2,
2008); Troubled Asset Relief Program: Status of Efforts to Address Transparency and
Accountability Issues, GAO-09-296 (Washington, D.C.: Jan. 30, 2009).
3

GAO-09-161; GAO-09-296; and GAO, Troubled Asset Relief Program: March 2009 Status of
Efforts to Address Transparency and Accountability Issues, GAO-09-504 (Washington,
D.C.: Mar. 31, 2009); Auto Industry: Summary of Government Efforts and Automakers’
Restructuring to Date, GAO-09-553 (Washington, D.C.: Apr. 23, 2009); and Troubled Asset
Relief Program: June 2009 Status of Efforts to Address Transparency and Accountability
Issues, GAO-09-658 (Washington, D.C.: June 17, 2009) for our past 60-day reports.

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GAO-09-837 Troubled Asset Relief Program

officials responsible for its design. To describe HAMP’s second-lien and
foreclosure alternatives subprograms, we reviewed publicly available
documents and discussed these proposed HAMP subprograms with
Treasury officials. To examine how Treasury’s HAMP helps homeowners
with negative equity—a factor that could have a major impact on
delinquencies and foreclosures, especially if home price declines
continue—we reviewed Treasury documents that described guidelines for
loans and borrowers eligible to participate in the program with particular
attention to negative equity and interviewed the officials. We also
observed a demonstration of the HAMP net present value (NPV) test
model by Fannie Mae and Federal Housing Finance Agency (FHFA) staff, a
model used by participating servicers to determine whether to modify a
loan. We also reviewed literature on factors likely to affect mortgage
delinquencies and home foreclosures and analyzed data on home
foreclosures, negative equity, and unemployment rates across states in the
United States from various sources, including the Mortgage Bankers
Association’s National Delinquency Survey data on home foreclosures,
First America CoreLogic’s data on negative equity, and the Department of
Labor’s Bureau of Labor Statistics data on unemployment rates.
To examine the analytical basis for Treasury’s estimate of the number of
loans that are likely to be successfully modified for at-risk borrowers using
TARP funds, we reviewed documents from Treasury that described the
loan characteristics of the mortgage market, Treasury’s guidelines for
loans and borrowers eligible to participate in the program, assumptions
about participation by homeowners and servicers, and calculations of
loans that were likely to be modified. These calculations used the NPV test
model developed by an interagency working group made up of officials
from FDIC, Fannie Mae, Freddie Mac, FHFA, and Treasury. We also
reviewed documentation from other federal agencies that were involved in
HAMP or that had experience with loan modifications—FDIC, Fannie Mae,
Freddie Mac, and FHFA. We observed a demonstration by Fannie Mae, the
program administrator, on the NPV test model using the HAMP Web site
designed for participating servicers. 4 We interviewed officials from
Treasury, FHFA, Fannie Mae, and Freddie Mac who were responsible for
the design of the loan modification program and the default and NPV
models that support the design and operations of the program. We also
consulted publications by private entities about loan characteristics of the

4

Administrative Website for Servicers, Home Affordable Modification Program,
https://www.hmpadmin.com/portal/index.html

Page 3

GAO-09-837 Troubled Asset Relief Program

mortgage market, including the Mortgage Bankers Association’s National
Delinquency Survey data on delinquencies and foreclosures and mortgage
market analyses by Credit Suisse.
To evaluate the status of Treasury’s efforts to implement operational
procedures and internal controls for HAMP, we reviewed the financial
agent agreements and the servicer participation agreements to understand
their roles and responsibilities. In addition, we reviewed documents from
these entities that outlined the organizational structure of HAMP and
described internal controls, including organizational charts, flow charts
depicting operational processes, narrative descriptions of risks and related
controls, and other support documentation. To determine the extent to
which Treasury and its financial agents had taken steps to insure that
servicers were prepared for and had the capacity to conduct HAMP loan
modifications at the time of program admittance, we reviewed a summary
of the results of the readiness reviews conducted, discussed the readiness
review process and the reviews done to date with Treasury officials, and
reviewed HAMP servicer registration procedures. We also interviewed
officials at Treasury, Fannie Mae, and Freddie Mac who were responsible
for designing the operational procedures and internal controls for HAMP.
To understand servicers’ capacity to fulfill data collection and reporting
requirements, we reviewed a summary of Treasury’s meeting with 13
servicers and the results of a survey of servicers on these HAMP
requirements. We also conducted interviews with participating servicers
who entered into HAMP participation agreements to discuss program
requirements. These servicers were Saxon Mortgage, Citi Mortgage, Home
Loan Services, Green Tree Servicing, Carrington Mortgage Services, and
Ocwen Servicing. We also reviewed the HAMP-related Web sites, press
releases, and reports published by the regulatory agencies, in part to
identify the data collection and reporting requirement guidelines that were
in place.
We conducted this performance audit from May 2009 through July 2009 in
San Francisco, California, 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.

Page 4

GAO-09-837 Troubled Asset Relief Program

Background

As shown in figure 1, national default and foreclosure rates have increased
dramatically between the third quarter of 2006 and the first quarter of
2009, rising to their highest level in 30 years. Loans in nonpayment status
for 90 days or more are commonly considered to be in default, and for
these loans, foreclosure can be a real possibility. Foreclosure is a legal
process initiated by a mortgage lender against a homeowner after a certain
number of payments have been missed. The foreclosure process has
several possible outcomes, but generally means that the homeowner loses
the property, typically because it is sold to repay the outstanding debt or
repossessed by the lender. The foreclosure process is usually governed by
state law and varies widely by state. Foreclosure processes generally fall
into one of two categories—judicial foreclosures, which proceed through
courts, and nonjudicial foreclosures, which do not involve court
proceedings. The legal fees, foregone interest, property taxes, repayment
of former homeowners’ delinquent obligations, and selling expenses can
make foreclosure extremely costly to lenders.

Figure 1: Default and Foreclosure Inventory Rates through the First Quarter of 2009
Q1 1979 – Q1 2009

Q4 2005 – Q1 2009

Percentage

Percentage
4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

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
(Q 09
1)

4.0

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
'05 '06
'07
'08
'09

Default
Foreclosure starts
Foreclosure inventory
Periods of economic recession
Source: GAO analysis of MBA data, National Bureau of Economic Research.

Page 5

GAO-09-837 Troubled Asset Relief Program

The increase in foreclosures has affected homeowners in all states, but
some states have been affected more than others. As illustrated in figure 2,
the Sunbelt states—Arizona, California, Florida, and Nevada—have
particularly large inventories of homes in foreclosure.
Figure 2: Foreclosure Inventory Rates by State, as of March 31, 2009
Percentage
12

10
8

6

4

2

Flo
ri
Ne da
va
Ar da
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is
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od Main
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e
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org
i
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ec aii
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is ho
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lva o
nia
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ah
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lah a
om
a
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om
ing

0

Source: GAO analysis of Mortgage Bankers Association data.

Options to Avoid
Foreclosure

Defaults and foreclosures have imposed significant costs on borrowers,
lenders, and mortgage investors and have contributed to increased
volatility in the U.S. and global financial markets. Options to avoid
foreclosure include forbearance plans, short sales, deeds-in-lieu of
foreclosure, and loan modifications. With forbearance plans and loan
modifications, the borrower retains ownership of the property. With short
sales and deeds-in-lieu, the borrower does not.
•

With a forbearance plan, a lender agrees not to exercise the legal right of
foreclosure if the borrower agrees to a payment plan that will resolve the
borrower’s deficiency for a set period of time. The plan may incorporate
features such as reduced or suspended payments that allow the
homeowner to recover from a serious event, such as illness, that has
caused the homeowner to miss several loan payments. Usually, the lender

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GAO-09-837 Troubled Asset Relief Program

will require the borrower to make up the difference at a later time.
•

•

In a short sale, a house is sold through a real estate agent or other means
rather than through foreclosure, even if the proceeds of the sale are less
than what the owner still owes on the mortgage. Lenders may agree to
accept the proceeds of a short sale and may waive any deficiency.

•

Role of the Secondary
Market in Foreclosures

Loan modification involves making temporary or permanent changes to
the terms of the existing loan agreement. There are several ways to make
these changes, including allowing the borrower to skip payments and
adding the skipped payments to the amount of the loan (capitalizing
arrearages), reducing the interest rate charged, extending the loan term,
and reducing the total amount of the loan (forgiving principal).

Under a deed-in-lieu of foreclosure, the homeowner voluntarily conveys
the interest in the home to the lender to satisfy a loan that is in default as
an alternative to foreclosure proceedings. Lenders may opt to accept
ownership of the property in place of the money owed on the mortgage
and may waive any deficiency. Deeds-in-lieu will generally not be accepted
by a mortgage holder if there are other liens on the property, as
foreclosure may be necessary for the mortgage holder to gain clear title.
As we noted in December 2008, any program that aims to modify loans or
present other alternatives to foreclosure faces challenges, particularly
when the loans have been bundled into securities that are sold to
investors. 5 Most mortgages are bundled into residential mortgage-backed
securities that are bought and sold by investors. These securities may be
issued by government-sponsored enterprises (GSE), such as Fannie Mae
and Freddie Mac, and private companies. 6 Privately issued mortgagebacked securities, known as private-label securities, are typically backed
by mortgage loans that do not conform to GSE purchase requirements
because they are too large or do not meet GSE underwriting criteria. The
originator/lender of a pool of securitized assets usually continues to

5

GAO, Troubled Asset Relief Program: Status of Efforts to Address Defaults and
Foreclosures on Home Mortgages, GAO-09-231T (Washington D.C.: Dec. 4, 2008).

6

The GSEs—Fannie Mae and Freddie Mac—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.

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GAO-09-837 Troubled Asset Relief Program

service the securitized portfolio, including providing customer service and
payment processing for borrowers and collection actions, in accordance
with the pooling and servicing agreement. The decision to modify loans
held in a mortgage-backed security typically resides with the servicer.
However, one of the challenges that servicers face in modifying these
loans is making transparent to investors the analysis supporting the value
of modification over foreclosure. Additionally, the pooling and servicing
agreements may place some restrictions on the servicer’s ability to make
large-scale modifications of the underlying mortgages without the
investors’ approval. 7 In addition, many homeowners may have second
liens on their homes that may be controlled by a different loan servicer,
potentially complicating loan-modification efforts.

Treasury’s Making Home
Affordable Program

As we reported in December 2008, Treasury established an Office of
Homeownership Preservation within OFS to address the issues of
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. First, one
of the efforts—the Home Affordable Refinance Program—would provide a
refinancing vehicle for homeowners that had (1) Fannie Mae and Freddie
Mac held or guaranteed mortgages, (2) interest rates above the prevailing
market rates, and (3) loan-to-value ratios between 80 and 105. 9 Treasury
estimated the number of borrowers in that current loan-to-value range for
whom a refinanced mortgage would be potentially beneficial, based on the
prevailing interest rates in February, at 4 to 5 million homeowners. No
TARP funds would be used to refinance these loans. Second, Treasury
would increase its funding commitment in preferred stock purchase
agreements to Fannie Mae and Freddie Mac, authorized by the Housing
and Economic Recovery Act (HERA) of 2008, from $100 billion each to
$200 billion each to help support low mortgage rates by strengthening

7
A pooling and servicing agreement is a contractual agreement for the pooling (i.e.,
collection) of a large amount of individual mortgage loans and the servicing of those loans
by a servicer. A mortgage pooling and servicing agreement describes how pooled loans will
be serviced and dictates how proceeds and losses will be distributed to mortgage
holders/investors, and may set forth loss-mitigation options available to the servicer and
the extent of the servicer’s authority to use these options.
8

GAO-09-161.

9

On July 1, 2009, the Department of Housing and Urban Development (HUD) announced
that the maximum loan-to-value rate had been increased to 125 percent.

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GAO-09-837 Troubled Asset Relief Program

confidence in the two GSEs. Treasury indicated that the increased funding
commitment would be made under HERA and would not require the use of
TARP funds. The third effort, HAMP, is designed to commit $75 billion of
GSE and TARP funds to offer relief through loan modification for up to 3
to 4 million borrowers struggling to pay their mortgages. According to
Treasury officials, up to $50 billion of TARP funds will be used primarily to
encourage the modification of mortgages that financial institutions own
and hold in their portfolios (whole loans) and mortgages held in privatelabel securitization trusts. 10 Fannie Mae and Freddie Mac 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.
Treasury has taken various key steps to implement HAMP. Fannie Mae and
Freddie Mac are in the process of implementing the HAMP guidelines for
borrowers with loans that they own or guarantee. 11
As outlined in the March 4, 2009, program guidelines, HAMP’s eligibility
requirements 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 (1-4 unit) property with a maximum
unpaid principal balance on the unmodified first-lien mortgage that is
equal to or less than $729,750 for a 1-unit property; 12

•

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

10
Loans held in private-label securitization trusts include loans not insured or guaranteed
by Fannie Mae, Freddie Mac, HUD’s Federal Housing Administration (FHA), the
Department of Veterans Affairs (VA), and rural housing loans. The $50 billion dollars will
also be used for activities other than loan modification as discussed in later sections of this
report.
11

Any funds provided by Treasury to the GSEs under the funding commitments, while not
under TARP, will be funded, like TARP, through the issuance of public debt. Any losses
incurred by the GSEs in relation to the additional $25 billion they provide would be
financed by Treasury (through issuance of public debt) through the funding commitments
to the extent that the GSEs have liabilities that exceed assets.

12

Unpaid principal balance limits (prior to modification) are $729,750 for a 1-unit building;
$934,200 for a 2-unit building; $1,129,250 for a 3-unit building; and $1,403,400 for a 4-unit
building.

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GAO-09-837 Troubled Asset Relief Program

•

the first-lien mortgage payment must be more than 31 percent of the
homeowner’s gross monthly income. 13
The cutoff date for borrowers to be accepted into the program is
December 31, 2012.
Treasury has delegated significant responsibilities to its financial agents to
administer the program, which we discuss in greater detail later in this
report. Fannie Mae has signed an agreement with Treasury to act as the
program administrator and record keeper for HAMP and is responsible for
developing and administering program operations. Freddie Mac has signed
an agreement with Treasury to act as the compliance agent for HAMP, and
its responsibilities include conducting information technology testing,
security reviews, and audits. Finally, Bank of New York-Mellon, in the role
of custodian for TARP, is responsible for remitting mortgage payment
reductions and program incentive payments to participating servicers.
As we described in our January 2009 report, the act created other
oversight entities in addition to our oversight responsibilities, including
the Congressional Oversight Panel (COP), the Office of the Special
Inspector General for TARP (SIGTARP), and the Financial Stability
Oversight Board (FSOB). We are coordinating our work with COP,
SIGTARP, and FSOB and are meeting with officials from these entities to
share information and effectively make use of our combined resources.
COP issued a report in March 2009 that focused on foreclosures, and
Treasury’s efforts related to its Homeowner Affordability and Stability
Plan. 14 As of June 30, 2009, SIGTARP and FSOB had not issued any reports
specifically looking at Treasury’s planned use of TARP funds to preserve
homeownership and protect property values, although this area may be
the topic of future efforts.

13

The mortgage, or front-end, debt-to-income ratio under the HAMP first-lien component is
the percentage of a borrowers income comprising mortgage principal, interest, taxes,
insurance, and association dues.

14

Congressional Oversight Panel, The Foreclosure Crisis: Working Towards a Solution
(Washington, D.C., Mar. 6, 2009).

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Treasury Has Not
Fully Developed All
HAMP Subprograms,
and the Initial Design
of At Least Two
Aspects of HAMP
Limits Its Potential to
Help Homeowners •

In keeping with the act’s purposes, Treasury has developed HAMP with the
objective of preserving homeownership and protecting home values. 15
According to Treasury, HAMP’s primary goal is to reduce struggling
borrowers’ mortgage payments to an affordable level, thereby preventing
unnecessary foreclosures and helping to stabilize home prices in
neighborhoods hardest hit by foreclosures. HAMP was announced on
February 18, 2009, and since that time, in addition to HAMP’s main firstlien modification program, four major subprograms have been announced.
Together these five programs use the $50 billion Treasury targeted for
HAMP to
modify first-lien mortgage loans;

•

provide additional incentives to mortgage holders/investors to modify,
rather than foreclose on, loans in areas where home price declines have
been most severe;

•

modify or eliminate second-lien loans (such as home equity lines of
credit);

•

offer alternatives to foreclosure for homeowners that do not qualify for a
first-lien loan modification under HAMP; and

•

provide incentive payments under the HOPE for Homeowners mortgage
refinance program under the Federal Housing Administration (see fig. 3). 16

15

As noted above, the act authorized Treasury to purchase troubled assets from financial
institutions. The act defines troubled assets to include both certain residential or
commercial mortgages and securities based on such mortgages, and any other financial
instrument that the Secretary determines needs to be purchased to promote financial
market stability. Sections 101 and 3(9) of the Emergency Economic Stabilization Act.
Under HAMP, Treasury, acting through its financial agent, enters into contracts with
servicers that are financial institutions to purchase financial instruments under which the
servicers commit to modify mortgages and to receive and make payments in accordance
with specified criteria. To participate in HAMP, the servicer is required to enter into a
Commitment to Purchase Financial Instrument and Servicer Participation Agreement with
Fannie Mae, acting as Treasury’s financial agent. We are planning to analyze these
agreements in future work.
16

The HOPE for Homeowners program was created by Congress under the Housing and
Economic Recovery Act of 2008. The program, which was put in place in October 2008, is
administered by the Federal Housing Administration under HUD and is designed to help
those at risk of default and foreclosure refinance into more affordable, sustainable loans.

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Treasury has made the most progress in implementing the first-lien
modification program, and most of its features appear to be consistent
with goals articulated by Congress and Treasury. However, one of the firstlien modification requirements—that borrowers with high levels of
household debt obtain housing counseling in order to avoid possible
redefault, which borrowers agree to when they enter into a trial loan
modification—lacks an appropriate mechanism that would help ensure the
requirement’s success. Specifically, Treasury does not plan to
systematically track borrowers who are told they must obtain counseling
to determine whether they do so or to analyze the effectiveness of the
counseling. In addition, Treasury developed the HPDP subprogram with
the purpose of increasing the number of modifications completed under
HAMP. However, as it is currently described, some of the HPDP incentive
payments appear to be unnecessary because Treasury may make
payments for modifications that would have been made without this
program. Treasury has targeted up to $10 billion for the HPDP program.
Figure 3: Timeline of Major HAMP Events from February 18, 2009, through July 27, 2009
March 4: Treasury issued official
guidance for loan modifications under
the Home Affordable Modification
program (HAMP) across the
mortgage industry and announced
that servicers could begin conducting
modifications that conform to the
guidelines.

2009

February

February 18: Treasury
announced a national
modification program
intended to offer
assistance to up to 3 to 4
million homeowners by
reducing monthly
payments to sustainable
levels.

April 13: Six initial servicers
sign participation agreements
under HAMP: Chase Home
Finance, Wells Fargo,
CitiMortgage, GMAC
Mortgage, Saxon Mortgage
Services, and Select Portfolio
Servicing.

March

April

March 19: To reach
borrowers, Treasury
launched its Making
Home Affordable Web
site that provides
program, eligibility, and
housing counseling
information, among other
things.

May 14: Treasury announces
additional details on the Home
Price Decline Protection
Incentives program and the
Foreclosure Alternatives
program—two additional
components of HAMP.

May

April 28: Treasury announces
additional details related to the
Second Lien program—an
additional component of
HAMP.
April 15: Treasury launched
an administrative Web site
for mortgage servicers to
provide them information and
tools needed to participate in
HAMP.

June

July

July 18-20: Over 1
million letters sent to
borrowers, over
350,000 trial modification offers extended,
and over 180,000 trial
modifications under
way. Over 27 million
page views on the
Making Home
Affordable Web site.

July 27: The
earliest date
Treasury expects
to make the first
matching and
incentive
payments to
servicers under
HAMP.

Source: Treasury, OFS.

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Breakdown of Costs for
HAMP Initiatives Has Yet
to Be Determined

As shown in table 1, Treasury expects to use about $32.5 billion in TARP
funds to encourage modifications on first-lien mortgages of up to 2 to 2.6
million borrowers by sharing the costs of reducing borrowers’ monthly
payments with mortgage holders/investors, and by providing incentive
payments for successful modifications to borrowers, servicers, and
mortgage holders/investors. 17 Also, using part of the $50 billion in TARP
funds, Treasury plans to provide up to $10 billion in incentive payments to
mortgage holders/investors for modifications in areas experiencing home
price declines to partially offset potential losses should the modified loan
redefault once prices have dropped. To reduce payments or pay off second
lien loans of 1 to 1.5 million borrowers, Treasury has announced a Secondlien Modification Program using a yet to be determined amount of the
TARP funds targeted for HAMP. For borrowers unable to qualify for a firstlien modification under HAMP, Treasury will provide TARP funding to
encourage servicers to use alternatives to foreclosure, including short
sales and deeds-in-lieu of foreclosure. Finally, Treasury announced that it
would use part of the TARP funds allocated for HAMP to provide incentive
payments to servicers that help refinance mortgages and lenders that
originate refinanced mortgages under the HOPE for Homeowners
program.
The number of borrowers Treasury expects to reach through the HPDP,
foreclosure alternatives, and HOPE for Homeowners incentive payments
subprograms has yet to be determined. In addition, funding levels for
second-lien modifications, foreclosure alternatives, and HOPE for
Homeowners incentive payments subprograms have yet to be determined.
According to Treasury officials, these specifications have not yet been
made because they wish to retain flexibility under HAMP to target TARP
funds to those subprograms that attract the largest numbers of borrowers,
servicers, and mortgage holders/investors.

17

HAMP is designed to commit a combined total of $75 billion in GSE and TARP funds to
offer assistance to up to 3 to 4 million borrowers. The estimate of 2-2.6 million first-lien
modifications is approximately two-thirds of the estimated total 3 to 4 million first-lien
modifications to be offered assistance under the combined program.

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Table 1: Projected Cost and Number of Borrowers Targeted for Assistance Using TARP Funds under HAMP, as of July 14,
2009
Estimated number of borrowers
HAMP subprograms (TARP funds only) assisted

Initial subprogram funding
level

Obligated

First-lien Modification

Up to 2 to 2.6 million

About $32.5 billion

$18.7 billion

Home Price Decline Protection

To be determineda

Up to $10 billion

None

Second-Lien Modification

Up to 1 to 1.5 million

To be determined

None

Foreclosure Alternatives

To be determined

To be determined

None

HOPE for Homeowners Incentive
Payments

To be determined

To be determined

None

Total initial HAMP funding level

Up to $50 billion
Source: Treasury, OFS.
a

All modified first-lien loans are eligible for HPDP payments.

Treasury Has Focused
Most of Its Efforts on the
First-Lien Modification
Program

The first-lien modification program is the largest and most developed of
HAMP’s five parts and will use TARP funds to share the cost of modifying
first-lien mortgages over a set period (5 years or until the loan is paid off,
whichever occurs first) with mortgage holders/investors in order to reduce
to affordable levels the monthly loan payments of homeowners in danger
of foreclosure. 18 The first-lien program targets borrowers in default
(defined as 60 days or more delinquent on their mortgage payments) or in
imminent danger of default (borrowers that are current on their mortgages
but facing hardships such as job losses or interest rate increases on their
adjustable rate mortgages) for first-lien modifications. Initial HAMP
guidelines for completing first-lien modifications were released on March
4, 2009, and updated guidance was issued on April 6, 2009. 19 The guidelines
set out the requirements for eligibility, loan underwriting, loan
modification, and servicer compliance and reporting. Treasury has
launched a Web site that describes first-lien modification opportunities
under HAMP and provides self-assessment tools and calculators
borrowers can use to determine if they might be eligible. 20 Through the

18
Mortgage holders/investors can include servicers/lenders that own whole mortgages
within their portfolio, as well as individuals or institutions that invest in pools of
securitized mortgages.
19

HAMP Supplemental Directive 09-01, Introduction of the Home Affordable Modification
Program (Apr. 6, 2009).

20

Making Home Affordable, Help for America’s Homeowners,
http://makinghomeaffordable.gov/.

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GAO-09-837 Troubled Asset Relief Program

Web site, borrowers are directed to free housing counseling, homeowner
events in their communities, and a hotline. According to Treasury, as of
July 18, 2009, this Web site had been viewed over 27 million times.
Treasury has also established an additional Web site to communicate with
potential and participating servicers. Servicers can use the Web site to
register to participate in HAMP, obtain official HAMP guidance, and
submit program data once they begin conducting HAMP trial first-lien
modifications. 21 As of July 14, 2009, 27 servicers had executed HAMP
servicer participation agreements with Fannie Mae, the HAMP
administrator. The servicer participation agreements for HAMP specify the
loan modification and other foreclosure prevention services to be
performed, the payment structure for the first-lien subprogram, and other
requirements, including those concerning audits, reporting, and data
collection and retention. The agreements specify actions Fannie Mae may
take if a servicer defaults under the agreement, such as by failing to
perform or comply with any of its material obligations. In the event of a
servicer default, Fannie Mae has the authority, with Treasury’s approval,
to reduce the amounts payable to the servicer, require repayment of
previous payments made under HAMP under certain circumstances,
require the servicer to submit to additional oversight, or terminate the
servicer’s participation agreement. According to Treasury, participating
servicers report that as of July 20, 2009 they had extended over 354,115
trial modification offers to borrowers and 180,305 trial modifications had
begun. 22
To control total obligations for HAMP first-lien modifications, Treasury
has set initial funding limits, or caps, for the potential total amount that
will be obligated to each participating servicer. The caps include the
maximum amount allotted to help reduce borrowers’ mortgage payments
and to pay the associated incentive payments to borrowers, servicers, and

21

Administrative Web site for Servicers, Home Affordable Modification Program,
https://www.hmpadmin.com/portal/index.html.

22

This information has been reported to Treasury’s financial agent by participating
servicers. Treasury has not validated the number of trial modification offers extended or
the number of trial modifications begun.

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GAO-09-837 Troubled Asset Relief Program

mortgage holders/investors. 23 Almost $19 billion of the TARP funds had
been obligated to these servicers as of July 14, 2009 (see app. I for a list of
the servicers that had signed TARP agreements as of July 14, 2009.)
The first-lien modification program has three main features. First, a costsharing arrangement with mortgage holders/investors is designed to help
reduce first-lien mortgage payments to 31 percent of the homeowner’s
gross household income. Mortgage holders/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. Treasury will then use TARP
funds to match further reductions on a dollar-for-dollar basis, down to the
target of 31 percent. For eligible loans with monthly mortgage payments
that are already below 38 percent, Treasury will match servicers’
reductions. This modified monthly payment is fixed, as long as the loan
remains in good standing with the program for a maximum of 5 years or
until the loan is paid off, whichever is earlier. Treasury estimated that
HAMP would cut participating borrowers’ existing monthly payments by
one-third, on average. 24
A second major feature of the program is the required use of standardized
loan modification procedures, including the application of a net present
value (NPV) test on all loans that are 60 days or more delinquent and for
those borrowers who are current but in imminent danger of default. The
NPV test compares the “net present value” of expected cash flows from a

23

According to Treasury, the initial cap allocations were based on publicly available data, or
data submitted by the servicers once admitted to the program, and reflect Treasury’s
estimated cost to be paid by each servicer for modifications. For initial caps, set with
publicly available information, the caps have been updated using more complete data on
the servicer’s mortgage portfolio. All servicer caps will be reassessed on a quarterly basis
using data on the actual number of modifications made by the servicer under the program.
24

According to Supplemental Directive 09-01, if the modified interest rate is below the
interest rate cap, this reduced rate will be in effect for the first 5 years followed by annual
increases of 1 percent per year (or such lesser amount as may be needed) until the interest
rate reaches the interest rate cap, at which time it will be fixed for the remaining loan term.
If the resulting rate exceeds the interest rate cap, then that rate is the permanent rate. The
directive defines the interest rate cap as the Freddie Mac Weekly Primary Mortgage Market
Survey rate for 30-year fixed-rate conforming loans, rounded to the nearest 0.125 percent,
as of the date the agreement is prepared (the March HAMP guidelines define the interest
rate cap as the lesser of this survey rate or the fully indexed and fully amortizing original
contractual rate).

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GAO-09-837 Troubled Asset Relief Program

loan with a modification and the same loan with no modification. 25 If the
estimated cash flow with a modification is “positive” (i.e., more than the
estimated cash flow of the unmodified loan), the loan servicer is required
to make the loan modification. According to Treasury, the NPV test
increases mortgage holder/investor confidence and the consistency of
borrower treatment under the program by providing a transparent and
externally derived objective standard for all loan servicers to follow. In
addition, the first-lien modification guidelines set forth the sequential
modification process (the modification “waterfall”) that servicers are to
follow to reduce payments. Specifically, to reach the target affordability
level of 31 percent, interest rates must first be reduced to as little as 2
percent. If the debt-to-income ratio is still over 31 percent at the 2 percent
interest rate, servicers must then extend the amortization period of the
loan up to 40 years. Finally, if the debt-to-income ratio is still over 31
percent, the servicer must forbear—defer—principal until the payment is
reduced to the 31 percent target. 26 Servicers may also forgive mortgage
principal to achieve the target monthly payment ratio of 31 percent of the
borrower’s income on a stand-alone basis or before any other step in the
standard waterfall process set forth above.
A third major feature of the first-lien modification program is its incentive
payment structure. Treasury will use HAMP funds to provide both onetime and ongoing, so-called pay-for-success incentives to loan servicers,
mortgage holders/investors, and borrowers to increase the likelihood that
the program will produce successful modifications over the long term and
help cover the costs of modifying a loan (see table 2). In addition to the
cost-sharing payment to reduce borrowers’ monthly payments to be paid
to mortgage holders/investors, Treasury will make the following HAMP
incentive payments:
•

Servicer incentive payments include one-time payments of $1,000 for each
completed modification under HAMP.

25
The NPV test compares the expected cash flow from the loan if a modification were to be
made using program guidelines against the expected cash flow from the loan if no
modification were to be made and the loan remained in default or became current again.
26

The principal forbearance amount cannot accrue interest under the 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.

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GAO-09-837 Troubled Asset Relief Program

•

Servicers also receive an additional current borrower bonus incentive
payment of $500 when a loan is modified for a borrower whose loan is
current. Mortgage holders/investors will also receive this type of incentive
as a one-time payment of $1,500 for each modification agreement executed
with a borrower who is current on entering HAMP. 27

•

Borrowers who remain current on their mortgage payments are eligible for
up to $1,000 in annual, ongoing “pay-for-performance” incentives for 5
years to be used to pay down the mortgage principal. 28

•

Servicers are also eligible for up to $1,000 in annual, ongoing, so-called
pay-for-success incentive payments that accrue when monthly mortgage
payments are made on time for 3 years after borrower’s monthly mortgage
payment is modified.
According to Treasury, modifying the loans of borrowers facing a hardship
that could make default imminent while they are current on their mortgage
payments may reduce the likelihood that these borrowers will default on
the modified loan. All HAMP matching and incentive payments are
contingent on the successful completion of a trial period. All HAMP
payments listed in table 2, except for the cost-reduction share payment
and the one-time servicer incentive payment, are contingent on a
reduction of at least 6 percent in the borrower’s monthly mortgage
payment. 29

27

According to program guidelines, servicers must determine whether a borrower is at
imminent risk of default based on their own servicing standards. Potentially eligible
hardships leading to imminent default may include, among others, job loss, income
reduction, or an interest rate reset that makes mortgage payments unaffordable.

28
The Internal Revenue Service has ruled that if a homeowner benefits from pay-forperformance success payments under HAMP, the payments are excludable from income
under a specified exclusion. Rev. Rul. 2009-19, 2009 FED 46,412.
29

Compensation for mortgage payment reduction matching and incentives may not be
remitted until the completion of a successful trial modification period.

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Table 2: Summary of HAMP Payments Using TARP Funds on First-Lien Modifications
Payment type

Payment
beneficiary

Description

Payment period

Amount

Monthly
payment
reduction cost
share

Mortgage holder/
investor

Monthly one-to-one matching
payments made to achieve 31
percent debt-to-income ratio
for borrower.

Paid monthly by
Treasury for up to 5
years beginning in the
first month of the official
modification.

Mortgage holder/investor first
reduces the mortgage payment to
38 percent of the borrower’s
monthly income if the
premodification payment is higher
than that amount. Between 38 and
31 percent of the borrower’s
monthly income Treasury matches
reductions down to 31 percent on
a dollar-for-dollar basis.

Servicer
incentive

Servicer

One-time payment for loans
Paid one time by
that successfully complete trial Treasury in the first
modification period.
month of the official
modification.

$1,000

Current
borrower onetime bonus

Servicer and
mortgage holder/
investor

To encourage modifications
for nondelinquent borrowers.

Paid one time by
Treasury in the first
month of the official
modification.

$500 (servicer)
$1,500 (mortgage holder/investor)

Borrower
Pay-forperformance
success

Borrower

Annual payment for ongoing
timely borrower loan
modification payments.
Success payments pay down
borrower unpaid principal
balance.

Paid by Treasury 12
months after the trial
modification start date
and annually thereafter
for a total of 5 years.

Up to $1,000 per year for 5 years

Servicer
pay for
success

Servicer

Annual incentive payment for Paid by Treasury 12
ongoing borrower participation months after the trial
and timely payments in HAMP. modification start date
and annually thereafter
for a total of 3 years.

Up to $1,000 per year for 3 years

Source: Treasury, OFS.

A number of other HAMP first-lien loan modification features are intended
to help reduce monthly payments and prevent foreclosures while
protecting taxpayer funds. For example, to avoid helping borrowers with
mortgages on investment properties, eligibility requirements limit HAMP
to borrowers with owner-occupied properties. To qualify for the program,
borrowers’ incomes must also be verified. According to Treasury,
accurately measuring income is critical to making sure the program is
helping borrowers who truly need the assistance to remain in their homes
and to preventing fraud. Furthermore, as we have reported in the past,
particularly between the years 2000 and 2006, an increased number of
private-label securitized loans were underwritten using limited or no

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documentation of borrower income or assets. 30 For certain loans
prospectively eligible for HAMP modification, servicers may have limited
past data on the borrower’s income or assets.
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 considered modified and any government payments are made under
HAMP. According to Treasury, this feature was instituted to ensure that
loan modifications are affordable and sustainable, thereby reducing the
amount of taxpayer funds that would be used for unsuccessful
modifications. Further, servicers are required to screen all current
borrowers who contact them with an economic hardship to see if there is
a danger of imminent default. Treasury has not specified how servicers
should screen borrowers for imminent default. Rather, according to HAMP
guidelines, the servicer must make a determination as to whether a
payment default is imminent based on the servicer’s own standards for
imminent default. One participating servicer told us that clarification from
Treasury would be helpful on this point. In the process of making its
imminent default determination, the servicer must evaluate and verify the
borrower’s financial condition in light of any financial hardship and
investigate the condition of and circumstances affecting the property
securing the mortgage loan. If the servicer determines that default is
imminent, it must document in its servicing system the basis for its
determination and evaluate the borrower for a HAMP modification using
the NPV test. According to Treasury, loan modifications are more likely to
succeed if they are made before a borrower misses a payment because,
among other reasons, delinquent borrowers are often difficult to contact.

30

GAO, Information on Recent Default and Foreclosure Trends for Home Mortgages and
Associated Economic and Market Developments, GAO-08-78R (Washington, D.C.: Oct. 16,
2007).

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Treasury Informs
Borrowers with High Total
Household Debt They Must
Obtain Housing
Counseling but Does Not
Plan to Track Whether
Counseling Has Occurred

HAMP requires borrowers with high total household debt levels
(postmodification debt-to-income ratios of 55 percent or higher) to agree
to obtain housing counseling, which according to Treasury, will help
reduce redefaults. 31 We have previously reported that it is important for
any loan modification program to be designed to limit the likelihood of
redefault. 32 While HAMP requires high debt-to-income borrowers to agree
to obtain this counseling, it does not require documentation that they
actually received the counseling. Specifically, HAMP first-lien modification
guidelines instruct servicers to send a counseling letter to borrowers with
high total debt levels informing them that they must work with a counselor
approved by the Department of Housing and Urban Development (HUD)
on a plan to reduce their total indebtedness. 33 Borrowers are made aware
of this requirement before entering the trial period in the cover letter to
the trial period plan, and the trial period plan itself requires borrowers to
certify that they will obtain counseling if the lender requires them to do so.
Treasury officials told us that they would not require proof that the
borrowers had obtained housing counseling because Treasury does not
want to deny a modification to borrowers that successfully complete the
trial period but may not have obtained counseling. Treasury also did not
want to delay modifications under the program until servicers built
systems in coordination with counselors to track whether borrowers
obtained counseling. Treasury officials told us that while designing HAMP,
Fannie Mae, Freddie Mac, and servicers had expressed concerns about the
difficulty and burden of communication between the servicer and the
counseling agency to certify that borrowers had received counseling.
Treasury has indicated that it will capture information on borrowers who
access counselors through the Homeowners HOPE hotline listed on the

31

The total household debt-to-income ratio is a comparison of the borrower’s total monthly
debt payments (such as monthly housing payments, any mortgage insurance premiums,
payments on all installment debts, monthly payments on all junior liens, alimony, car lease
payments, aggregate negative net rental income from all investment properties owned, and
monthly mortgage payments for second homes) to the borrower’s monthly gross income.

32

GAO, Troubled Asset Relief Program: Status of Efforts to Address Defaults and
Foreclosures on Home Mortgages, GAO-09-231T (Washington, D.C.: Dec. 4, 2008).

33

HAMP Supplemental Directive 09-01. The counseling letter also informs borrowers that
housing counseling is free of charge for the borrower.

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GAO-09-837 Troubled Asset Relief Program

Making Home Affordable Web site. 34 However, according to a senior
administrator of that hotline, providing loan-level tracking on borrowers
they counsel is a complicated issue. One national organization that has
been involved in counseling HAMP high debt-to-income borrowers told us
that it will soon be able to use its Web-based loan-level portal to track
whether HAMP borrowers receive housing counseling. 35 Without knowing
if borrowers who were told that they are required to obtain this counseling
actually do so, or evaluating the performance of borrowers who do and do
not receive counseling, Treasury will not know whether the requirement is
meeting its purpose of reducing redefaults among high-debt-burdened
borrowers.

Treasury Has Announced
Four Additional HAMP
Subprograms, but the
Need for the $10 Billion
Home Price Decline
Protection Subprogram Is
Unclear

In addition to the first-lien modification program of HAMP, Treasury has
announced a HAMP subprogram intended to partially protect mortgage
holders/investors against future declining home prices and thus encourage
additional loan modifications. It is also designing other HAMP
subprograms intended to reduce payments on second mortgages, provide
alternatives to foreclosure to homeowners who do not qualify for
modifications or cannot maintain payments during the trial period or
modification, and offer incentives to servicers and lenders involved in
originating refinanced loans under the HOPE for Homeowners Program.
•

On May 14, 2009, Treasury announced additional details on its HPDP
subprogram, which is designed to use up to $10 billion in TARP funds to
encourage mortgage holders/investors to undertake more modifications by
assuring them that their losses in housing markets experiencing high price
declines will be partially offset. These incentives will be based on the
severity of house price declines in different metropolitan area housing
markets and the average house price in each of those markets. Treasury

34

The Homeowners HOPE hotline is operated by the Homeownership Preservation
Foundation—a nonprofit organization that currently has a network of nine HUD-certified
housing counseling agencies from across the United States that offer free housing
counseling to callers.

35

NeighborWorks America is an organization chartered by Congress that has been
appropriated $410 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); and Omnibus
Appropriations Act of 2009, Pub. L. No. 111-8, Div. I, Title III, 123 Stat. 524, 982 (2009) ($50
million). Counseling from a HUD-approved counselor typically includes advice on defaults,
foreclosures, and credit issues.

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will make HPDP payments benefiting mortgage holders/investors annually
for the first 2 years after the modification of a loan located in a
metropolitan area with declining house prices. 36 No payments would be
made if prices appreciate in the two quarters preceding modification of the
loan. HPDP incentive payments will be included in future versions of the
NPV model for loans being considered for modification under HAMP, and
will, according to Treasury, increase the likelihood that the NPV
calculation will produce a result in favor of modification. Although
Treasury says that this incentive will increase the number of modifications
made under HAMP, it has not yet stated how many more modifications
might be made. According to Treasury officials, the number of additional
modifications as a result of these payments depends on interactions with
other changes in the NPV model and the specific subprogram parameters.
Treasury is developing these estimates as the subprogram specifications
are finalized.
According to Treasury officials, a loan with a positive NPV test result—
that is one that would mean a mandatory modification–without the benefit
of the HPDP payments will nonetheless receive this incentive payment,
but only if the property is located in a qualified metropolitan area. It is not
clear why mortgage holders/investors should further benefit from
modifying loans that would pass an NPV test without an HPDP incentive
solely because the properties are located in a market where home prices
are declining. Providing HPDP payments for modifications that would
have been made without this payment reduces the funds available for
other HAMP efforts. As the subprogram is currently described, it is unclear
how much of the $10 billion allocated to the HPDP incentives would be
needed to increase the number of modifications made under HAMP and
maximize assistance to homeowners as provided for by the act.
Furthermore, because none of the expenditures under HPDP would be
recouped, it is crucial that Treasury ensure that funds are spent only when
they are specifically needed to encourage additional modifications that
would not be made without this incentive.
•

On April 28, 2009, Treasury announced the framework for reducing
payments on or, in some cases, extinguishing second liens for borrowers
that receive first-lien loan modifications under HAMP. Treasury estimates
that approximately 50 percent of the borrowers who may receive a HAMP

36

As discussed later in this report, Treasury’s custodian for TARP, Bank of New YorkMellon, will remit all payments under HAMP to servicers. Servicers are then responsible for
distributing payments consistent with program guidelines to borrowers’ accounts and
mortgage holders/investors.

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first-lien modification have second liens, and between 1 million and 1.5
million borrowers, might be eligible to receive a second-lien payment
modification depending on servicer participation in this subprogram.
Treasury plans to release second lien modification guidelines in late July
or August 2009. Servicers that sign a second lien subprogram participation
agreement will be obligated to modify the second lien when a HAMP
modification is performed on the associated first lien. The second-lien
modification will include an interest rate reduction down to 1 percent and
a reamortization of the loan to match the terms of the modified first-lien.
There will be three types of incentives under this subprogram: a servicer
incentive, an investor incentive, and a borrower incentive that will be
applied toward paying down the principal on the first lien if the borrower
is successful in making payments on the second. As an alternative to
modifying the second lien, the servicer will have the option of paying it off
in exchange for a lump sum payment under a preset formula. According to
Treasury officials, the purpose of the second-lien subprogram is to help
lower total monthly household debt payments and increase affordability of
the second mortgage. As we have seen, Treasury has yet to determine the
cost of the second-lien modification subprogram.
•

Another planned HAMP subprogram provides alternatives for borrowers
that do not qualify for a loan modification under the first-lien subprogram
or cannot maintain payments during the trial period or modification but
want to avoid foreclosure. Treasury states that these alternatives will be
less costly to mortgage holders/investors than foreclosures because the
borrower, servicer, and investor will avoid the foreclosure process
entirely. According to an announcement by Treasury on May 14, 2009,
participating servicers will be required to consider a short sale and, if that
is unsuccessful, a deed-in-lieu of foreclosure when eligible borrowers are
not able to complete a modification under HAMP. A short sale allows the
borrower to sell the property at its current value even if the sale nets less
than the total amount owed on the mortgage. With a deed-in-lieu under
HAMP, the borrower voluntarily transfers ownership of the property to the
servicer (provided the title is free and clear of additional liens). Servicers
will receive compensation of $1,000 for a short sale or deed-in-lieu, and
borrowers will receive $1,500 for relocation expenses. The Foreclosure
Alternatives Program is designed to minimize the negative impact
foreclosures can have on communities, including home price decline,
vandalism and crime. This subprogram is still under development, and
Treasury has not yet released detailed guidelines or estimated the overall
cost or number of borrowers it expects to reach with these foreclosure
alternatives. According to Treasury officials, detailed guidelines are
expected by the end of August.

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GAO-09-837 Troubled Asset Relief Program

•

On April 28, 2009, Treasury announced that it would partially support
additional loan refinancings under the HOPE for Homeowners program.
Servicers and lenders that help make mortgages more affordable for
struggling homeowners through HOPE for Homeowners will receive payfor-success incentive payments comparable to some of the incentive
payments made under a HAMP first-lien modification. Servicers can
receive a $2,500 up-front incentive payment for a successful HOPE for
Homeowners refinancing. Lenders who originate the new HOPE for
Homeowners refinanced loans are eligible for success fees of up to $1,000
per year for up to 3 years, so long as the refinanced loan remains current.
According to Treasury, it will use TARP funds targeted for HAMP for these
incentive payments. Treasury has not yet estimated the overall cost or the
number of borrowers it expects to reach with the HOPE for Homeowners
incentive payments.

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GAO-09-837 Troubled Asset Relief Program

HAMP May Not Resolve
the Challenges of a
Growing Segment of
Borrowers with Negative
Equity in Their Homes

According to Treasury officials, HAMP’s overriding policy objectives are to
make mortgages more affordable for struggling homeowners; maximize
participation by borrowers, servicers, and mortgage holders/investors;
implement HAMP quickly; and maintain reasonable budget costs. As a
result, HAMP, which deals with making borrowers’ monthly payments
affordable by reducing them to the target of 31 percent of their gross
household incomes, does not focus directly on the issue of negative equity
that is experienced by a large and growing segment of borrowers (socalled “underwater” borrowers). When a borrower owes more on the
mortgage than the house is currently worth, the affordability of monthly
payments may not be the only consideration in the borrower’s decision to
stay in the house. Several other factors may influence the borrower’s
decision to default, including the degree to which the borrower is
underwater, the borrower’s expectation of future house prices, the
borrower’s current employment status and wealth, and possibly the
borrower’s views on the moral and social acceptability of default. As
shown in figure 4, many states with high foreclosure rates also have high
proportions of mortgages with negative equity, and these proportions are
often higher in states with large increases in unemployment. 37

37

Home foreclosures data (based on foreclosure inventories) are from the National
Delinquency Survey by Mortgage Bankers Association, December 31, 2008. Negative equity
is measured as properties with 5 percent or less equity to account for borrowers on the
margin of being underwater. The data are available for only 44 states. See Table 1,
Summary of December 2008 Negative Equity Data from First American CoreLogic,
March 4, 2009. Unemployment rate data are from the Unemployment Rates for States,
Bureau of Labor Statistics, http://www.bls.gov/lau/lastrk06.htm for 2006 and
http://www.bls.gov/lau/lastrk08.htm for 2008. The percentage point change in
unemployment is used to reflect the change in the economic status of borrowers in states.

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Figure 4: Rates of Home Foreclosure, Negative Equity, and Unemployment by State

A. Rates of home foreclosures (2008)

No data
Less than 1%
1-2%
2-3%
3-4%
Greater than 4%

B. Rates of negative home equity (2008)

C. Change in unemployment rate (2006-2008)

No data

20-30%

No data

1.0-1.5%

Less than 10%

30-40%

-0.5-0.0%

1.5-2.0%

10-20%

Greater than 40%

0.0-1.0%

Greater than 2.0%

Sources: GAO analysis of Mortgage Bankers Association, First American CoreLogic, and Bureau of Labor Statistics data; Art Explosion.

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GAO-09-837 Troubled Asset Relief Program

Although HAMP does not address the issue of negative home equity
directly, Treasury officials emphasized that underwater borrowers were
not precluded in any way from applying for HAMP loan modifications and
that HAMP had no loan-to-value ratio (LTV) ratio requirements. The
officials also told us that ultimately the overall homeownership
preservation program, Making Home Affordable (MHA), would have
initiatives designed to address other factors affecting foreclosures, such as
negative equity. For example, servicers are required to simultaneously
evaluate borrowers for a trial loan modification under HAMP and HOPE
for Homeowners refinance and to offer the HOPE for Homeowners option
if possible. MHA will offer incentives to servicers under the HOPE for
Homeowners program that are as generous as the incentives offered with
HAMP modifications. 38 Under HOPE for Homeowners, borrowers could
also benefit from principal reduction that would reinstate positive equity
in their homes. In addition, borrower incentive payments under the HAMP
first-lien modification program go toward paying down principal on a firstlien mortgage. Treasury officials also noted that other HAMP incentives
could help address negative equity including the possibility of a principal
write-down as part of reducing borrowers’ monthly payments under
HAMP.
Analyses by Fannie Mae showed that underwater borrowers who were
eligible for loan modifications under HAMP because they were in default
or in imminent danger of default could pass the NPV test for loan
modification successfully. These analyses found that borrowers with highLTV mortgages generally passed the NPV model test for loan modification.
Although Treasury has said that HAMP does not exclude and will
ultimately offer specific tools to address the problem of underwater
borrowers, there is still the possibility that some of these homeowners,
facing the prospect of owing far more than their homes are worth, will
walk away from their mortgages. A possible relationship between growing
numbers of mortgage holders with negative equity and rising foreclosure
rates suggests that the problem may become more critical, especially if
home price declines continue. Currently no clear consensus exists on how
to deal with underwater borrowers. In particular, lenders and

38

Under the HOPE for Homeowners program, new insured mortgages cannot exceed 96.5
percent of the current LTV for borrowers whose mortgage payments do not exceed 31
percent of their monthly gross income and whose total household debt does not exceed 43
percent; alternatively, the program allows for a 90 percent LTV for borrowers with debt-toincome ratios as high as 38 (mortgage payment) and 50 percent (total household debt).

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GAO-09-837 Troubled Asset Relief Program

policymakers face an information problem in trying to help borrowers
with negative equity because it is hard to determine which borrowers
really need help in order to stay in their homes. Nonetheless, the
possibility of using negative equity as a criterion for loan modification
should be approached with caution, given limited historical experience
with large segments of borrowers with negative home equity and the
potential for providing incentives to borrowers who would not default on
their mortgages without them. We are currently undertaking further
analysis to better understand the relationship between negative equity and
the risks of defaults and foreclosures.

Treasury’s Projection
of the Number of
Loans That Could Be
Modified under HAMP
Was Based on
Uncertainties in Key
Assumptions and May
Be Overstated

Treasury’s estimate of the number of borrowers who would likely be
helped under HAMP reflects uncertainty created by data gaps and the need
to make numerous assumptions, and this projection may be overstated.
Further, documentation of the many assumptions and calculations
necessary for the analysis is incomplete and Treasury has not specified
plans for systematically updating its projections. While we acknowledge
that Treasury was moving quickly to develop estimates for a new and
untried program for which there were limited comparable data, more
thorough documentation would help establish a credible baseline against
which to monitor and revise key program assumptions to ensure the
program objectives are being met.

Treasury’s Projected
Number of Loans That
Could be Modified Is
Complicated, Challenging,
and Uncertain

The process for estimating the expected number of home loans that could
be modified under HAMP is complicated and challenging, and the
projection is uncertain. Treasury officials faced challenges in projecting
the number of loans likely to be modified under HAMP. First, Treasury had
to cope with incomplete data on the characteristics of mortgage loans and
borrowers. For example, there is no single source of information on
existing mortgages. Loan databases vary in the information collected and
in their presentation, making it difficult to develop comparable and
consistent bases for empirical projections. Also, it is arguable whether
models of borrower and lender behavior based on experience prior to the
mortgage crisis are completely relevant in predicting behavior in stressed
markets because of the unprecedented severity of the housing price
decline exacerbated by weaknesses in the overall economy. These
conditions complicate the analysis and create uncertainty. Furthermore,
Treasury officials had to develop the estimate very quickly. HAMP was
initially announced on February 18, 2009, and Treasury published detailed
guidelines and authorized servicers to begin modifications only 2 weeks
later, when HAMP guidelines were publicly released on March 4, 2009.

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Such a time constraint limited Treasury’s ability to undertake rigorous
empirical analysis to provide a projection that is robust to changes in its
assumptions.

Treasury Projected That
HAMP Could Help Up to 3
to 4 Million Borrowers, but
Loans That Would Remain
Current under the FirstLien Subprogram Could Be
Lower

In order to support Treasury’s policy design and cost estimation, it
developed an initial internal projection that up to 3 to 4 million borrowers
who were at risk of default and foreclosure could be offered a loan
modification under HAMP. However, because of the unsettled dynamics of
the mortgage market and overall economic conditions, actual outcomes
may well be different from the projection. Treasury projected that about
two-thirds of the eligible 3 to 4 million borrowers would have their
mortgages modified using TARP funds and that the remaining one-third—
those owned or guaranteed by Fannie Mae or Freddie Mac—would be
modified using GSE funds. However, consistent with recent experience,
not all of the loans modified under HAMP would likely remain current
over the 5-year life of the first-lien subprogram. According to Treasury
officials, the redefault rate estimates that they examined were for loan
modification programs that predated HAMP, which likely did not result in
monthly mortgage payment reductions or contain incentive payments
similar to those of HAMP.
According to HAMP guidelines, loans that originated on or before January
1, 2009, may be eligible, and new borrowers will be accepted until
December 31, 2012. Because the maximum possible length of the first-lien
modification program for each loan after the 90-day trial period is 5 years,
loans that enter HAMP in 2012 will have to terminate participation in
HAMP by 2017. After completion of the first-lien modification program,
borrowers’ mortgage payments could gradually increase to levels
consistent with an interest rate cap that reflects market conditions at the
time the loan modification is made. 39

39

We have previously discussed the interest rate cap.

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GAO-09-837 Troubled Asset Relief Program

Treasury’s Projection of
Loans Likely to Be
Modified Depends on
Several Uncertain
Assumptions and Requires
Complete Documentation

Based on our analysis of Treasury’s description and documentation of its
process for determining the number of loans that could be modified under
HAMP, we identified four phases, consisting of projecting the following:
1. the likely number of borrowers at risk of default/foreclosure;
2. the proportion of loans held by borrowers with debt-to-income ratios
greater than 31 percent that were eligible for payment reductions
because these loans were likely unaffordable;
3. the proportion of borrowers likely to apply for loan modification as
determined by servicers’ and borrowers’ expected participation; and
4. the proportion of loans that would likely pass the NPV test for loan
modification and be offered the 90-day loan modification trial.
As previously noted, HAMP has several eligibility requirements, including
that the property be an owner-occupied, single-family residence (one to
four units) that is the borrower’s primary residence and that the mortgage
loan amount not exceed the current threshold for so-called “jumbo”
loans. 40
To determine the number of eligible loans likely to become at risk of
foreclosure, Treasury used data from a variety of sources to make its
initial projection that roughly 50.3 million active loans, excluding those
insured by FHA or guaranteed by VA, existed, including those in default
and already in the foreclosure process. 41 Excluding loans that did not meet
HAMP’s eligibility requirements, Treasury calculated that about 47.4
million, or 94 percent, of this group might be eligible for loan modification.
Next, based on current mortgage market conditions and expected future
changes in the performance of different types of loans, in March 2009,
program officials projected that over 10 million loans, or 21 percent of the

40

Jumbo loans, which are eligible for HAMP, are loans that exceed the loan limits set by the
GSEs and include conforming jumbo loans (those that can be purchased by the GSEs but
are priced higher than nonjumbo loans).

41

The data sources included Mortgage Bankers Association data for securitized loans,
FHFA reports on data for loans owned or guaranteed by Fannie Mae and Freddie Mac, and
loan data reported by industry participants. According to the program guidelines, loans
owned or guaranteed by FHA, the Rural Housing Service, and VA will also be included in
the Making Home Affordable program. As already discussed, loans owned or guaranteed by
the GSEs are not modified using TARP funds but are modified using GSE funds.

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GAO-09-837 Troubled Asset Relief Program

existing total loans, would likely become at risk of foreclosure through the
fourth quarter of 2012 (step 1 of fig. 5). 42 Treasury officials underscored
that this estimate was not a formal Administration projection and did not
reflect an Administration view about either the housing market or
economic recovery. Uncertainties exist in this projection both because of
the problematic nature of forecasting the future macroeconomic situations
including home prices, unemployment rates and other factors that have
influenced default and foreclosure rates as well as the difficulty
forecasting borrower decisions to default. Further complicating the
projections is a lack of knowledge about the potential number of vacant
homes and the number of investor-owned homes that are improperly or
potentially fraudulently classified as owner occupied. A recent estimate by
the Joint Center for Housing Studies of Harvard University indicated that
the homeowner vacancy rate for the nation had reached a record high of
2.8 percent last year. For homes built since 2000, the vacancy rate was 9.7
percent in 2008, a jump of almost 4 percentage points in just 2 years. 43
Because of the recent increase in vacancy rates and the potential number
of homes owned by investors and not households, Treasury’s estimate of
owner-occupied homes, and thus of the number of borrowers HAMP could
assist, may be overstated.
The second step of the estimation considers the HAMP’s requirement that
borrowers’ current debt-to-income ratios exceed 31 percent. Extrapolating
from limited data on borrowers’ current debt-to-income ratios, Treasury
projected that 80 percent of the over 10 million loans at risk of foreclosure
would meet this requirement, or about 8.4 million loans, because these
loans are likely unaffordable (step 2 of fig. 5).
Third, the estimation required an assumption about the participation of
eligible borrowers who apply for loan modification. Treasury projected
that 65 percent (about 5.5 million loans) of the targeted group of
borrowers (borrowers at risk of foreclosure and with debt-to-income
ratios exceeding 31 percent) would likely apply for loan modification
under HAMP (step 3 of fig. 5). According to Treasury, this projection is
consistent with its projection that enough servicers would participate in

42

Program officials indicated they had made projections of the number of loans that would
be at risk of defaults and foreclosures from a number of sources, including the private and
public sectors.

43

See The State of the Nation’s Housing 2009, Joint Center for Housing Studies of Harvard
University, 2009.

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GAO-09-837 Troubled Asset Relief Program

HAMP to cover approximately 90 percent of the potential loan population
and that the borrower response rate would be more than 50 percent. In
developing the participation rate, Treasury officials told us they
considered a number of possible combinations of the servicer
representation rate and borrower participation rate, including a borrower
participation rate of 70 percent. However, Treasury’s estimate of lender
participation has not yet been borne out by experience. As of July 14, 2009,
27 loan servicers (including the 5 largest U.S. servicers) had signed
participation agreements. Treasury estimated that these participants
represented about 76 percent of non-GSE loans (see app. I for a listing of
the servicers that had signed agreements as of July 14, 2009). As previously
noted, HAMP covers GSE loans, as well as non-GSE loans. According to
Treasury officials, servicers with signed participation agreements
represent around 85 percent of GSE and non-GSE loans in the country.
Treasury officials noted that the process of signing up servicers is ongoing,
that servicer participation rates have been increasing, and that several
servicers were “in the pipeline” and ready to sign contracts shortly. In
deciding to participate, servicers can be influenced by several factors,
including their own capacity to modify loans and the appeal of the
government’s incentive programs. It remains to be seen how many more
servicers will decide to sign up for HAMP.
Treasury’s projected response rate for borrowers may also be too high.
The program that is most like HAMP—FDIC’s IndyMac Federal Bank loan
modification program—thus far has had a maximum response rate of 50
percent for borrowers, well below the rate projected for HAMP. 44 Treasury
stated that HAMP’s participation rate will likely be higher, in part because
of the outreach Treasury has done to publicize it. According to Treasury
officials, a number of steps have been taken to raise awareness of the firstlien modification program consistent with the Presidential announcement
and the high-profile nature of HAMP. These steps include creating a Web
site that is targeted toward borrowers and that, according to Treasury
officials, received over 27 million page views as of July 18, 2009. Treasury
officials also said that, according to servicers, more than 1 million letters
had been mailed to borrowers to inform them about HAMP and that
servicers had reviewed several hundred thousand current and delinquent
loans for potential eligibility.

44

On July 11, 2008, FDIC was named conservator of IndyMac Federal Bank. Soon after,
FDIC developed a loan modification program to convert nonperforming mortgages owned
or serviced by the bank into affordable loans.

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However, Treasury’s estimate includes borrowers holding mortgages on
homes that may not be owner-occupied, which are specifically excluded
from HAMP participation. Further, not all potentially eligible borrowers
may decide to participate in HAMP for a variety of reasons—for example,
because of their experience with loans that eventually became
unaffordable or because they may have limited knowledge about HAMP.
Moreover, borrowers cannot participate in HAMP unless their servicers
also do. Borrowers with servicers who elect not to participate in HAMP
will thus be excluded. All these factors suggest that Treasury’s estimate of
the participation rate may well be optimistic, but Treasury has planned to
provide resources to support the targeted projection.
Treasury’s fourth step in the process of calculating how many
homeowners the first-lien modification subprogram would help was to
estimate the number of loans that were likely to pass the NPV test required
to start a 90-day loan modification trial. Treasury officials developed a
simplified NPV test model to help determine the expected number of loans
that would be modified. As previously discussed, the NPV test is
considered positive for loan modification if the total expected cash flow of
a modified loan is greater than the total expected cash flow of an
unmodified loan. Servicers are required to modify loans when the NPV test
shows this “positive” outcome, while they have the discretion to modify
loans that do not pass the NPV test or to pursue alternatives to foreclosure
such as short sales or deeds-in-lieu. Treasury estimated that about 70
percent (3.9 million) of the at-risk population of borrowers tested would
likely pass the NPV test and be offered the 90-day trial modification (see
step 4 in fig. 5).

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GAO-09-837 Troubled Asset Relief Program

Figure 5: Treasury’s Projections of Homeowner Participation in HAMP, Reflecting
Uncertainties Due to Data Gaps and Necessary Assumptions, 2009-2012
(1) Borrowers likely at risk of default/foreclosure
Borrowers likely at risk of default/foreclosure
Using a variety of data sources constituting roughly 50.3
million loans nationwide, program officials project over
10 million borrowers (meet the qualifying terms in the HAMP
guidelines and) are likely at risk of default/foreclosure

Over
10 million

(2) Borrowers likely to have unaffordable loans
Using limited data on these borrowers’ current
debt-to-income ratios, Treasury projects about 80 percent
(8.4 million) of these borrowers have debt-to-income ratios
greater than 31 percent, and thus are likely to have
unaffordable loans

8.4 million

(3) Borrowers likely to apply for loan modification
Using information on the proportion of these loans carried
by servicers likely to apply for loan modification and
borrower likely response rate, Treasury projects about 65
percent (5.5 million) of these borrowers would likely apply for
loan modification

5.5
million

(4) Borrowers likely to pass the NPV test and
be offered the 90-day loan modification trial
Using information from their simplified net present value
(NPV) test model to determine borrowers whose loans
would benefit from modification, Treasury projects about 70
percent (3.9 million) of these borrowers would likely pass the
test and be offered the 90-day loan modification trial

3.9
million

Source: GAO analysis of OFS documents, as of March 2009.

Note: The data include loans modified using TARP funds and loans modified using GSE funds.

Among the 3.9 million borrowers likely to be offered trial modifications,
not all of the borrowers will successfully complete the trial period. In
addition, some borrowers will subsequently default on their modified
loans after completing the trial period. According to Treasury officials, the
redefault rate estimates that it examined were consistent with the Office

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GAO-09-837 Troubled Asset Relief Program

of the Comptroller of the Currency’s (OCC) and Office of Thrift
Supervision’s (OTS) analyses of loan modifications, as well as with FDIC’s
IndyMac Bank estimates. For example, the IndyMac Federal Bank loan
modification program, which is the program most like Treasury’s, used a
40 percent redefault rate in its base NPV spreadsheet to determine the
value of modifying a loan. 45 In their most recent quarterly Mortgage
Metrics Report dated June 30, 2009, OCC and OTS reported the percentage
of borrowers that had redefaulted (60 days or more delinquent) on their
modified loans ranged between about 23 percent at 3 months following
modification to about 52 percent at 12 months following modification. 46
However, Treasury officials stressed that it was difficult to compare
potential HAMP redefault rates to those for other loan modification
programs because of significant differences in program features. In
particular, they noted that loan modifications that did not result in
monthly mortgage payment reductions similar to those required under
HAMP (31 percent debt-to-income threshold) or contain incentive
payments similar to HAMP’s would not provide an adequate basis for
comparison. Also, the data cover activities of only certain member
institutions (9 national banks and 4 thrifts) and, therefore, may not fully
represent all market segments, including the subprime lending market. In
addition, the redefault rates reported by others are for loans that have
been recently modified (typically within the last 12 months or less), while
the life of the HAMP, over which redefaults would be measured, covers
five years.
Treasury officials have indicated that some of their key assumptions
involve significant uncertainties, and these uncertainties make the need
for complete and accurate documentation of the assumptions and analyses
supporting the estimates of critical importance. The lack of adequate
documentation and incomplete specification of many of the assumptions
underlying Treasury’s projection of the number of borrowers who could
be helped by HAMP makes it difficult to assess the reliability of the

45

According to FDIC, the redefault rate used in its NPV spreadsheet was estimated per
historical re-default experience for other modification programs and a program specific
projection.

46

See Office of the Comptroller of the Currency and Office of Thrift Supervision, OCC and
OTS Mortgage Metrics Report: Disclosure of National Bank and Federal Thrift Mortgage
Loan Data First Quarter 2009, June 2009. This report presents key data on first lien
residential mortgages serviced by national banks and thrifts, focusing on mortgage
performance, loan modifications, payment plans, foreclosures, short sales, and deed-inlieu-of-foreclosure actions.

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estimates and, going forward, may hinder efforts to evaluate how well the
first-lien program is meeting its objectives. 47 In order to improve the
validity of the overall projection of the number of loans that would be
modified under HAMP, it is essential that the process be supported by
detailed information and complete documentation and that the key
assumptions and calculations are regularly reviewed and updated.

Treasury Has
Developed but Not
Finalized the
Oversight Structure
for HAMP, and Is Not
Systematically
Evaluating Servicers’
Capacity during
Program Admission

Treasury has taken a number of important steps toward implementing
operational procedures and internal controls for HAMP including
establishing an organizational structure for overseeing HAMP; delegating
implementation authorities and responsibilities to its financial agents; and
drafting work flows, such as the allocation process for each participating
servicer. However, significant gaps in its oversight structure remain,
including the lack of a full complement of permanent staff in OFS’s
Homeownership Preservation Office (HPO), the office responsible for
HAMP governance, and the lack of a finalized comprehensive system of
internal control for the program, including policies, procedures and
guidance for program activities. In addition, it is unclear when
comprehensive processes will be in place to address noncompliance
among servicers, including processes to ensure that servicers evaluate
borrowers in imminent danger of default for HAMP participation. Further,
Treasury has not established procedures to consistently evaluate the
capacity of participating servicers to fulfill HAMP requirements or to
assess any risk that individual servicers may pose to the program during
the admission process. Moreover, some servicers have raised concerns
about the complexity and burden of HAMP’s data collection and reporting
requirements, suggesting that these servicers may not have the capacity to
fulfill HAMP requirements. Without a consistent method of evaluating all
servicers during program admission, Treasury is limited in its ability to
identify, assess, and address potential risks that could prevent servicers
from fulfilling program requirements.

47

For example, Treasury has not provided supporting documentation for why a borrower
response rate of 70 percent is reasonable. Also, program officials have not provided
detailed information and supporting documentation for the program’s projection of the
proportion of the existing total loans that would likely become at risk of foreclosure.

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Treasury and Its Financial
Agents Have Taken Steps
to Design Procedures and
Controls to Implement
HAMP but Have not
Finalized a Comprehensive
System of Internal Control

In implementing HAMP, Treasury developed an organizational structure
that delegates some administrative and oversight responsibilities to its
financial agents while retaining authority for overall HAMP
implementation. According to Treasury, the broad responsibilities that
have been delegated to its financial agents—Fannie Mae, Freddie Mac, and
Bank of New York-Mellon—have been delineated in the agreements that
have been signed with these entities, with specific roles assigned to each
entity:

•

Fannie Mae, as the HAMP program administrator, is responsible for
developing and administering program operations including registering,
executing participation agreements with, and collecting data from
servicers.

•

Freddie Mac, as the HAMP compliance agent, is responsible for
compliance and audit of the program, including onsite and remote servicer
reviews and audits. According to Freddie Mac, its authorities include
conducting announced and unannounced information technology testing,
security reviews, and audits. In addition, Freddie Mac officials said they
would manage any corrective action and report compliance violations to
Treasury and other regulatory agencies.

•

Bank of New York-Mellon, as Treasury’s custodian and payment agent for
TARP, is responsible for remitting mortgage payment reductions and
program incentive payments to participating servicers.
Individual servicers enter into servicer participation agreements that set
out their responsibilities, including processing loan modifications that
adhere to program guidelines; reporting complete and accurate data to
Fannie Mae; receiving and distributing incentive payments for borrowers
and investors; properly applying payments to borrower accounts; and
developing, enforcing, and conducting internal reviews of an internal
control process that monitors and helps ensure program compliance. As
previously discussed, the servicer participation agreement specifies
actions Fannie Mae may take if a servicer fails to perform or comply with
any of its material obligations under the program including reducing the
amounts payable to the servicer, requiring repayment of previous
payments made under HAMP under certain circumstances, requiring the
servicer to submit to additional program oversight, or terminating the
servicer participation agreement.
Within Treasury, OFS’s HPO has primary responsibility for HAMP
implementation. According to Treasury, roles within HPO include audit

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oversight, Congressional and regulatory liaisons, communications and
marketing, policy development, data analysis, and operations. HPO
officials told us that they rely on several other OFS and Treasury support
offices, including those involved with compliance and risk, internal
controls, cash management, and human resources to assist HPO with
various aspects of HAMP governance.
While much of Treasury’s organizational structure for HAMP has been
established, as we have previously reported, hiring efforts for HAMP are
still ongoing. 48 Although HPO was created in November 2008, and its
current structure established in March 2009, some of its positions continue
to be filled with temporary detailees from other offices or agencies, and
many positions remain vacant. According to Treasury officials, all director
positions within HPO have been filled. However, although Treasury has
continued to seek a highly qualified candidate to fill the position of Chief
Homeownership Preservation Officer, as we stated in our most recent
TARP 60-day report, it has been filled by interim chiefs. According to
Treasury, as of July 16, 2009, 11 positions are filled with permanent
employees and 3 are filled with temporary detailees, while 17 positions
remain vacant. According to OFS’s strategic workforce plan, Treasury will
perform a review of each major component of OFS on a bi-monthly basis
to assess continuing workforce needs and determine where adjustments
are needed, including whether positions are filled by appropriate staff,
whether position descriptions need to be updated, and whether there are
staffing gaps that need to be addressed.
According to Treasury, as of July 2009, a bi-monthly review of HPO had
not yet been conducted but would be scheduled later in the month.
Because HAMP is a new and untested program involving significant
outlays of taxpayer dollars to privately owned companies (servicers) and
mortgage holders/investors, it will be important for HPO to continue to
regularly evaluate the number of staff and their competencies to ensure
that it has the resources needed to effectively govern the program.
Consistent with GAO’s internal control standards, the quality of human
capital policies and practices including, but not limited to, hiring affects
the control environment. 49 A strong control environment will depend, in
part, on the competence of staff hired to manage and perform program

48

GAO-09-658.

49

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C.: November 1999).

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operations. As we have previously recommended, Treasury should
continue its hiring efforts in an expeditious manner to ensure that
Treasury has the personnel needed to carry out and oversee TARP
initiatives. Potential weaknesses in the control environment due to hiring
and staffing deficiencies may limit Treasury’s ability to plan, direct, and
control HAMP operations and could put taxpayer funds at risk.
In addition to establishing an organizational structure for HAMP, Treasury
has developed and, according to program officials, continues to refine key
operational procedures and internal controls that it anticipates executing
when the initial first-lien modification payments are made to servicers
under HAMP. In particular, Treasury has drafted flow charts which
delineate aspects of the overall HAMP process, using key internal control
points with corresponding narrative descriptions. According to Treasury,
internal controls have been implemented for transactions that have
already occurred To date, transactions have primarily involved the setting
of servicer caps. On July 17, 2009, Treasury began a simulation involving
Treasury, Fannie Mae, and Bank of New York-Mellon of the HAMP
disbursement process that tested internal controls over the disbursement
of TARP funds. However, complete policies and procedures for HAMP are
still in draft and are scheduled to be completed by September 30, 2009. To
ensure that program guidelines are followed consistently and resources
are used appropriately throughout the HAMP process in the coming stages
of the program, it will be important for Treasury to finalize and monitor its
internal control system. As part of our future TARP work, we will continue
to review Treasury’s ongoing efforts to establish and implement a
comprehensive system of internal control.
Treasury officials noted that they are developing performance measures
for HAMP, an early draft of which includes process measures such as the
number of servicers participating in the program and the number of
borrowers being reached, as well as outcome measures such as average
debt-to-income ratios (pre and post modification) and redefault rates.
However, many of the specifics of these performance measures have not
yet been defined. For example, Treasury has not specified the sources of
the data to be used or the definitions of success for each measure. Further,
the draft performance measures do not include measures of servicer
performance, including whether servicers are meeting program
requirements related to modifying loans for borrowers not yet in default.
Treasury officials indicated that they will work with servicers to set more
precise process measures for the program, including average borrower
wait time for inbound borrower inquiries, the completeness and accuracy
of information provided to applicants, and response time for completed

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applications. Treasury officials also told us that by August 4th, Treasury
will begin issuing monthly reports with some servicer-specific
performance measures, including the number of trial modifications each
servicer has extended to eligible borrowers, the number of trial
modifications that are underway; the number of final modifications and,
eventually, the long term success of those modifications. According to the
Senate committee report accompanying the Government Performance and
Results Act of 1993, annual performance goals are the major means for
gauging progress toward accomplishment of longer-term program goals. In
developing performance measurements, it will be important for Treasury
to be able to evaluate HAMP’s progress toward its goals, including
preserving homeownership, and to define outcome measures that will be
objective, measurable, quantifiable, and reflects the goals and mission of
HAMP.
While HPO continues to refine the areas of the HAMP operational process
that require direct Treasury involvement, Fannie Mae has begun mapping
out the overall HAMP program process—including registration and data
collection set up for participating servicers—and assessing potential risks
in the overall processes to specify points for internal control. In addition,
Treasury officials noted that they are currently reviewing with Fannie Mae
its documentation of the processes around the calculation of incentive
payments and the invoicing process. Treasury officials said Fannie Mae
has provided Treasury for its review and comment the most recently
available draft internal control documentation for HAMP processes for
which controls have been designed, completed or executed. Treasury
officials said they are participating in regular meetings with Fannie Mae
personnel to discuss the different HAMP processes and associated internal
controls.
According to Fannie Mae, the agency is developing controls to ensure the
effectiveness of operations throughout the modification process, including
those needed prior to making the first modification payment to servicers.
For example, Fannie Mae officials noted that—working with Treasury and
other agencies—they had developed automated edit checks for loans that
were being electronically evaluated for HAMP eligibility. Fannie Mae has
documented certain internal controls, including those that focus on
registering, executing contracts with, and setting up servicers in HAMP
electronic systems; the HAMP payment process; and the HAMP reporting
process. Fannie Mae is working with Treasury to develop processes and
internal control documentation for additional steps in the HAMP process,
including, for example, trial modification administration and data
collection and reporting. Fannie Mae has set a timeline for the

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development, assessment, and testing of the administrative and set-up,
record keeping and reporting, paying agent, and electronic data
management processes for HAMP. According to the timeline, most
processes will be designed by mid-August, with assessment and testing to
continue through late October 2009. According to Treasury, as of June 30,
2009, Fannie Mae, in coordination with Treasury, performed effectiveness
testing for three areas—servicer set-up, servicer caps, and incentive
accruals (calculations of HAMP payments owed to each servicer in the
immediate future). However, some processes that were scheduled to be
completed by now are still under development. Specifically, setting up the
trial modification process in Fannie Mae’s electronic data system, and the
initiation and eligibility aspects of the official modification process were
all scheduled to be completed in June 2009, but were still under
development as of July 2009.
Freddie Mac has begun defining and documenting its HAMP compliance
testing program. According to Freddie Mac, compliance reviews will take
three approaches:
•

announced reviews (remote and onsite), which will provide a structured
and consistent process to assess servicer compliance;

•

unannounced reviews (remote and onsite), which will provide the ability
to review any loan at any time; and

•

data analysis, including third-party data verification, which will provide
ongoing analyses of servicers to identify patterns or trends that require
investigation.
Freddie Mac plans to use these three approaches to verify participating
servicers’ adherence to program guidelines and has begun to consider how
potential areas of noncompliance will be identified. For example, Freddie
Mac will conduct trial period reviews, which are on-site audits and file
reviews targeting larger servicers and are intended to assess the strength
of the servicer’s control environment, systems, and staffing. According to
Treasury, the first trial review was completed in June 2009, two reviews
began or will begin in July 2009, and four reviews are scheduled to begin in
August 2009. In addition, to ensure that all eligible borrowers are given the
opportunity to participate in the program, Freddie Mac indicated that it
will use performance reporting data to track modification volume against
expectations. According to Treasury officials, Freddie Mac will also
develop a “second look” process, whereby it will audit modification
applications that have been declined. Freddie Mac will coordinate with

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servicers to address specific cases that surface as a concern, as well as
more generally address potential operational weaknesses where errors
prove more systematic. To identify fictitious modifications, such as
modifications reported by a servicer on a loan that does not exist, Freddie
Mac will take steps such as investigating borrower complaints and running
database tests to identify multiple modifications for a single borrower.
However, it is unclear when Freddie Mac will have procedures in place to
address identified instances of noncompliance among servicers. In
particular, while Treasury has emphasized in program announcements that
one of HAMP’s primary goals is to reach borrowers who are still current
on mortgage payments but at risk of default, no comprehensive processes
have yet been established to assure that all borrowers at risk of default in
participating servicers’ portfolios are reached. For example, the program
guidelines do not specify how servicers are to document inquiries from
borrowers claiming to be at risk of default. According to Treasury officials,
some procedures have been put in place to ensure that this goal is
reached. For example, they said that Freddie Mac would assess whether
servicers were offering modifications to borrowers who were not yet
delinquent by reviewing servicer call records of borrowers in this situation
who contacted servicers. However, it is unlikely that these reviews will
provide a complete assessment of servicers’ responses to borrower
inquiries.

Neither Treasury Nor Its
Financial Agents Are
Systematically Evaluating
the Capacity of Servicers
to Fulfill HAMP
Requirements during
Program Admittance

Servicers are required to fulfill extensive program requirements, which for
some servicers will necessitate increasing staffing and updating data
collection systems. However, Treasury and its financial agents are not
consistently assessing the ability of prospective HAMP servicers to meet
distinct HAMP requirements and guidelines during the program
admittance process. In November 2008, the federal banking regulators
stated that banking organizations needed to ensure that their servicers
were sufficiently funded and staffed to work with borrowers to avoid
preventable foreclosures while implementing effective risk mitigation
measures. However, in its March 2009 report, COP noted that servicers
were generally understaffed, lacked the capacity to handle the pre-HAMP
demand for loan workout requests, and had no apparent ability to handle a
greater volume of loan modifications, such as that expected to be

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generated under HAMP. 50 Furthermore, on July 9, 2009, the Secretaries of
the Treasury and HUD sent a letter to participating servicers that
identified a general need for servicers to devote substantially more
resources to HAMP’s loan modification program. In this letter, the
secretaries asked that servicers appoint a high-level liaison to be the point
of contact for implementation of the MHA program, expand their servicing
capacity, and improve the execution quality of loan modifications.
Consistent with GAO standards for internal control, program managers
should identify potential program risks, and analyze them for their
possible effect. 51 As mentioned above, participating servicers agree to
fulfill program requirements set forth in all program guidelines, including
the servicer participation agreements they sign with Fannie Mae. The
HAMP servicer registration process guidelines contain controls to validate
the servicers and their portfolio size and activity level, and Treasury
officials said that they were conducting weekly phone calls with servicers
and planning a servicer conference.
Freddie Mac conducted readiness reviews of a limited number of
servicers. However, Treasury officials told us that the readiness reviews
were not intended to be used to evaluate servicers prior to entering the
program, but instead were part of the program implementation process.
Freddie Mac officials noted that the objective of these reviews was to
assess servicers’ readiness to (1) understand the requirements of the
HAMP program; (2) effectively execute program requirements within their
infrastructure; and (3) ensure compliance with program requirements by
implementing new policies, procedures, and controls. Treasury described
the reviews as a snapshot of how an initial group of servicers understood
and could implement HAMP requirements. According to Treasury and
Freddie Mac, readiness reviews of seven of the largest servicers that own
or service some loans not owned by Freddie Mac or Fannie Mae have been
completed and no additional readiness reviews are planned. As a result, 20
servicers that have executed agreements as of July 14, 2009, will not
receive readiness reviews. Thus, without systematically conducting
readiness reviews—or using other means of assessing servicer capacity—
during the admittance process Treasury cannot identify, assess, and

50

Congressional Oversight Panel, March 2009. Loan workouts include forbearance plans
and loan modifications, which are options to avoid foreclosure discussed previously in this
report.

51

GAO/AIMD-00-21.3.1.

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GAO-09-837 Troubled Asset Relief Program

address risks associated with servicers that lack the capacity to fulfill all
program requirements.
Moreover, Freddie Mac officials told us that they had initially planned
multiday servicer readiness reviews that included both interviews and
documentation reviews, but they indicated that the reviews to date
consisted only of interviews with senior executives and that information
gathered during the interviews was not verified. Freddie Mac also initially
stated that if deficiencies were identified during servicer readiness
reviews, a remediation plan would be developed and appropriate follow up
actions instituted, but it later indicated that the reviews conducted did not
involve any follow-up monitoring as a result of identified deficiencies. It is
unclear how Treasury and Freddie Mac will follow up with servicer
deficiencies identified as part of these reviews.
While Freddie Mac noted that servicers that had received readiness
reviews were optimistic about their ability to meet program requirements,
they also indicated that servicers needed adequate time to fully design,
develop, test, and implement new procedures and infrastructure to
properly handle cash movement and incentive disbursements. In addition,
as part of these reviews servicers expressed concerns about their
capability to monitor potential fraud among borrowers and said that they
need greater guidance in identifying, assessing, mitigating, and disclosing
potential noncompliance situations including those involving fraud, waste,
and abuse.
Moreover, some servicers have expressed concerns about their ability to
meet all program requirements, particularly with regard to data collection
and reporting, outside of the readiness reviews. On April 6, 2009, Fannie
Mae announced requirements for data collection and reporting by
participating HAMP servicers and on July 6, 2009 it issued an update to
this guidance. 52 According to these guidelines, servicers are required to
report selected data during the modification trial period and when the
modification has been approved. Once the modification has been
approved, servicers must begin reporting activity on HAMP loans on a
monthly basis. These data reports are submitted to Fannie Mae in its role
as HAMP program administrator and record keeper, and include loan
identifiers, servicer registration and bank account information, and loan-

52

HAMP Supplemental Directive 09-01 and Home Affordable Modification Program (HAMP)
Servicer Reporting Requirements.

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level data such as borrower identification information and NPV test
results. However, according to a HOPE NOW survey of some of its servicer
members, none of the nine servicers that provided written responses could
provide all of the 106 data elements that Treasury had deemed high
priority, with servicers reporting that they could collect between 38 and 87
of these high-priority data elements. 53 In addition, during an outreach
meeting Treasury held with 13 HAMP servicers, some participating
servicers indicated that they would have difficulty collecting data and
providing reports for all of the required data elements, citing barriers such
as capacity issues, limited system platform capabilities, lack of experience
with particular data elements, and incomplete guidance on data definitions
and report templates. Similarly, all six of the servicers that we contacted
also told us that that they would need to develop separate platforms to
capture HAMP data they had not collected in the past. For example, three
out of the six small to large servicers specifically cited as a concern
collecting demographic information (race, ethnicity, gender, etc.), which
will be required as of October 1, 2009, because of the sensitive nature of
the information. 54 Treasury updated its data definition document again on
July 20, 2009. According to Treasury, HAMP’s phased in data collection
and reporting approach was developed to try to limit the burden of these
requirements on servicers.
Treasury officials noted that nearly all of the servicers that were expected
to participate in HAMP had already been approved through a GSE
eligibility process. 55 Currently, all 27 participating HAMP servicers were
GSE-approved servicers. However, some HAMP requirements are distinct
from requirements set by GSEs. For example, as previously noted, some

53

HOPE NOW is an alliance between counselors, mortgage companies, investors, and other
mortgage market participants to maximize outreach efforts to homeowners in distress to
help them stay in their homes and creates a unified, coordinated plan to reach and help as
many homeowners as possible. The Department of the Treasury and the U.S. Department
of Housing and Urban Development encouraged leaders in the lending industry, investors
and non-profits to form this alliance.

54
To help servicers implement HAMP, Fannie Mae issued a supplemental directive
concerning the collection of such data. HAMP Supplemental Directive 09-02, Fair Housing
Obligations under the Home Affordable Modification Program (Apr. 21, 2009).
55

Servicers who wish to service mortgages for Freddie Mac or Fannie Mae must meet
certain criteria before being approved to service these loans. Eligibility requirements for
both Freddie Mac and Fannie Mae primarily include being able to service mortgages in a
manner acceptable to the GSE, meeting certain net worth requirements, agreeing to
provide audit records and financial statements, and meeting specified insurance
requirements.

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servicers have expressed concern about meeting HAMP requirements.
Therefore, even when HAMP participating servicers are GSE-approved,
the servicers’ capacity to implement a large-scale loan modification
program has not been assessed and is unknown. Furthermore, in the
future, HAMP servicers may include those that only service non-GSE
loans. Treasury officials indicated that they plan to develop eligibility
requirements for non-GSE servicers, but the assessment criteria and
processes for implementing these requirements remain unclear. Consistent
with GAO’s standards for internal control, program managers should
identify risks, consider all significant actions between the program and
other parties, and analyze risks identified for their possible effect. 56
Without a comprehensive assessment of servicers’ capacity or the
potential risks servicers pose before they enter into participation
agreements and receive taxpayer funds, Treasury and its financial agents
cannot adequately determine the potential areas of risk individual
servicers may pose. Further, they cannot mitigate the potential negative
effects of these risks and may not be able to provide the additional support
and guidance some servicers may need to properly meet all program
requirements. We will continue to look at servicers’ capacity to effectively
implement HAMP as part of our ongoing TARP oversight responsibilities.

Conclusions

In our March 2009 report on TARP, we reported that significant program
components and controls were under development for HAMP. Currently
several components have not yet been implemented, and although the
central program—the first-lien modification initiative—has been
implemented, many of its administrative processes and its internal control
policies and procedures are not yet finalized. HAMP is the cornerstone
effort under TARP to meet the act’s purposes of preserving
homeownership and protecting home values. But as of the date of this
report a number of HAMP programs remain largely undefined. Our
analysis found weaknesses with the design and monitoring plans for the
counseling feature of the first-lien modification program and the rationale
for the HPDP program and with Treasury’s estimate of the number of
borrowers that might be helped under the first-lien modification program.
Furthermore, we identified weaknesses with HAMP’s management
infrastructure and found that the development of some processes and
internal controls was behind schedule. Finally, we are concerned that

56

GAO/AIMD-00-21.3.1.

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Treasury is not fully vetting servicers with which they contract to make
modifications. One of Treasury’s stated goals is to complete initial
modifications quickly. But, unlike other TARP programs, such as the
Capital Purchase Program, HAMP expenditures—which are projected to
be up to $50 billion—are not investments that will be partially or fully
repaid but expenditures that, once made, will not be recouped. For this
reason, a system of effective internal control over program expenditures is
of critical importance.
The design of the first-lien modification program, which has been designed
to reduce borrowers’ mortgage payments to affordable levels by modifying
their loans, does appear to largely meet the act’s goals. Servicers that have
entered into HAMP servicer participation agreements have reported that
over 180,000 borrowers have entered into the trial period for the
modification of their first-lien mortgages. A number of features have been
built into the first lien-modification program to try to ensure that the
program’s objectives of helping borrowers in danger of foreclosure are
met. The key feature is a cost-sharing arrangement between Treasury and
the mortgage holder/investor to lower mortgage payments to 31 percent of
the borrower’s income combined with various incentive payments to
servicers, mortgage holders/investors, and the borrower intended to
facilitate and ensure the long-term success of the loan modification. One
of HAMP’s features intended to help reduce the rate of redefault on
modified loans requires borrowers with high total household debt to
obtain housing counseling. Treasury is not tracking whether all borrowers
told they must obtain counseling do so, and thus may not know if this
provision is having its intended effect or if a potential lack of borrower
compliance may limit its impact.
Program guidelines and specific operational procedures have not been
established for four other HAMP subprograms, and the need for one of
these—the $10 billion Home Price Decline Protection (HPDP) program—
remains unclear. HPDP is designed to encourage investors to modify more
mortgages by providing incentives to partially offset probable losses from
home price declines. However, Treasury officials told us that they had not
independently estimated the number of new modifications that incentive
payments under this program might generate. Further, according to
Treasury officials, incentives under HPDP might be paid to modify loans
that already would have qualified for modification under the first-lien
modification program using the NPV test. Although HPDP may provide
incentives for some loan modifications that would otherwise not be made,
without demonstrating the need for these incentive payments for all loans
modified in a given area experiencing home price declines, Treasury may

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not be maximizing assistance for helping homeowners avoid potential
foreclosure as required by the act.
Treasury’s estimates of the number of borrowers HAMP might help with
first-lien loan modifications are also problematic. We recognize that
Treasury was moving very quickly to develop these estimates for a
program that has no relevant historical point of comparison. As a result,
some of the key assumptions and calculations regarding the number of
borrowers whose loans would be successfully modified under HAMP using
TARP funds were necessarily based on limited analyses and data.
However, Treasury’s estimates of the number of homeowners who would
likely participate in its HAMP loan modification program may be
overstated. In developing these estimates, Treasury did not take into full
account some of the variables underlying its assumptions about the
behavior of both borrowers and servicers and did not provide full
documentation for some of the key assumptions and analyses. Because of
the lack of relevant historical data, the changing nature of the mortgage
market, and the weaknesses in the national economy, the key assumptions
and calculations are surrounded by uncertainty, and documentation is
essential to establishing a baseline against which to monitor them.
Treasury also did not indicate that it planned to update the information
that it used in its assumptions, leaving open the possibility that its
calculations could rapidly become outdated. Establishing a documented
baseline and regularly updating these estimates would help Treasury and
its stakeholders monitor program progress, identify problem areas as they
emerge, and focus program resources.
Finally, administrative processes, including staffing, and a comprehensive
system of internal controls have yet to be finalized. Of particular concern
is the fact that the key leadership position for HAMP within HPO has not
been permanently filled and that many other positions affecting HAMP
remain open. Furthermore, although the office has been established for 10
months and its current structure has been in place since March 2009, HPO
has yet to complete a bimonthly workforce planning review, as called for
in each TARP office under OFS’s strategic plan. Given, the importance of
HPO’s role with respect to monitoring the financial agents and privately
owned servicers involved in the $50 billion HAMP program, having enough
staff with appropriate skills is essential to governing the program
effectively. While some processes and internal controls have been
developed for the early stages of program implementation, many more
controls will need to be finalized as the program progresses, the first
modifications are completed, and payments begin to ensure that taxpayer
dollars are safeguarded, program objectives are achieved, and program

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GAO-09-837 Troubled Asset Relief Program

requirements are met. We also noted that Treasury had no plans to
develop processes to systematically evaluate the capacity of servicers to
fulfill specific HAMP requirements or to identify risks individual servicers
might pose when they applied for the program. Some servicers have raised
concerns about their ability to meet extensive program guidelines, and
another TARP oversight entity has questioned whether servicers have the
staff and operational framework to implement a large-scale loan
modification program. Without a means of reviewing the capacity of
servicers to fulfill program requirements, Treasury cannot be assured that
initial modifications will be completed quickly—one of Treasury’s stated
priorities for the program—or that they will be consistent with program
guidelines. Because Treasury does not systematically evaluate servicers
prior to admittance to the program, it is unable to identify, assess, and
address risks, including those associated with servicers that lack the
capacity to fulfill requirements such as collecting and reporting complete
and accurate data, before executing a contract with them under HAMP.
Given the magnitude of the investment in public funds for HAMP, and the
fact that the program is structured to make direct purchase payments,
rather than investments that may yield a return to the taxpayer as in other
TARP programs, it is important for Treasury to work expeditiously to
establish effective processes and controls to manage the program.

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 the following actions:

•

consider methods of (1) monitoring whether borrowers with total
household debt of over 55 percent of their income who have been told that
they must obtain HUD-approved housing counseling do so, and
(2) assessing how this counseling affects the performance of modified
loans to see if the requirement is having its intended effect of limiting
redefaults;

•

reevaluate the basis and design of the HPDP program to ensure that HAMP
funds are being used efficiently to maximize the number of borrowers who
are helped under HAMP and to maximize overall benefits of utilizing
taxpayer dollars;

•

institute a system to routinely review and update key assumptions and
projections about the housing market and the behavior of mortgageholders, borrowers, and servicers that underlie Treasury’s projection of
the number of borrowers whose loans are likely to be modified under

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GAO-09-837 Troubled Asset Relief Program

HAMP and revise the projection as necessary in order to assess the
program’s effectiveness and structure;
•

•

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; and

•

Agency Comments
and Our Evaluation

place a high priority on fully staffing vacant positions in HPO—including
filling the position of Chief of Homeownership Preservation 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 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.

We provided a draft of this report to Treasury for review and comment. We
received written comments from Treasury that are reprinted in appendix
II. We also received technical comments from Treasury that we
incorporated as appropriate.
In its written comments, Treasury stated that it would consider GAO’s
recommendations seriously as it moved forward. Specifically, Treasury
stated that in response to its discussions about the program with GAO and
others, it would continue to assess and implement changes to features of
the program to improve its ability to assist the greatest number of
borrowers most in need of assistance at the least cost to taxpayers.
Treasury noted that there had never before been a government program
designed to incentivize mortgage modifications and help struggling
homeowners on the scale of the HAMP program, and that there were many
uncertainties inherent in making projections about participation, cost and
performance for a program that is unprecedented in size, scope, and goals.
Accordingly, Treasury indicated that it planned on actively evaluating the
program, testing key assumptions, and updating cost and participation
estimates as the program progressed. Treasury also stated that it planned
to staff positions in the Homeownership Preservation Office as quickly as
possible. Treasury noted that it recognized that a strong compliance

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GAO-09-837 Troubled Asset Relief Program

system was critical to program effectiveness, and it was committed to
finalizing its compliance processes as a top priority of the program. Lastly,
Treasury stated that it planned to continue to assess servicers’ capacity to
meet requirements of the HAMP program and to work aggressively with
servicers to ensure that capacity, implementation, and compliance
requirements are met. As part of our ongoing monitoring of Treasury’s
implementation of TARP, we will continue to monitor 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 also is 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 III.

Gene L. Dodaro
Acting Comptroller General
of the United States

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GAO-09-837 Troubled Asset Relief Program

List of Congressional 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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GAO-09-837 Troubled Asset Relief Program

The Honorable Barney Frank
Chairman
The Honorable Spencer Bachus
Ranking Member
Committee on Financial Services
House of Representatives
The Honorable Charles B. Rangel
Chairman
The Honorable Dave Camp
Ranking Member
Committee on Ways and Means
House of Representatives

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GAO-09-837 Troubled Asset Relief Program

Appendix I: List of Servicers That Have
Signed HAMP Participation Agreements, as of
July 14, 2009

Appendix I: List of Servicers That Have
Signed HAMP Participation Agreements, as
of July 14, 2009
Dollars in thousands
Name of Institution

Original cap

Adjustments
to cap

Revised
cap

Select Portfolio Servicing

$376,000

$284,590

$660,590

CitiMortgage, Inc.

2,071,000

(991,580)

1,079,420

Wells Fargo Bank, NA

2,873,000

(462,990)

2,410,010

GMAC Mortgage, Inc.

633,000

384,650

1,017,650

Saxon Mortgage Services, Inc.

407,000

225,040

632,040

Chase Home Finance, LLC

3,552,000

3,552,000

Ocwen Financial Corporation, Inc.

659,000

(105,620)

553,380

Bank of America, N.A.

798,900

5,540

804,440

Countrywide Home Loans Servicing LP

1,864,000

3,318,840

5,182,840

Home Loan Services, Inc.

319,000

128,300

447,300

Wilshire Credit Corporation

366,000

87,130

453,130

Green Tree Servicing LLC

156,000

(64,990)

91,010

Carrington Mortgage Services, LLC

195,000

(63,980)

131,020

Aurora Loan Services, LLC

798,000

(338,450)

459,550

Nationstar Mortgage LLC

101,000

16,140

117,140

Residential Credit Solutions

19,400

19,400

CCO Mortgage

16,520

16,520

RG Mortgage Corporation

57,000

57,000

First Federal Savings and Loan

770

770

Wescom Central Credit Union

540

540

Citizens First Wholesale Mortgage
Company

30

30

Technology Credit Union

70

70

National City Bank

294,980

294,980

Wachovia Mortgage, FSB

634,010

634,010

44,260

44,260

Lake National Bank

100

100

IBM Southeast Employees’ Federal Credit
Union

870

870

$16,237,450

$2,422,620 $18,660,070

Bayview Loan Servicing, LLC

Total
Source: Treasury, OFS.

Note: Where Treasury has made no adjustments to the cap, we have listed the same amount for the
revised cap as the amount listed for the original cap.

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GAO-09-837 Troubled Asset Relief Program

Appendix II: Comments from the Department
of the Treasury

Appendix II: Comments from the Department
of the Treasury

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GAO-09-837 Troubled Asset Relief Program

Appendix II: Comments from the Department
of the Treasury

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GAO-09-837 Troubled Asset Relief Program

Appendix II: Comments from the Department
of the Treasury

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GAO-09-837 Troubled Asset Relief Program

Appendix III: Contacts and Staff
Acknowledgments

Appendix III: 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 J. Hillman, (202) 512-8678 or hillmanr@gao.gov

Staff
Acknowledgments

In addition to the contacts named above, Susan Offutt (Chief Economist);
Lynda Downing, Harry Medina, John Karikari (Lead Assistant Directors);
and Tania Calhoun, Emily Chalmers, Rachel DeMarcus, Christopher
Klisch, Damian Kudelka, Marc Molino, Mary Osorno, Julie Trinder, Winnie
Tsen, and Jim Vitarello made important contributions to this report.

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GAO-09-837 Troubled Asset Relief Program

Related GAO Products

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Transparency and Accountability Issues. GAO-09-658. Washington, D.C.:
June 17, 2009.
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Small Business Administration’s Implementation of Administrative
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GAO-09-507R. Washington, D.C.: April 16, 2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-504. Washington, D.C.:
March 31, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for the Period October 28, 2008 through March 20, 2009 and
Information on Financial Agency Agreements, Contracts, and Blanket
Purchase Agreements Awarded as of March 13, 2009. GAO-09-522SP.
Washington, D.C.: March 31, 2009.
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D.C.: March 31, 2009.
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Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-474T. Washington,
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Troubled Asset Relief Program: Status of Efforts to Address
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Troubled Asset Relief Program: Status of Efforts to Address
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GAO-09-837 Troubled Asset Relief Program

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Ensure Integrity, Accountability, and Transparency. GAO-09-266T.
Washington, D.C.: December 10, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. GAO-09-247T. Washington, D.C.: December, 5, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. GAO-09-242T. Washington, D.C.: December 4, 2008.
Troubled Asset Relief Program: Status of Efforts to Address Defaults and
Foreclosures on Home Mortgages. GAO-09-231T. Washington, D.C.:
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Washington, D.C.: December 2, 2008.

(250471)

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