The Obama administration's foreclosure prevention plan is coming under fire this week from members of Congress. The program was supposed to help 3 million to 4 million homeowners avoid foreclosure, but it has fallen far short of that goal, and now Republican lawmakers have introduced legislation to shut it down.
The so-called Home Affordable Modification Program was designed to lower interest rates and mortgage payments for struggling homeowners, and it has worked for around 600,000 people across the country. But critics say it should be reaching a lot more people.
There are "3.3 million families who might have been reached by this program if only it had been better designed, better managed and better executed by the Treasury department," said Neil Barofsky, the special inspector general installed to oversee the government's bank bailout efforts. Speaking at a House hearing Wednesday, Barofsky responded to questions from North Carolina Republican Rep. Patrick McHenry, who recently introduced the legislation that would end the program.
Barofsky has been critical of the Treasury department for not doing more to make the program work better and reach more people, and for not offering a current estimate of how many homeowners the program will actually reach.
"It is somewhat shameful that at this point — here we are in March 2011 — and the Treasury department will in one breath say that, 'Well, we know the number is not going to be anywhere close to what we originally said it would be,' " Barofsky said, "and then in the second breath refuse — I mean, this is such a basic failure in transparency, to refuse to tell you what their expectation is as to the total number that are going to receive permanent modifications. It evades accountability, and it's trying to cover up a program that is clearly a failure."
Barofsky and other critics say one of the program's major weaknesses is that it's a government program but it relies on the banks to decide who gets help and who doesn't. They say the banks lose homeowners' paperwork all the time, and that the program rejects homeowners who actually should qualify.
The Treasury department and Barofsky both agree that the banks — or "mortgage servicers," as they're called — have been doing a terribly inadequate job.
"An abysmal job — there is universal agreement to that," Barofsky said. "But Treasury has done nothing to punish or penalize these servicers."
One of the problems is that the servicers — the banks — often string homeowners along in a way that's harmful in the end. The banks are supposed to tell homeowners within three months whether they qualify for help. But that process can drag on for much longer, sometimes more than a year. During that time, the homeowners make smaller payments. But if in the end they get rejected, rightly or wrongly, they suddenly owe a pile of back payments — $5,000 or $10,000 that they can't possibly pay — because those smaller payments are then considered inadequate.
"They're hit not just with a bill for all of the difference between their trial payments and the amount original done, but late fees ... and Treasury permits this in their program — late fees when they've never actually missed a payment," Barofsky said.
For its part, the Treasury department defends the program. It says it's not perfect, but it has helped more than a half-million people and keeps helping more.
Asked about ending the program this week, Treasury Secretary Timothy Geithner said it would "cause a huge amount of damage to a very fragile housing market and leave hundreds and hundreds of thousands, if not millions, of Americans without the chance to take advantage of a mortgage modification that would allow them to stay in a home they can afford."
Barofsky stopped short of calling for the program to be shut down. Instead, he has long called for the Treasury to fix the program so it will help more people.