Foreclosure Express: Why the Feds Let Banks Get Away With Murder

Last Updated Feb 11, 2011 3:43 PM EST

Big banks that participate in the Obama administration's main program to combat foreclosures have, appropriately, drawn fire for failing to help struggling homeowners by lowering their mortgage payments. But the largely untold part of the story is why the government is so reluctant to force these loan servicers to comply with the federal Home Affordable Modification Program, or HAMP.

ProPublica has the goods, and it will make your blood boil. Ignoring calls by lawmakers of both parties, consumer advocates and even its own staff, the Treasury Department refuses to punish financial institutions that blatantly violate HAMP, according to the nonprofit journalism outfit. The agency has imposed no fines or other penalties, such as withholding the "incentive" payments servicers get for modifying mortgages through the program. It has no written policy for handling violations. Treasury, which once vowed to sanction financial firms that didn't play by the rules, now even contends it has little power to do so:

In fact, despite issuing public warnings for more than a year about imposing penalties, the Treasury Department told ProPublica this week they don't even have the power to punish servicers for wrongfully denying help to homeowners. Instead of toughening the program, Treasury has actually loosened it in the face of industry lobbying.
Paging Mr. Kafka
It gets worse. Treasury says it can withhold or "claw back" payments to servicers only when a firm incorrectly modified a person's mortgage. Got that? In other words, if your helpful neighborhood servicer decides to turn your loan-mod application into confetti just for the hell of it, the government can't financially penalize them.

Under pressure from financial lobbyists, ProPublica suggests, Treasury also weakened the HAMP rules that stipulate what servicers must do to fix problems in administering the program. As a result, "servicers can define for themselves what violations" they choose to disclose to the agency.

But wait, there's more. Why is Treasury reluctant to punish Wall Street giants with large servicing operations, such as Bank of America (BAC), Citigroup (C) and JPMorgan Chase (JPM), for failing to comply with HAMP? Because the agency is afraid that cracking down by, say, withholding modification payments would cause loan servicers to abandon the program.

"If servicers don't get paid for future modification activity, there is a risk that they will be less inclined to continue completing HAMP modifications or to follow HAMP guidelines to evaluate homeowners for all loss mitigation options before referring them to foreclosure," said a Treasury spokeswoman.
Let us pause briefly to marvel at the imbecility of this policy, at its Kafkaesque incoherence, its brutish indifference to people's lives: The feds won't punish banks for breaking the rules because, if they do, the banks might break the rules. I've read Zen koans that make more sense.

Disastrous HAMP
With such lax federal oversight, it's no wonder HAMP has been a bust. When the program launched in March 2009, the government said it would help 3-4 million homeowners avoid foreclosure. Nearly three years later, fewer than 522,000 mortgages had been permanently modified under HAMP. The government claims it has taken steps to make financial firms improve their notoriously bad customer service in helping borrowers under HAMP, but to no avail -- complaints about the program are rising.

Neil Barofsky, the government official who oversees TARP (though which HAMP is funded), recently blasted Treasury for failing to crack down on servicers:

At some point, Treasury needs to ask itself what value there is in a program under which not only participation, but also compliance with the rules, is voluntary.... Without meaningful servicer accountability, the program will continue to flounder. Treasury needs to recognize the failings of HAMP and be willing to risk offending servicers. And if getting tough means risking servicer flight, so be it; the results could hardly be much worse.
Or the timing. A record 2.9 million homes fell into foreclosure in 2010, with banks seizing more than 1 million homes. As of December, roughly one out of every 500 housing units in the U.S. had received a foreclosure filing, according to research firm RealtyTrac. More than 3 million foreclosure notices are expected in 2011.

Treasury's dismal record of fighting foreclosures comes awfully close to complicity with the financial industry. To that end, agency chief Tim Geithner also has argued against even a temporary slowdown in foreclosures in wake of the "robo-signing" scandal.

By now it seems clear that the government, far from trying to stop foreclosures, wants to accelerate them in order to speed the economic recovery. Ponder that.

Thumbnail from Flickr user gruntzooki; Geithner image from U.S. Treasury Department
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    Alain Sherter covers business and economic affairs for CBSNews.com.