The same irregularities that caused banks to temporarily halt foreclosures earlier this year may be undermining the government's mortgage modification program, the Congressional Oversight Panel announced in its latest report released today.
This fall, Bank of America Corp. and JPMorgan Chase & Co. delayed or suspended foreclosure proceedings due to irregularities with foreclosure affidavits, the documents signed by bank officials certifying they own the mortgage. GMAC Mortgage also temporarily suspended evictions and post-forelocusre closings in some states.
The problem is due to the increasing tendency of financial institutions to bundle and sell mortgages many times over. Eventually, it can become difficult to determine exactly who owns the loan.
The panel, charged with providing oversight of the Troubled Asset Relief Program, reported that -- given the confusion over the ownership of those loans -- it is possible that the Treasury Department is dealing with the wrong parties when it seeks to modify mortgages through the Home Affordable Modification Program.
Under HAMP -- a program within TARP -- Treasury pays incentives to mortgage servicers who are willing to modify the mortgages of borrowers who are having trouble making their payments.
But if an institution does not legally own a mortgage, its servicer cannot foreclose on it. In that case, HAMP could be paying incentives needlessly to a servicer that lacks the legal authority to foreclose.
Treasury has no way to determine whether improper payments are being made, the panel wrote. "Treasury may well be paying incentives to servicers that have no right to receive them," the panel reported.
The panel also wrote that servicers' "tendency to cut corners" means they may have made mistakes when calculating who is eligible for modifications and who is not.
Phyllis Caldwell, who leads Treasury's Homeownership Preservation Office, said that HAMP "is not directly affected" by the questionable affidavits. The COP reported that Treasury is doing nothing to independently verify that mortgages modified by HAMP servicers are under proper ownership.
Treasury, meanwhile, has said that if mistakes have been made in the HAMP process, it can clawback the incentive payments when a legal owner ultimately emerges. But, the oversight panel wrote, that plan "optimistically assumes that legal owners will be able to identify clearly the mortgages they own." In other words, those legal owners may not come forward.
Additionally, that policy creates a double standard in which borrowers must provide extensive documentation to benefit from HAMP, while servicers do not. The program has been marred by criticism from borrowers, who say the documentation requirements of HAMP are onerous and not consistently followed.
The panel urged Treasury to investigate whether documention problems are undermining HAMP and to publicly report its findings.
The panel also advised the Treasury Department and bank regulators to continue monitoring allegations of illegal foreclosures on a broader level. The report reiterated the critique that the growth of mortgage securitization has outpaced the industry's ability to track ownership of properties, and that banks may have foreclosed on homes they couldn't prove they owned.
"If documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed properties but also pooled mortgages, the consequences could be severe," the panel wrote.
"Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse."
Sen. Ted Kaufman (D-Del.), who chairs the panel, said in a conference call with the reporters that the latest report covers only potential problems that "could turn out to be nothing."
Given the vast size of the mortgage-backed security market -- an estimated $7.6 trillion -- even if a small portion of the market was affected by the confusion, the damage to the financial system could be vast, Kaufman said. That's of particular concern to the panel, given that such a crisis could undo the progress of TARP in stabilizing the financial system.
The panel also urged bank regulators to conduct stress testing to determine whether Wall Street banks can handle a potential real estate crisis that may emerge from the questionable ownership concerns.
Kaufman declined to promote a national moratorium on foreclosures when questioned by reporters.