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The Treasury Department has swapped the carrot for the stick for three of the largest participants in the administration's foreclosure prevention program.
June 9
The Treasury Department said Thursday that it did not pay any incentives for foreclosure prevention efforts to Bank of America Corp. and JPMorgan Chase & Co. in the second quarter, as the two banks still need "substantial improvement" in their mortgage servicing operations.
But Wells Fargo & Co., which like the two other banks did not receive any incentives in the first quarter and vociferously disputed Treasury's
The department itself has been lambasted for the lack of effectiveness of its Making Home Affordable Program, which sought to rectify the collapse of the housing market by having servicers modify the loans of defaulted borrowers. Treasury has claimed it cannot assess financial penalties against servicers, so withholding incentive payments is one of its only ways to prod servicers to improve.
Participants in the voluntary program have been encouraged to reduce the monthly mortgage payments and interest rates of homeowners who stopped paying their mortgages. In return, the servicers receive payouts for modifying loans as long as the loans do not redefault later.
To improve transparency, Treasury created benchmarks to assess the performance of servicers in seven areas.
JPMorgan Chase leap-frogged over B of A as the worst performer in the second quarter, receiving the lowest rating — one out of three stars — in three categories. Those categories are: having proper internal controls for indentifying and contacting homeowners, calculating the eligibility of borrowers based on their income and assessing the incentive payments they are owed. Its error rate for calculating a borrower's income was 20.6%, and Chase also miscalculated its incentive payments by 12.4%.
B of A got the lowest rating — one star — in just one category: calculating the eligibility of borrowers based on their income. The bank's error rate for calculating income was 13.2%. B of A also ran into trouble because Freddie Mac, which conducts a "Second Look" review of its mortgages, could not determine how it reached a loan modification decision on 8.2% of all loans.
Ally Financial Inc., formerly GMAC, received the highest rating in all seven categories.
The Making Home Affordable program has been widely criticized because most of the borrowers in it have massive debt loads beyond just mortgage payments.
In the latest performance report, Treasury said the average borrower's back-end debt-to-income ratio, which includes mortgage, car payments and credit card debt and other payments like alimony, was 78.4%. That means defaulted homeowners had just 20% of their income left over to buy basics like food and clothing once they had covered their debts.
After a modification, the average borrower's back-end debt ratio improved to 61.6%. That ratio is still considered very high and makes the borrower susceptible to redefault.
