A $7.6 billion fund established by the Treasury Department to help underwater and unemployed homeowners make their mortgage payments will aid far fewer borrowers than initially intended, according to a report issued Tuesday by the Special Inspector General for the Troubled Asset Relief Program.

The Treasury used Tarp money to create the Hardest Hit Fund in early 2010 and is deploying the funds through state housing finance agencies in areas most damaged by the housing crisis. Officials in 18 states and Washington, D.C., predicted in 2011 that the funds would provide relief up to 546,562 homeowners, but since then slashed that figure by roughly one-third, to 367,290.

In its report Tuesday, SIGTARP said that the Treasury and the states are not moving quickly enough get money into hands of struggling homeowners. Special Inspector General Christy Romero also sharply criticized the Treasury permitting states "to lower the bar on the number of people who will be helped by this program."

"If you allow states to change estimates and the Treasury itself has no goal for how many people they want to help with the program, ultimately there can be no accountability," she said in an interview Monday.

But Tim Massad, the Treasury's assistant secretary for financial stability, says that SIGTARP's criticisms misconstrue the objectives of the fund. He says many states are reducing their estimates in order to shift funds to the long-term unemployed as other once-struggling homeowners have found jobs.

"We and the states are focused on whether the money is being used wisely, not just whether it's being spent," Massad said in an interview Wednesday.

As of June 30, just 22% of the fund, or $1.7 billion, had been spent on relief efforts as of June 30, according to the report. States held 9% of the fund as cash on hand and spent 4% on administrative costs. The rest remained untouched.

A number of factors conspired to leave states sitting on billions of dollars in aid, according to Romero. The problems began with the Treasury's hurried rollout of the Hardest Hit Fund. "They rushed the program without collaborating with key stakeholders and gave states six to eight weeks to come up with these programs," Romero says, "which caught many states off guard."

Some states faced initial delays as large mortgage servicers refused to participate. Those servicers came on board at the behest of the Treasury in September 2010, Romero says, but with caveats.

According to guidance issued by Fannie Mae and Freddie Mac, the servicers would support only unemployment and reinstatement assistance, in which mortgage payments are made to the servicer on behalf of the borrower. These forms of aid don't cut into servicers' bottom lines. Unemployment and reinstatement assistance made up 87% of the aid received by homeowners as of June 30. Mortgage modification—including principal reduction—accounted for just 12.5% of the distributed funds, while 0.4% had gone to second-lien reduction assistance and 0.2% to transition assistance.

The Treasury's failure to set clear performance standards compounded issues with the program, according to the report. Romero faults the department for failing to heed SIGTARP's earlier recommendation that it set performance goals for the fund and instruct state housing finance agencies to develop metrics that measure progress toward short- and long-term objectives.

Those recommendations were ignored for "no good reason," Romero said. The resulting confusion as states change assistance programs, eligibility requirements and estimates of how many borrowers will receive help has created an environment with little accountability.

Three and a half years into the program, Massad admits that fund distribution has been delayed. "Yes, it took some time to build operations to help people," he says. "But that's partly because states hadn't done this before and we insisted on some administrative controls."

The more important news, he adds, "is that the number of people being helped has doubled in the past year and funds dispersed have tripled in the last year. That's the progress we're seeing."

Still, while the Treasury and states work to resolve issues with assistance programs, Romero says, "homeowners may be losing their homes."

"Tarp was not supposed to be just a bailout of banks, AIG and auto companies. It was envisioned to provide assistance to homeowners," Romero says. The fund is set to expire in December 2017.

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