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Report: Bank of America, Wells Fargo received incentives but mortgages redefaulted

Bank of America and Wells Fargo serviced home loans that received more than $200 million in taxpayer funds as an incentive to modify them, only to have those mortgages go into redefault, according to a report slated for release Wednesday by a federal watchdog.

“It’s lost taxpayer money,” Christy Romero, the special inspector general for the federal bailout of the financial system, said Tuesday in an interview with the Observer.

The report, which heads to Congress, details how much in taxpayer incentives has been awarded to reduce mortgage payments through the federal Home Affordable Modification Program. The report also gives examples of homeowner complaints – some from as recently as this month – about their HAMP servicers.

According to the report, $102 million in incentive payments went to loans that were serviced by Charlotte-based Bank of America and that ended up back in default. The amount is equal to 16 percent of all the incentive payments awarded for loans that Bank of America has serviced under HAMP.

Loans serviced by San Francisco-based Wells Fargo and that went into redefault received $99.7 million in incentives, or 15 percent of the total incentives awarded for HAMP mortgages the bank has serviced.

Bank of America and Wells Fargo said Tuesday that it was difficult to respond to the report without having seen it.

Borrowers working with other HAMP servicers, not just Bank of America and Wells Fargo, also have redefaulted, according to Romero’s report. All told, taxpayers have lost $815 million in incentives awarded for 163,811 homeowners who later redefaulted.

On Tuesday, Romero expressed concern that the U.S. Department of the Treasury has not been investigating why homeowners are redefaulting.

“That’s troubling,” she said in a telephone interview. “Treasury’s not tracking that. They’re not requiring servicers to track that. That should have been a given.”

But a senior Treasury Department official said the department has “studied the (redefault) issue since the beginning.” The official said Treasury increased the incentives for principal reduction after observing that borrowers with larger mortgage-payment reductions were less likely to redefault.

The official, who spoke during a conference call with reporters and whose name the Treasury Department asked the media not to disclose, also said HAMP redefault rates have been falling.

“I think it’s important to recognize that we launched this program in response to the worst housing crisis since the Great Depression and the worst economic crisis we’ve had since the Great Depression,” the official said. “And there will always be an inherent risk of homeowner redefault in a program like this, given the very difficult circumstances that people who need modifications face.”

HAMP is part of the Troubled Asset Relief Program, the financial-system bailout created in 2008 in response to the mortgage meltdown. Launched in 2009, HAMP was designed to help struggling homeowners avoid foreclosure by modifying their mortgages to more affordable payments.

The Treasury Department has withheld HAMP incentives from Bank of America, Wells Fargo and other servicers after reviewing their performance. In 2011, the department, in announcing the withholding of incentives, said Bank of America and Wells Fargo were in need of “substantial improvement.”

The Treasury Department, which administers TARP, does not have the authority to fine mortgage servicers who fail to comply with HAMP, the Treasury official said. At most, the Treasury Department can withhold incentive payments to punish the servicers.

“We, as Treasury, had a contractual program that we were administering,” the Treasury official said. “We weren’t a law enforcement agency that had the power to impose fines.”

But for Romero, the Treasury Department could do other things to improve the behavior of the servicers.

“Treasury hasn’t even permanently withheld any incentive payments from them,” she said. “There’s been no financial repercussions on these servicers, despite repeated allegations of misconduct and mistreatment of homeowners.”

Romero said the Treasury Department has agreed to implement some oversight changes her office has recommended. But more could be done to improve supervision of the program, she said.

“We’ve put out a number of recommendations that Treasury has not accepted,” Romero said. “There has been some improvement in the servicers, and that improvement only came when Treasury implemented our recommendations to set some benchmarks and hold servicers publicly accountable against those benchmarks. But there’s more that they can do in that area.”

According to Romero’s report, her office continues to receive complaints from homeowners upset over their HAMP servicers. Complaints range from servicers losing paperwork and servicers not returning phone calls to borrowers redefaulting after a transfer of servicing rights from one servicer to another.

“Anecdotal evidence suggests that poor service by mortgage servicers contributes to homeowners redefaulting on HAMP permanent modifications,” the report says. “Anecdotal evidence suggests servicers need more improvement.”

Roberts: 704-358-5248; Twitter: @DeonERoberts
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