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Audit faults execution of program to aid homeowners

The federal program, intended to help avert foreclosures, didn't set enough goals for states or do enough to get big banks to participate, the government audit says.

April 12, 2012|By E. Scott Reckard, Los Angeles Times
  • A foreclosure sign hangs in front of a home in Richmond, Calif. As of Jan. 1, only 3% of the $7.6 billion in Hardest Hit funding available nationally had been distributed.
A foreclosure sign hangs in front of a home in Richmond, Calif. As of Jan.… (Justin Sullivan, Getty…)

A $7.6-billion federal program to help homeowners avert foreclosure set too few goals for the 18 participating states and didn't do enough to make sure the nation's biggest banks were on board, according to a government audit.

The audit criticized the Treasury Department for rolling out the Hardest Hit Fund with no advance notice in February 2010, then leaving the states to implement it on their own. The report by a special inspector general pointed out that it took seven months before the government met with the states, banks and mortgage giants Freddie Mac and Fannie Mae to make sure everyone was participating in the program.

The 76-page audit will be released Thursday by the special inspector general for the federal Troubled Asset Relief Program, or TARP, best known for bailing out the nation's banks after the financial crisis.

"The TARP money went out to banks within days, but here you only have 30,000 homeowners helped after more than two years," Christy Romero, the special inspector general for TARP, said in an interview.

Romero said the lack of any measurable goals for the program creates the appearance that the Treasury Department is trying to avoid accountability to "Congress and taxpayers who funded TARP." Even though the states deliver the Hardest Hit Fund money, Romero added, "it's not a state program — it's a federal program with Treasury as its overseer."

The Treasury Department acknowledged in a written response that Hardest Hit started slowly, but it said each state had to build systems to run and monitor its programs "from scratch." It said the programs were gaining traction and would continue to help homeowners well into the future.

Hardest Hit was designed to provide cash so states with high unemployment and depressed housing markets could devise their own programs in five relief categories, including making mortgage payments for unemployed homeowners and writing down principal on troubled loans.

As of Jan. 1, only 3% of the $7.6 billion available nationally had been distributed. Keep Your Home California, the Golden State's version of the program, had distributed less than 2% of its nearly $2-billion slice of the funds, a Times review of the program revealed last month.

The audit said the program's single goal was "to help prevent foreclosures and preserve homeownership." The Treasury Department was blamed for not setting specific goals for the states to achieve.

In its response, the Treasury Department said that setting numerical goals for distribution of funds and homeowners to be helped — "a one-size-fits-all approach" — would violate the aim of the program. It said states need more flexibility to devise and adapt their own approaches to healing troubled housing markets.

The funds are kept at the Treasury until the states identify uses for them, and then they flow through special nonprofit agencies, not state coffers.

The Times review of state filings showed a wide range of funds distributed, with Oregon having disbursed 16% of its available money as of Dec. 31, the most of any state, and New Jersey in last place, with 0.1% out the door.

The review also found that California had not mailed notices of the assistance program to people applying for unemployment insurance. The state Employment Development Department included a notice about the program in a mailing made after the report was published.

California's 2% put the Golden State in the middle of the pack and ahead of neighboring Arizona and Nevada, which had doled out 0.4% and 1.8% of their allocated Hardest Hit money, respectively.

Michael Trailor, director of the Arizona Department of Housing, said in an earlier interview that the three states, where home prices have declined far more than in most of the country, spent considerable time and effort at the beginning of the program on a collaborative effort that went nowhere.

California, Nevada and Arizona developed a joint program to use Hardest Hit funds to match any principal reduction by a lender. If a bank would write down a loan by $50,000, the program would use federal funds to reduce it another $50,000.

Of the large banks providing mortgage customer service, only Bank of America agreed to use the program, and nonprofit mortgage counselors told The Times that BofA rarely approved principal reduction.

Fannie Mae and Freddie Mac, which own or back 60% of the nation's mortgages, and their regulator, the Federal Housing Finance Agency, also declined to participate. They cited the "moral hazard" of tempting borrowers to default in order to have their loan balances cut, Trailor said.

He and officials at the California Housing Finance Agency said they have switched their emphasis to helping borrowers catch up on mortgage payments after a temporary job loss and paying loans for those out of work.

The audit said 95% of the Hardest Hit Fund help provided to homeowners so far has been unemployment assistance or payment of past-due amounts — the only assistance that Fannie and Freddie directed the banks and other mortgage servicers to participate in.

Because the states have little bargaining power with national financial firms, the Treasury "should have been, and still should be, the driving force" in getting Fannie, Freddie and the banks onboard, the report said.

It quoted an unidentified housing official as saying the $1 billion provided to Florida "has been a nice carrot to use with servicers in Florida, but there is no stick with the carrot to force servicers to participate."

The Treasury Department said it can't compel participation in Hardest Hit programs but had "actively and consistently engaged" with the banks, Fannie and Freddie "from the earliest stages of the program, encouraging support and addressing impediments to participation."

scott.reckard@latimes.com

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