The recent financial crisis has resulted in dramatic increases in home mortgage defaults and foreclosures, and imposed significant costs on borrowers, lenders, mortgage investors, and neighborhoods. In response, the FDIC developed a loan modification program (LMP) at IndyMac Federal Bank, FSB (IndyMac), an FDIC conservatorship, to place borrowers into affordable mortgages while achieving an improved return for bankers and investors over foreclosure. Since November 2008, the FDIC has required institutions assuming FDIC failed bank assets to implement some form of loan modification program on single-family assets acquired under shared-loss agreements (SLAs). We performed this assignment as part of our efforts to evaluate the controls over, and operations of, new corporate programs.
The objectives of our evaluation were to assess the:
In 2008, the FDIC initiated a systematic and streamlined approach to loan modifications at IndyMac, by turning troubled loans into performing loans and, thereby, avoiding unnecessary and costly foreclosures. The FDICís LMP requires that a successful loan modification candidate result in a (1) positive net present value as opposed to a foreclosure option and (2) monthly payment representing no more than 31 percent of the borrowerís gross monthly income. The FDICís LMP process has to be straightforward and efficient in order to modify a large number of ďat-riskĒ mortgages in a short period of time.
In February 2009, the Obama Administration announced The Homeowner Affordability and Stability Plan, a $75 billion federal program designed to provide for a sweeping loan modification program targeted at borrowers who are at risk of foreclosure. The plan tasked Treasury with developing and implementing uniform guidance for the governmentís loan modification efforts. Treasury announced its HAMP in March 2009, which built on the work of Congressional leaders and the FDIC's LMP efforts.
The FDIC frequently enters in SLAs with institutions that assume failed bank assets. These SLAs require the assuming institution to implement some form of LMP on the acquired single-family loans. Through December 31, 2009, the FDIC had entered into 86 SLAs for single-family loans totaling $53.2 billion. The FDICís LMP is the default program for SLAs; however, assuming institutions have the option of using HAMP or another loan modification program acceptable to the FDIC. Three large assuming institutions, representing 50 percent of total single-family SLA assets as of December 31, 2009, are implementing Treasuryís HAMP.
We evaluated loan modification activity for the eight largest SLAs, representing 97 percent of the single-family assets under SLAs as of July 31, 2009. Through December 31, 2009, the assuming institutions had completed 4,348
modifications and had 6,492 modifications in process. Collectively, the eight SLAs had a total of 24,853 single-family loans that had been delinquent longer than 60 days or were in foreclosure. FDIC officials noted that it is important to consider single-family portfolio characteristics when assessing the success of an assuming institutionís loan modification program. Such characteristics include the type of loan portfolio (e.g., non-traditional or subprime); the number of second lien loans, non-owner occupied loans, or loans in bankruptcy; and the proportion of delinquent loans that are actually eligible for modification.
The FDIC may also enter into public-private partnerships with private sector investors, which require the purchasers to implement some form of LMP or retain single-family assets in FDIC receiverships. With respect to receivership assets, the FDIC encourages, but does not require, servicers to pursue loan modifications due to the temporary nature of the FDICís ownership of those assets. The FDIC may issue guidance for pursuing loan modifications of receivership assets in the future.
President Obamaís strategy for restructuring or refinancing millions of at-risk mortgages tasked Treasury with developing uniform guidance for loan modifications and required agencies such as the FDIC to seek to apply uniform guidance to loans that the agency owns or guarantees. We evaluated the FDICís LMP program against Treasuryís HAMP program. While certain important characteristics of the FDICís LMP are consistent with HAMP, we identified other areas where the FDICís LMP program attributes and controls could be strengthened, related to:
In comparing the FDICís LMP to Treasuryís HAMP, we acknowledge that HAMP is a much broader program aimed at modifying millions of mortgages. Accordingly, we are not suggesting that the FDICís program should be identical to HAMP; rather, this report discusses certain program principles and attributes that could be strengthened in the FDIC LMP program to help ensure program success. We also acknowledge that the FDICís LMP is a relatively new program and that the Division of Resolutions and Receiverships is still in the process of implementing program controls.
We made five recommendations to enhance program controls related to: the LMP agreement with the assuming institution and LMP guidelines; underwriting and clarifying information collection requirements for fair housing purposes; assuming institution internal control programs; and FDIC compliance monitoring of assuming institutions. DRR concurred with each recommendation and proposed responsive actions to be completed by June 30, 2010.
ACRONYMS IN THE REPORT
|DRR||Division of Resolutions and Receiverships|
|GAO||Government Accountability Office|
|HAMP||Home Affordable Modification Program|
|IRS||Internal Revenue Service|
|LMP||Loan Modification Program|
|NVP||Net present value|
|OIG||Office of Inspector General|
|P&A||Purchase & Assumption|
|SPA||Servicer Participation Agreement|
This report presents the results of our evaluation of the FDIC's Loan Modification Program (LMP). In 2008, the FDIC initiated a systematic and streamlined approach to loan modifications at IndyMac Federal Bank, FSB (lndyMac), in order to place borrowers into affordable, long-term mortgages while achieving an improved return for bankers and investors compared to the results of foreclosure. In February 2009, President Obama tasked the Department of the Treasury (Treasury) with program responsibility for developing and implementing uniform guidance for loan modifications across the mortgage industry based, in part, on the FDIC's work at IndyMac. Since November 2008, the FD IC has required most purchasers of failed bank assets to implement the FDIC's LMP, Treasury's Home Affordable Modification Program (HAMP), or some other loan modification program acceptable to the FDIC.
EVALUATION OBJECTIVES AND APPROACH
The purpose of this evaluation was to assess FDIC LMP implementation at institutions that had acquired single-family loans from failed institutions. Our initial objectives were to
We tailored our objectives to address concerns communicated to us by Senator Charles Grassley that the IndyMac LMP include controls to prevent borrowers who fraudulently obtained an original mortgage from benefiting from an IndyMac loan modification. The FDIC subsequently sold IndyMac to OneWest Bank, FSB, on March 19,2009. The FDIC also entered into a number of additional agreements with assuming institutions to implement the FDIC's LMP during 2009.
Accordingly, we revised our evaluation objectives to assess the:
Appendix I includes additional detail on our objectives, scope, and methodology. We performed our evaluation between April 2009 and October 2009 in accordance with the Quality Standards for Inspections.
In 2008, the FDIC developed the LMP after taking over as conservator for IndyMac to achieve improved value for the IndyMac Federal conservatorship by turning troubled loans into performing loans and, thereby, avoiding unnecessary and costly foreclosures. The FDIC LMP requires that a successful candidate for loan modification result in a (1) positive net present value (NPV) as opposed to a foreclosure option and (2) monthly payment representing no more than 31 percent of the borrowerís gross monthly income, known as the front-end debt-to-income ratio. The FDIC LMP utilizes a ďwaterfallĒ approach to reach the 31-percent ratio, by first lowering the borrowerís interest rate, then extending the term of the loan not to exceed 40 years, and finally forbearing principal to the end of the loan period. FDIC officials have noted that a critical characteristic of the FDIC LMP process is that it has to be straightforward and efficient in order to modify a large number of ďat-riskĒ mortgages in a short period of time.
In February 2009, the Obama Administration announced The Homeowner Affordability and Stability Plan, a $75 billion federal program designed to provide for a sweeping loan modification program targeted at borrowers who are at risk of foreclosure. The plan tasked Treasury with developing and implementing uniform guidance for the governmentís loan modification efforts. Treasury announced its HAMP guidelines on March 4, 2009, which built on the work of Congressional leaders and the FDIC's LMP. Treasuryís HAMP uses the FDIC LMP 31-percent ďwaterfallĒ process and the NPV test. However, HAMP also provides various incentive payments to the loan servicer and borrower for achieving sustainable loan modifications.
Under Treasuryís HAMP, the Federal National Mortgage Association (Fannie Mae) serves as the financial agent and fulfills the role of administrator, record-keeper, and paying agent for the program. The Federal Home Loan Mortgage Corporation (Freddie Mac) is the compliance agent for the program and is responsible for ensuring that participating servicers comply with Treasuryís guidelines.
As of August 2009, Treasury had signed Servicer Participation Agreements (SPA) with 38 servicers, who, along with 2,300 servicers of Fannie Mae and Freddie Mac loans, account for
more than 85 percent of the mortgage market.1 In an August 2009 report, Treasury stated that more than 230,000 trial modifications had started and that the program was on pace to help 3 to 4 million homeowners over the next 3 years.
Status of the FDICís Loan Modification Program
The FDIC generally requires entities that acquire failed bank residential assets through large, structured transactions to implement a loan modification program acceptable to the FDIC. These structured transactions include shared-loss agreements (SLA) and private-public partnerships (PPP). The FDIC encourages, but does not require, servicers of assets that remain in FDIC receiverships to pursue loan modifications of single-family receivership loans.
Single-Family Loans Under Shared-Loss Agreements: Since November 2008, the FDIC has been requiring purchasers (known as assuming institutions) of failed financial institutions to implement the FDICís LMP or some other loan modification program acceptable to the FDIC, such as HAMP, on the single-family loans that the purchasers are acquiring. The FDIC enters into a purchase and assumption (P&A) agreement with the assuming institution, which explains the terms of the sale and assets and liabilities that transfer to the assuming institution. Most P&As also include an SLA wherein the assuming institution is responsible for managing and selling the failed bank assets, and the FDIC guarantees the bulk of any losses incurred in the disposition of the failed bank assets.2 Each SLA requires the assuming institution to implement loan modification efforts, as follows:
For each single family shared-loss loan in default or for which a default is reasonably foreseeable, the assuming bank shall undertake reasonable and customary loss mitigation efforts, in accordance with any of the following programs selected by Assuming Bank in its sole discretion, Exhibit 5 (FDIC Mortgage Loan Modification Program), the United States Treasuryís Home Affordable Modification Program Guidelines or any other modification program approved by the United States Treasury Department, the Corporation, the Board of Governors of the Federal Reserve System or any other governmental agency (it being understood that the Assuming Bank can select different programs for the various Single Family Shared-Loss Loans).
Through December 31, 2009, the FDIC had entered into 86 SLAs with single-family assets totaling $53.2 billion.3 FDIC officials indicated that the FDICís loan modification program is the default program for SLAs. The assuming institution must notify the FDIC if it wishes to use another loan modification program, such as HAMP. An FDIC official indicated that larger institutions may prefer to implement HAMP, because of Treasuryís incentive structure, while smaller institutions without a large infrastructure may prefer the FDICís LMP. The FDIC
official indicated that three large assuming banks were implementing HAMP. Collectively, these three SLAs represent 50 percent of the total single-family shared-loss assets through December 31, 2009. At this point, the assuming banks for the remaining 83 SLAs have not expressed an interest in implementing a program other than the FDICís LMP.
FDIC officials indicated that one reason that assuming institutions may prefer the FDICís LMP over HAMP involves the scope of the loan modification effort. The FDICís LMP requires that the assuming institution apply the loan modification efforts only to the single-family loans acquired through the P&A transaction. Treasury requires HAMP participants to apply HAMP loan modification efforts to all of the single-family loans that the institution or servicer owns.
We compiled loan modification activity for eight SLAs, representing 97 percent of the total single-family assets under SLAs as of July 31, 2009.4 Table 1 presents the results of our work.
Table 1: Compilation of Loan Modification Activity of Selected SLAs
(1) Loans delinquent 60 days or more, including loans in foreclosure.
(2) This SLA involves a mature loan modification program; as a result, fewer loans are eligible for modification.
(3) This assuming institution is participating in HAMP, which requires a 3-month trial period before modified loans are considered completed.
(4) Activity is shown through October 31, 2009 and September 30, 2009 for 5 and 8, respectively. This was the most recent data available to our office.
As shown, through December 31, 2009, assuming institutions for the eight SLAs had completed 4,348 modifications and had 6,492 modifications in process. Collectively, the eight SLAs had a total of 24,853 single-family loans that had been delinquent longer than 60 days or were in foreclosure.
FDIC officials noted that in gauging the success of an assuming institutionís loan modification program, one must also consider single-family portfolio characteristics such as (1) the loan product type distributionófor example, Option ARM (adjustable rate mortgage) products are difficult to successfully modify because the modified loan often does not meet
the NPV test; (2) the population of second-lien loans, non-owner occupied or second homes, and loans in bankruptcy; and (3) the proportion of delinquent loans that are actually eligible for modification. The maturity and type of loan modification program (e.g., HAMP or FDIC LMP) can also be a factor in gauging an assuming institutionís loan modification program success.
Public-Private Partnership Transactions: The FDIC has also entered into several joint venture agreements with private sector investors to manage pools of assets drawn from one or more receiverships. In a PPP transaction, the FDIC sells a managing joint venture interest in a pool of receivership assets. The buyer manages the assets, and the FDIC and the buyer share in any net asset collections. Through October 19, 2009, the FDIC had entered into six PPP transactions with residential and commercial assets totaling $4.91 billion. Under the PPP, the FDIC requires the private-sector investor to implement a loan modification program acceptable to the FDIC. Due to evaluation time constraints, we did not evaluate loan modification activity for PPP transaction purchasers.
Single-Family Assets Retained in FDIC Receiverships: The FDIC retains failed financial institution single-family assets that are not acquired by assuming institutions, or otherwise sold, in failed bank receiverships. The FDIC may manage receivership assets internally or hire external vendors to service the assets. As of October 2009, DRR officials indicated that the FDIC had approximately 5,500 single-family loans valued at $950 million in receiverships.5
DRR officials told us that the FDIC provides resolution assistance contractors and external servicers of receivership assets with LMP documentation and encourages servicers to implement loan modification efforts; however, the FDIC does not require servicers to pursue loan modification efforts for single-family assets in receivership. The FDIC is working to package receivership assets into structured sales transactions, and an FDIC official cited the temporary nature of the FDICís ownership of receivership assets as a reason that the FDIC does not always pursue loan modification efforts for receivership assets. The official also indicated that DRR is developing guidance related to performing loan modifications for receivership assets.
Controls Over the FDICís Loan Modification Program
President Obamaís Homeowner Affordability and Stability Plan required Treasury to develop uniform guidance for loan modifications and federal agencies to seek to apply uniform guidance to loans that they own or guarantee. Both the FDICís LMP and HAMP possess similar key controls related to income verification and owner-occupancy that are important in ensuring that the modification effort is valid and sustainable, and these controls help to prevent or detect loan modification fraud. However, we identified differences between the FDICís LMP and HAMP where the FDICís program controls could be strengthened to be more consistent with HAMP program principles.
In February 2009, the Obama Administration announced the Homeowner Affordability and Stability Plan as a comprehensive strategy to restructure or refinance millions of at-risk mortgages. Among other things, the Plan provided that:
Treasury will develop uniform guidance for loan modifications across the mortgage industry, working closely with the bank agencies and building on the FDIC's pioneering work. The Guidelines will be used for the Administration's new foreclosure prevention plan. Moreover, all financial institutions receiving Financial Stability Plan financial assistance going forward will be required to implement loan modification plans consistent with Treasury Guidance. Fannie Mae and Freddie Mac will use these guidelines for loans that they own or guarantee, and the Administration will work with regulators and other federal and state agencies to implement these guidelines across the entire mortgage market. The agencies will seek to apply these guidelines when permissible and appropriate to all loans owned or guaranteed by the federal government, including those owned or guaranteed by Ginnie Mae, the Federal Housing Administration, Treasury, the Federal Reserve, the FDIC, Veterans' Affairs and the Department of Agriculture.
An FDIC official noted that the FDICís LPM is consistent with Treasuryís HAMP because both programs utilize the ďwaterfallĒ approach and NPV test. We also note that both the FDICís LMP and HAMP possess some similar key controls, such as requirements for income verification, that the loan modification involve the borrowerís primary residence, and that the property subject to the loan modification be owner-occupied. Each of these controls are important in ensuring that the modification effort is valid and sustainable, and these controls help to prevent or detect fraudulent loan modification attempts.
The remaining sections of this report compare the FDICís LMP to Treasuryís HAMP and, where appropriate, identify areas where the FDICís program could be strengthened.
Agreement with Assuming Institution to Follow the
FDICís LMP: The P&A agreement is the governing document for the FDICís LMP and requires the assuming institution to implement some form of loan modification program acceptable to the FDIC on the single-family loans subject to the SLA. Exhibit 4.15A, Single Family Shared-Loss Agreement, requires the assuming institution to manage and administer each single-family shared-loss loan in accordance with the assuming bankís usual and prudent business and banking practices and customary servicing procedures and to comply with the terms of the modification guidelines with the objective of (1) minimizing the loss to the assuming institution and the FDIC and (2) maximizing the opportunity for qualified homeowners to remain in their homes.
The P&A also requires loan-specific monthly reporting for shared-loss claims and recoveries and losses resulting from loan restructuring (loan modification); monthly submission of the servicing file for each outstanding shared-loss loan; record retention requirements for the term of the agreement; and an annual report signed by the assuming institutionís independent public accountant. In the annual report, the auditors must indicate that they have reviewed the terms of the single-family SLA and in the course of their annual audit of the
assuming institutionís books and records, nothing came to their attention to suggest that any required computations on the part of the assuming institution during such calendar year were not made. The P&A agreement also provides the receiver or the FDIC in its corporate capacity the right to perform audits to determine the assuming institutionís compliance with the provisions of the SLA. While these P&A provisions are important, we note that most of the provisions focus on reporting information about loss amounts as opposed to information about loan modification efforts. Opportunities exist to strengthen the SLA, by incorporating, by reference, expanded program guidance and other program requirements discussed in this report.
Treasuryís HAMP: Treasuryís program requires participants to sign an SPA and Financial Instrument requiring the servicer to, among other things, follow program guidelines and procedures and to maintain complete and accurate records. The Financial Instrument includes requirements for audits, reporting, data retention, and a servicer internal control program.
The Financial Instrument provides that Freddie Mac, the Federal Housing Finance Agency, and other parties designated by the Treasury or applicable law shall have the right to conduct unannounced, informal onsite visits and to conduct formal onsite and offsite physical, personnel, and information technology testing; security reviews; and audits of the servicer; and to examine all books, records, and data related to the services provided and purchase price received in connection with the program.
Under HAMP, the servicer is also required to certify annually that, among other things, the servicer is complying with all program guidance; applicable federal, state, and local laws; and has implemented an internal control program to monitor and detect loan modification fraud and to monitor compliance with applicable consumer protection and fair lending laws. The financial instrument acknowledges that the provision of false or misleading information to Fannie Mae or Freddie Mac in connection with the program or pursuant to the agreement may constitute a violation of: (a) Federal criminal law involving fraud, conflicts of interest, bribery, or gratuity violations found in title 18 of the United States Code or (b) the civil False Claims Act (31 U.S.C. Part 3729-3733).
Loan Modification Program Guidelines
FDIC LMP:The P&A agreement includes Exhibit 5, which is a 2-page document, entitled, FDIC Mortgage Loan Modification Program. The exhibit provides detailed guidance for the waterfall process and NPV test. However, as discussed in more detail later, the exhibit provides limited underwriting guidance or servicer internal control/quality control requirements.
During the pilot LMP at IndyMac, the FDIC published on its public Web site FDIC Loan Modification Program guidance, example marketing material, and FDIC Workout Program Guidelines. These documents provide much more implementing guidance than the 2-page exhibit. At a minimum, the FDIC should provide assuming institutions with LMP information similar in detail to the IndyMac LMP guidance published on the FDICís Web site. As discussed later, the FDIC has communicated extensive reporting requirements in the SLAs and through a Data Reporting Package provided to each assuming institution.
Treasuryís HAMP: Treasury has issued extensive guidance and frequently asked question documents related to HAMP. Key Treasury HAMP guidance includes:
Loan Underwriting and File Documentation Requirements
FDIC LMP: P&A agreement Exhibit 5 provides limited underwriting guidance, stating that ďthe borrowerís monthly income shall be the amount of the borrowerís (along with any co-borrowersí) documented and verified gross monthly income...Ē FDIC officials told us the FDIC LMP includes other program practices to promote strong underwriting practices that are not specifically reflected in the program guidance. For example, DRR representatives always meet with the assuming institution within a month of the SLA transaction date to review the assuming institutionís policies for underwriting. These would include policies and practices related to requiring property appraisals and reviewing borrower credit reports associated with a loan modification. A DRR official provided a Questionnaire for Assuming Institutions that is used to gather such information. In addition, assuming institutions are required to manage SLA assets consistent with their management of non-SLA assets and customary servicing procedures. Finally, assuming institutions verify or determine certain underwriting factors, such as owner occupancy and the propertyís appraised value, as part of the loan modification process. Notwithstanding, we believe that opportunities exist to clarify and strengthen program guidance provided to assuming institutions for underwriting loan modifications. At a minimum, the FDIC could strengthen controls by providing LMP program guidance to assuming institutions similar to the written materials for the FDICís IndyMac LMP, as presented on the FDIC Web site. Doing so would also promote program consistency among the assuming institutions.
Treasuryís HAMP: Treasuryís Supplemental Directive 09-02 includes detailed underwriting guidance for verifying information such as borrower income, debts, and owner occupancy. Table 2 compares loan underwriting and file documentation practices for the FDICís LMP and Treasuryís HAMP.
Table 2: Comparison of FDIC LMP and Treasury HAMP Underwriting and File Documentation Retention Practices
In developing underwriting guidance for the FDIC LMP, we recommend clarifying that borrowers should be reporting all sources of income, and that servicers should be verifying material sources of borrower income.6 LMP guidance should also clarify whether borrowers are required to report alimony, separation maintenance, or child support income to qualify for the LMP and to what extent rental income should be included as borrower income.7
We note that the owner occupancy requirement and most of the underwriting steps in the FDIC IndyMac LMP and Treasury HAMP are effective controls in preventing a fraudulent loan from benefiting from a loan modification. Beyond this, and consistent with the FDICís view that there is a trade-off between preventing fraud and achieving sustainable loan modifications on a large scale, we would suggest that that any antifraud measures related to the original mortgage be: (1) carefully weighed with respect to timeliness and effectiveness of the additional antifraud techniques and (2) limited to information readily available in the servicer loan file, servicer system history, or an IRS Form 4506-T related to the tax year of the
mortgage in question. We also note that such procedures may be impractical given the condition of servicer files or granularity of servicer system histories.
Implementation of antifraud procedures pertaining to the original mortgage may also be more appropriate outside of the loan modification process. For example, a servicer may want to review a sample of original mortgages from a common source before processing modifications to determine if the mortgages exhibit fraud characteristics or review a sample of re-defaulted loans for fraud characteristics.
We note that Treasuryís HAMP includes controls designed to prevent or detect fraudulent modifications, including:
FDIC LMP: The FDICís standard SLA requires assuming institutions to provide a monthly certificate consisting of:
The SLA also requires the assuming institution to submit the servicing file for single-family assets under the SLA with specific fields of information.
An FDIC official provided a data reporting package that the FDIC provides to each assuming institution. The data reporting package contains detailed guidance and templates for monthly or quarterly reporting. Several required reports include information fields that will enable DRR officials to monitor loan modification activity for larger institutions.
Specifically, assuming institutions that purchased single-family loan pools with an initial value greater than $100 million must submit monthly a loss certificate report that includes a summary of the performance of the single-family shared loss portfolio. The FDIC official indicated that assuming institutions must also provide supplemental information related to call center and mailing campaigns designed to reach eligible borrowers. Assuming institutions that purchase single-family loan pools with an initial value less than $100 million must report quarterly but are not required to report performance information related to loan modifications.
We acknowledge that the Data Reporting Package requirements are extensive and should provide the FDIC with comprehensive information to support shared-loss claims. The Data Reporting Package will also provide useful information for the reporting period about loan modifications completed or in process from the larger assuming institutions. However, it is not clear that the required reports will readily provide the FDIC with cumulative information necessary to monitor LMP success without some level of DRR compilation or analysis. Ideally, assuming institution LMP reporting should address basic areas related to loan modification activity such as:
We note that the FDIC collected such information under the IndyMac LMP and that OneWest Bank, which acquired IndyMac, continues to produce monthly reports for its investors containing much of the abovementioned information. Appendix II presents excerpts from IndyMac loan modification reporting information from OneWest Bankís Web site. Because DRR is already requiring extensive reporting from assuming institutions, we are not making a formal recommendation. However, we would encourage DRR to collect current period information about the number of loans eligible for modification and cumulative information about denied modification requests, completed modifications, and re-defaulted modifications. Doing so would provide DRR with information necessary to assess assuming institutionsí success in implementing the LMP.
Collection and Reporting of Fair Housing Act Information: Treasury and the Department of Housing and Urban Development have determined that loan modifications under HAMP are subject to the protections of the Fair Housing Act.9 Treasury is requiring servicers participating in HAMP to collect government monitoring data on the race, ethnicity, and sex of borrowers participating in loan modifications and to report such information to Fannie Mae.
The FDIC is not requiring assuming institutions to collect or report such government monitoring data under the FDIC LMP. DRR officials noted that while HAMP may require servicers to collect such data, providing information is voluntary and up to the applicant. Because applicants may elect not to provide such data, it may be difficult to draw meaningful
conclusions about servicer modification practices. Notwithstanding, we believe that DRR should consult with the FDICís Legal Division to determine whether the FDIC should require assuming institutions to request such information from loan modification applicants.
Treasuryís HAMP: Treasury has issued extensive reporting requirements for servicers participating in HAMP. Supplemental Directive 09-06, Home Affordable Modification Program-Data Collection and Reporting Requirements Guidance, dated September 11, 2009, requires that servicers provide monthly HAMP loan-level data to Fannie Mae, including:
Treasury also requires servicers to report on a loan-by-loan basis:
Assuming Institution Internal Control Programs to Monitor Program Compliance and to Detect Loan Modification Fraud
FDIC LMP: As discussed earlier, the SLA requires the servicerís annual audit report to include a negative assurance statement with respect to the accuracy of computations required under the SLA. With the exception of the annual audit statement, we did not identify any specific requirements for the assuming institution to maintain an internal control program or monitoring program associated with the SLA.
Treasuryís HAMP: Within the Financial Instrument agreement between Fannie Mae and the Servicer, Section 4, Internal Control Program, states the servicer shall develop, enforce, and review on a quarterly basis for effectiveness an internal control program designed to: (1) ensure effective delivery of services in connection with the program and compliance with the program documentation, (2) effectively monitor and detect loan modification fraud, and (3) effectively monitor compliance with applicable consumer protection and fair lending laws. The internal control program must include documentation of the control objectives for program activities, the associated control techniques, and mechanisms for testing and validating the controls.
Moreover, the agreement requires the servicer to provide Freddie Mac with access to all internal control reviews and reports that relate to services under the program performed by the servicer and its independent auditing firm to enable Freddie Mac to fulfill its duties as compliance agent.
Supplemental Directive 09-01 includes a section on program compliance stating that servicers must comply with the HAMP requirements and must document the execution of loan evaluation, loan modification, and accounting processes. Servicers must also develop and execute a quality assurance program that includes either a statistically based (with a 95-percent confidence level) or a 10-percent stratified sample of loans modified drawn within 30-45 days of final modification and reported on within 30-45 days of review. In addition, a trending analysis must be performed on a rolling 12-month basis.
Independent Monitoring of Assuming Institutions to Ensure Program Compliance
FDIC LMP: The FDIC has entered into basic ordering agreements with seven contractors to provide surveillance, oversight, and compliance monitoring of single-family shared-loss loans under SLAs.10 The FDIC will award task orders to the contractors to monitor individual assuming institutions. As of January 20, 2010, contractors had completed visitations at 5 assuming institutions and had 4 additional visitations in progress. The scope of work requires the contractor to:
We concluded that most of the compliance steps listed above are related to shared-loss compliance as opposed to loan modification program compliance. We noted that an earlier version of the scope of work included the following step under compliance visitations:
Selecting a sample of loan modifications [and] verifying that the loan modifications and respective calculations meet the terms of Qualifying Mortgage Loans and the objective of the FDIC Modification Program and/or Home Affordability Modification Program.
However, we did not see this step in the final executed contract. DRR officials indicated that they expected the SLA compliance contractors to include LMP monitoring and compliance procedures in their SLA compliance reviews. We also spoke with a representative from one of the contractors who indicated that it was his understanding that his firm would be monitoring the assuming institutionís compliance with the FDICís LMP. Still, we recommend that the
FDIC explicitly include in the surveillance and monitoring contract the FDICís expectation that the contractorís efforts should include assessing the assuming institutionís compliance with the LMP.11
Additionally, the FDIC Office of Inspector General (OIG) will be periodically performing reviews of assuming institutionsí compliance with SLAs, and such reviews will include procedures pertaining to LMP compliance. The OIG conducted the first of such reviews in October 2009.
Treasuryís HAMP: Treasury has selected Freddie Mac to serve as its compliance agent for the HAMP. In this role, Freddie Mac employees and contractors will conduct independent compliance assessments of mortgage servicers and review loan-level data for evidence of appropriate eligibility consideration, solicitation, cessation of foreclosure sales during HAMP consideration, and overall compliance with HAMP guidelines.
The scope of these assessments will include, among other things, an evaluation of documented evidence to confirm adherence to HAMP requirements with respect to the following:
Freddie Mac will also evaluate the effectiveness of the servicerís quality assurance program, to include: the timing and size of the servicerís sample selection, the scope of the servicerís quality assurance reviews, and the servicerís reporting and remediation process. Freddie Mac will also evaluate the servicerís fraud prevention controls as part of the on-site audits.
According to a July 2009 GAO report,12 Freddie Mac compliance reviews will take three approaches:
The GAO report noted that Freddie Mac conducted trial period reviews, which are on-site audits and file reviews targeting larger servicers and are intended to assess the strength of the servicerís control environment, systems, and staffing. Freddie Mac will also develop a ďsecond lookĒ process to review non-performing loans not offered a HAMP modification, to assess whether servicers appropriately evaluate loans for HAMP eligibility.
We visited Freddie Macís Office of Compliance to understand more about its planned monitoring efforts. We reviewed oversight program documentation and determined that Freddie Macís program will include the following elements:
We verified that Freddie Mac will not be performing compliance reviews of loan modification efforts outside of the HAMP (such as the FDICís LMP).
CONCLUSION AND RECOMMENDATIONS
The FDICís pioneering loan modification work at IndyMac Bank became the basis for Treasuryís comprehensive, industry-wide HAMP. Still, from November 2008 through December 2009, the FDIC entered into 86 SLAs with single-family assets totaling $53.2 billion. While some of the larger assuming institutions may elect to implement Treasuryís HAMP, the FDICís LPM is the default loan modification program, and most assuming institutions are electing to follow the FDICís program.
President Obamaís strategy for restructuring or refinancing millions of at-risk mortgages tasked Treasury with developing uniform guidance for loan modifications and required agencies such as the FDIC to seek to apply uniform guidance to loans that the agency owns or guarantees. We evaluated the FDICís LMP program against Treasuryís HAMP program. While certain characteristics of the FDICís LMP, such as the use of an NPV test, waterfall process, and owner occupancy requirements, are consistent with Treasuryís HAMP, we identified other areas where the FDICís LMP program attributes and controls could be strengthened or better documented. Doing so will promote program consistency among assuming institutions and help to ensure FDIC LMP success.
Accordingly, we recommend that the Director, DRR:
CORPORATION COMMENTS AND OIG EVALUATION
DRR management provided a written response, dated January 15, 2010, to a draft of this report. The response is presented in its entirety in Appendix III. Management concurred with our five recommendations and proposed responsive actions to be completed by June 30, 2010. A summary of managementís responses to our recommendations is presented in Appendix IV.
OBJECTIVES, SCOPE, AND METHODOLOGY
The purpose of this evaluation was to assess the FDICís implementation of the FDIC LMP at institutions that had acquired single-family loan assets from failed banks. Initially our objectives were to
Following the issuance of our February 2009 evaluation engagement letter for this assignment, on March 19, 2009, the FDIC sold IndyMac to OneWest Bank, FSB. During 2009, the FDIC also entered into a number of additional agreements with assuming institutions to implement the FDICís LMP. Accordingly, we revised our objectives to assess the:
To accomplish our objectives, we:
With respect to our original evaluation objectives, Appendix II provides information about the extent to which the loan modification program has been implemented at IndyMac through August 31, 2009.
We performed our evaluation between April 2009 and October 2009 in accordance with the Quality Standards for Inspections.
ONEWEST LOAN MODIFICATION REPORTING FOR INDYMAC BANK
MANAGEMENT RESPONSE TO RECOMMENDATIONS
MANAGEMENT RESPONSE TO RECOMMENDATIONS
b Once the OIG determines that the agreed-upon corrective actions have been completed and are responsive, the recommendation can be closed.
|Last updated 3/11/2009|