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Treasury Sets Three-Year Limit for Servicers Scamming Borrowers

The Treasury Department apparently has a simple rule. You can abuse a Treasury program and violate the program guidelines for two years. But if you go into that third still violating, well, they’re going to have to ask you to comply.

The Treasury Department will withhold Home Affordable Modification Program payments from JPMorgan Chase and Bank of America for the third straight quarter.

According to a third-quarter assessment of the mortgage servicers participating in HAMP, the Treasury found Chase was the only firm “in need of substantial improvement under the program” and has not yet addressed problems the Treasury found in previous quarters.

The Treasury said it would “permanently reduce” payments owed to Chase unless its problems are fixed in time for the first quarter of 2012. According to the results, Chase was found to regularly miscalculate the income of homeowners. Furthermore, the lender failed to contact borrowers effectively and committed numerous errors in delivering HAMP progress reports to the Treasury.

Recall that Treasury has already withheld incentive payments from servicers who failed to comply with HAMP, but over time, they returned the payments or continued to classify them as temporary. So the only thing different here is that Treasury threatens that next time, they will permanently withhold said payments. From Chase. If they don’t improve in the next three months.

Chase spokesman Tom Kelly reacted to the news by saying “We are disappointed with our rating, and will continue to work hard to improve our processes and controls.” Because Chase has so long to improve their performance, and because just moderate improvement will be enough to avoid permanent incentive payment cuts, they can continue to foreclose on borrowers rather than grant modifications, which is in their financial self-interest, thanks to the ridiculous incentives around mortgage servicers.

That would mark three years since the inauguration of HAMP in March 2009. For the first two-plus years since, Treasury sanctioned a grand total of zero servicers for documented violations of program guidelines. The temporary payments were the first sanction, and they involve future payments, rather than clawing back payments already made.

The other story here is that nobody uses HAMP anymore. Servicers achieved just 26,000 new permanent modifications in October 2011, according to the latest data. Just 735,464 permanent modifications have been achieved, far less than the 3-4 million goal when the program launched. Threatening future incentive payments now, as the pipeline for HAMP mods has slowed to a crawl, sounds just like something this Treasury Department would do.

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David Dayen

David Dayen