The Congressional Oversight Panel has once again concluded that a Treasury Department is coming up short of expectations. This time it is Home Affordable Modification Program (HAMP), Treasury's foreclosure prevention program.  COP raised concerns earlier this year that Treasury was not doing enough to stave off a foreclosure crisis, and now it seems HAMP has made too little an impact to satisfy members of the panel.  From COP's December report:

In some regards, the program‟s failure to make a dent in the foreclosure crisis may seem surprising.  HAMP‟s premise was straightforward: Because the foreclosure process allows

lenders to recover only a small fraction of the value of a mortgage loan, lenders should generally prefer to avoid foreclosure by voluntarily reducing a borrower‟s monthly payments to affordable levels.  Through HAMP, Treasury attempted to sweeten this deal by offering incentive payments to all parties to a mortgage loan modification.  Yet despite the apparent strength of HAMP‟s economic logic, the program has failed to help the vast majority of homeowners facing foreclosure.

A major reason is that mortgages are, in practice, far more complicated than a one-to-one relationship between borrower and lender.  In particular, banks typically hire loan servicers to handle the day-to-day management of a mortgage loan, and the servicer‟s interests may at times sharply conflict with those of lenders and borrowers.  For example, although lenders suffer significant losses in foreclosures, servicers can turn a substantial profit from foreclosure-related fees.  As such, it may be in the servicer‟s interest to move a delinquent loan to foreclosure as soon as possible.  HAMP attempted to correct this market distortion by offering incentive payments to loan servicers, but the effort appears to have fallen short, in part because servicers were not required to participate.  Another major obstacle is that many borrowers have second mortgages from lenders who may stand to profit by blocking the modification of a first mortgage.  For these reasons among many others HAMP‟s straightforward plan to encourage modifications has proven ineffective in practice.

Here's COP chair, Sen. Ted Kaufman, discussing the report:

Read the full report here.