3 big banks lose mortgage modification incentives

The Obama administration has punished three of the nation’s largest banks, judging them unworthy of receiving financial incentives through its signature foreclosure relief program until they improve their practices.

Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. were found to be in need of “substantial improvement� under the $75-billion Home Affordable Modification Program, officials said. It was the first time that the administration had taken any major punitive action against the banks in its program, which has been criticized by consumer advocates and Republicans as ineffective and falling short of its goals.

The three banks received $24 million in payments through the program last month, the Treasury Department said. No more payments will be made to the three banks until the mortgage servicers improve their performance.

“It’s about time,� said Paul Leonard, California director for the Center for Responsible Lending. “We’re two years into the modification program and only now is the Treasury Department taking action to enforce its own program rules. Unfortunately, it comes too late for all the thousands of borrowers who have already passed through the program into foreclosure.�

The reaction by the three banks was mixed. Bank of America conceded that it needed to improve its practices; meanwhile, both JPMorgan Chase and Wells Fargo said they disagreed with their evaluations. Wells Fargo was the only one of the three banks that said it would contest the evaluation.

“It paints an unfairly negative picture of our modification efforts and contradicts previous written assessments shared with us by the Treasury,� spokeswoman Vickee J. Adams said in a statement. “The report reviews activities that date back a year or more and in no way reflects the improvements Wells Fargo has made in our processes and the work we have done to help homeowners.�

After a review of the 10 largest mortgage servicers in its program, the Treasury Department found that Bank of America, JPMorgan Chase and Wells Fargo needed substantial improvement in correctly evaluating borrowers’ incomes — a key component of determining eligibility for the program.

Bank of America, the nation’s largest mortgage servicer, appeared to fare the worst in the administration’s evaluation. The bank also needs to make substantial improvement in identifying and contacting borrowers for the program, clearly demonstrating how the bank reaches its loan-modification decisions and ensuring the bank was receiving the correct incentive payments through the program, the government said.

Wells Fargo also was deemed as needing substantial improvement in contacting borrowers, in effectively processing and evaluating borrowers in accordance with the program’s guidelines and in ensuring the bank was receiving the correct incentive payments.

Ocwen Loan Servicing was found to be needing substantial improvement as well, but funds were not denied to that company because its poor performance was largely due to its acquisition of a portfolio of troubled loans during its evaluation period.

In grading the top 10 servicers in its program, the administration found all of them to be performing below its benchmarks. The 10 included American Home Mortgage Servicing Inc., Citigroup Inc., GMAC Mortgage, Litton Loan Servicing, OneWest Bank and Select Portfolio Servicing in addition to the four mentioned above.

The new assessments are intended to compel the nation’s biggest mortgage servicers to improve their practices in the program, officials said. The mortgage modification program has long been criticized as ineffective and falling short of its goal of helping 3 million to 4 million borrowers escape foreclosure by December 2012.

Alys Cohen, a staff attorney with the National Consumer Law Center, said the actions were “too little too late.�

“It is not even clear that the incentives payments are something that these banks want enough to change their behavior,� she said. “It certainly hasn’t caused the servicers to comply with the rules to begin with.�

Earlier this year the House of Representatives voted to end the program, arguing that it is a waste of money and gives homeowners false hope. The vote fell largely along party lines. The measure has not passed the Senate, and the White House has said it would veto the measure.

Under the program, the banks can collect $1,000 for each loan that they permanently modify, $1,000 if that modification is successful over time and $500 for successfully aiding borrowers who are not yet in default.

The payments are meant to motivate banks to participate in the voluntary program, which was launched in March 2009. A total of $1.14 billion has been paid out to banks and investors. Banks have made nearly 700,000 permanent modifications since the program started.

In a conference call with reporters, Tim Massad, acting assistant Treasury secretary for financial stability, defended the program, saying it set standards for how banks modify loans.

“You’ve got to look at where we’ve started and where we’ve come,� he said.

The stepped-up pressure from the Treasury comes as regulators have increased scrutiny of banks, including investigations by state and federal agencies, after revelations last year that banks mishandled foreclosures.

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