I’ve seen some buzz from, among other places, Pro Publica, about a new study blaming banks for the inadequacies of the Administration’s foreclosure mitigation program, HAMP. According to the study, if the banks were properly staffed and performed better under the program, HAMP would have produced 800,000 more modifications by the end of the year, putting the total at 2 million, instead of the 1.2 million expected under the current path (NOTE: this does not include the hundreds of thousands of redefaults after permanent modifications, which I would argue shouldn’t count among borrowers “helped” by the program; obviously the benefit didn’t do enough to stop a default event).

The study’s authors — from the Federal Reserve Bank of Chicago, the government’s Office of the Comptroller of the Currency (OCC), Ohio State University, Columbia Business School, and the University of Chicago — arrived at this conclusion by analyzing a vast data set available to the OCC. They wanted to measure the impact of HAMP, the government’s main foreclosure prevention program.

What they found was that certain banks were far better at modifying loans than others. The reasons for the difference, they established, were pretty predictable: The banks that were better at helping homeowners avoid foreclosure had staff who were both more numerous and better trained [...]

The report does not identify these poor performing banks, but it’s not hard to ID them. A “few large servicers [have offered] modifications at half the rate of others,” the authors say. The largest mortgage servicers are Bank of America, JPMorgan Chase, Wells Fargo and Citi.

I bow to nobody in my criticism of large banks. In a way it’s what this website has been designed to do. But I think this report lets the designers of the program off the hook far too easily. The reason that big banks were understaffed and under-resourced to deal with HAMP is because it wasn’t a mandatory part of their day-to-day operations. The Treasury Department made it voluntary, and furthermore, even when they found non-compliance on the part of mortgage servicers, they never sanctioned any of them. So why should big banks put any money into staffing their loan modification desks, if there were no consequences for failure?

Furthermore, the lack of motivation can be seen in the incentive payments offered to servicers. To some smaller servicers with diligent staffs this made a difference on participation. To the bigger servicers, the incentive payments were simply too low to counteract the financial incentives to foreclose, instead of modifying. Treasury had agency in that. They could have increased the payments (they did, years later). They could have made principal reductions mandatory when the net present value test showed a positive benefit for the stakeholders of the loan. They did none of this. There weren’t enough carrots and there were no sticks.

Finally, to the extent that bigger banks were confused and overwhelmed by HAMP, you have to attribute at least part of that to Treasury rolling out the program well before it was fully baked. They incessantly tweaked the program over the first year, changing the guidelines on numerous occasions, adding costs just in training for the servicers. Those problems fall directly on the head of Treasury. The authors acknowledge this by saying that the comprehensive screening under HAMP, designed to ensure that “irresponsible” borrowers received no benefit, was a weakness of the program. Of course, that was the brainchild of Treasury.

The authors do address the whole of this Treasury-centric critique later in the study:

The authors wrote that while they can’t be sure why these banks underperformed, they “may not have responded to the program since doing so would involve changing their business focus from processing and channeling payments to actively renegotiating loans. In addition, this may have involved significantly altering their organizational capabilities, such as building appropriate infrastructure and hiring and training servicing staff.”

But that’s a failure of design on the part of Treasury, not a failure of the banks per se. Treasury had it within its power to force the banks to engage in far more modifications and to reverse the incentives surrounding them. They failed. And when the banks clearly gamed the program and turned it into an engine for predatory lending, Treasury stood mute. That’s because the design was merely to “foam the runway” for the banks, to allow the banks to absorb foreclosures more gradually, not to actually induce modifications and save homeowners from foreclosure.

You have to appreciate the gumption of the Treasury spokeswoman who told Pro Publica that the servicers are “subject to an unprecedented level of compliance oversight” under HAMP. Usually compliance means actual penalties for violating program guidelines.

I don’t know why you would seek blame with the practitioners of a failed program rather than those who designed it in the first place.