Series: Foreclosure Crisis How Banks and Government Fail Homeowners

Buried in the massive financial regulation overhaul that President Barack Obama signed today, two provisions force the Treasury Department to increase the transparency of its loan modification program.

One measure takes aim at the secret formula the government developed to test homeowners’ eligibility for a modification. Treasury will now have to post its details online. The other measure requires that the government divulge far more data from the program.

Consumer advocates have long criticized the lack of transparency in the program and the loan modification process. That lack of transparency is particularly critical, they say, because the banks and other companies that service mortgages frequently make errors. As we’ve reported, in the worst cases those mistakes lead to foreclosure.

Many homeowners are wrongly denied modifications “because of the lack of transparency in the program,” said Alys Cohen, an attorney with the National Consumer Law Center. The new measures will help homeowners and advocates challenge errors by mortgage servicers, she said.

At the center of the loan modification program is a complicated — and until now, secret — formula called a “net present value” (NPV) calculation. The formula, which was developed by the Treasury Department and other government agencies, determines whether modifying a homeowner’s loan under the program is likely to be more profitable than a foreclosure. The servicer is required to run the formula for each homeowner who applies for a modification.

“A homeowner’s fate hinges on the NPV score, so the American Dream is literally at stake here,” said Rep. Mike Quigley, D-Ill., who sponsored the amendment to add the measure to the bill.

Servicers often run the formula incorrectly. Fifteen of the largest 20 servicers in the program have not followed “various aspects” of its rules concerning the formula, according to the Government Accountability Office.

Problems with servicers’ use of the formula have added to the serious delays that homeowners have experienced. Earlier this year, Treasury began requiring that servicers recheck denials based on the formula.

As we detailed last year, consumer advocates have criticized the Treasury for keeping the formula secret. The new rule requires the Treasury to open up its black box. Treasury must publish the “methodology and computer model” on the Internet, according to the new law.

Along with divulging the formula, the Treasury must provide a public “net present value” calculator so homeowners can run their own test to see if they qualify for a loan modification.

For homeowners who are denied based on the formula, the law also requires that servicers provide them with certain figures used in the calculation, such as the borrowers’ income, so they can make sure the information is correct.

Rep. Quigley said that, based on a recent meeting with Treasury officials, he is hopeful the new measures could be in place by the end of the summer.

The bill also beefs up the reporting requirements for the program. For the first time, the Treasury Department will be required to release individual data on homeowners involved in the program. Currently, servicers report around 150 different variables (PDF) for each homeowner, ranging from the credit score to the property valuation, but Treasury releases only a fraction of the information in its monthly reports.

Now, Treasury will be required to release this information, minus the parts it withholds to protect homeowner privacy. ProPublica has been waiting for over a year to get this data, which we requested under the Freedom of Information Act. Advocates and researchers have also been pressing for it, saying it’s necessary for independent review of the program, including a fair-lending analysis.

“By the time we get this data, which we have been asking for since the inception of the program, the program is already going to be set in stone,” said Julia Gordon, senior policy counsel at the Center for Responsible Lending. Gordon said the data will nonetheless be useful for a “historical” evaluation of the program and for policy makers looking to develop future foreclosure-relief efforts. (Disclosure: The center receives funding from the Sandler Foundation, the principal funder of ProPublica.)

Also, servicers will be required to submit monthly reports to Treasury detailing the number of modification applications they receive, process, approve and deny.

This month, Treasury began reporting the fate of the 539,000 homeowners who'd been rejected by the eight largest servicers, but the bill requires it to collect and share more information about applications to the program, such as how many homeowners have applied and are waiting for an answer.

Rep. Doris Matsui, D-Calif., proposed the reporting requirements as an amendment to the House bill. She said her constituency in Sacramento has been struggling with foreclosures. “The Making Home Affordable Program holds the potential to greatly reduce these figures, but without accountability, the lenders have failed to do so,” Matsui told ProPublica.