JP Morgan Chase & Co (JPM)

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U.S. halts mortgage fees to three big banks
J.P. Morgan, B. of A., Wells need ‘substantial’ improvements

WASHINGTON (MarketWatch) — The Obama administration on Thursday halted payments to three of the largest U.S. banks until they make “substantial” improvements to their performance in a mortgage assistance program.

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J.P. Morgan Chase & Co. JPM +1.54% , Bank of America Corp. BAC +0.81% , and Wells Fargo & Co. WFC +3.28% can no longer receive fees from the program known as the Making Home Affordable Program, until they make changes to ensure their processes work better, the Treasury Department announced. The program seeks to help troubled borrowers avoid foreclosure.

The big banks have been broadly criticized for foreclosure documentation errors, and in many cases, institutions have assigned only a single employee to rapidly approve numerous foreclosures. The major banks were sanctioned in April by federal regulators for “negligence” in residential mortgage loan servicing and foreclosure processes. Hefty fines in the billions of dollars are likely still on the way from a related, ongoing investigation on the part of state attorneys general and the Justice Department.

The Treasury Department found that the three firms are in need of substantial improvements based on the agency’s compliance reviews and program performance results from the first quarter of 2011. They agency evaluated banks on how they contacted homeowners, evaluated whether homeowners need assistance and their management and governance.

Banks have treated borrowers poorly, in part, by forcing them to repeatedly submit paperwork over and over and leaving them in limbo for months while they struggled to make payments, said Rev. Lucy Kolin, a spokeswoman at the PICO National Network, a group of faith-based community organizations.

In many cases, the institutions ultimately deny “hundreds of thousands” of troubled borrowers a chance to avoid foreclosure, Kolin said.

Wells Fargo spokeswoman Theresa Schrettenbrunner took issue with the Treasury report, noting that one of the calculations, on whether the lender correctly determined eligibility, uses data from the fourth quarter of 2010 and that Wells Fargo internal calculations show that the bank is performing much better lately.

J.P. Morgan spokesman Patrick Linehan made a similar point. “The bank respectfully disagrees with the assessment,” he said in a statement. “We have made significant improvements since the modifications that Treasury reviewed and continue to work hard to keep improving our processes and controls.”

Bank of America said in a statement that it acknowledges improvements must be made in key areas, particularly those affecting the customer experience. “We have made great progress in several key performance areas,” they added.

Acting Assistant Secretary Timothy Massad said he wasn’t going to talk about any particular bank and the problems they may have with the report. He added that the Treasury Department will discuss any objections with each bank individually.

He pointed out that the payment withholding decision is based on testing and sampling conducted in the fourth quarter of 2010 and first quarter of 2011.

“If the servicer has fixed a problem in a reasonable time, then we will go back and resume payments,” Massad told reporters. He added that lenders who fix problems appropriately can still be eligible down the road to obtain payments that were halted based on this assessment.

According to a Treasury spokeswoman, the three banks received $24 million in taxpayer-funded payments in May from the program. So far, the Treasury has spent just less than $2 billion of $50 billion in taxpayer funds allotted to the programs.

In addition to the three big banks, another servicer, Ocwen Loan Servicing LLC OCN -0.73% , was also found as having substantial improvements but the agency decided not to withhold payments from the program because, the Treasury said, their problems were caused in part by a large servicing portfolio the company acquired recently.

The Treasury results are part of an assessment it did on the ten largest mortgage servicers participating in the program. The Treasury said the other six servicers reviewed, including Citigroup Inc.’s C +2.41% CitiMortgage Inc., need moderate improvement and they are not having their taxpayer-funded payments stopped.

The Making Home Affordable Program includes five subsidiary programs, the largest of which is the embattled Home Affordable Modification Program, which is uses government funds to modify mortgages so troubled borrowers can avoid foreclosure.

As part of the HAMP program, mortgage servicers receive an up-front payment of $1,000 for each successful modification after completion of the trial-period, and “pay for success” fees of up to $1,000 per year for three years, as long as the borrower remains current.

The other programs are smaller and include the Second Lien Modification Program, the Unemployment Program, Principal Reduction Alternative and the Home Affordable Foreclosure Alternatives Program.

The penalties come after the Treasury last month required all lenders agreeing to modify mortgages using HAMP to provide a single point of contact to borrowers for loans not backed by housing giants Fannie Mae and Freddie Mac.

Ronald D. Orol is a MarketWatch reporter, based in Washington.

http://www.marketwatch.com/story/us-fees-to-three-big-banks-are-stopped-2011-06-09