Watchdog: Obama Mortgage Plan Vulnerable to Scams

Recent changes to the Obama administration's mortgage assistance program may make it more vulnerable to fraud, a government watchdog says.

The changes, announced last month, are intended to make it easier for struggling homeowners to avoid foreclosure. But the administration hasn't done enough to warn the public about fraud and hasn't included sufficient safeguards to prevent abuse, the special inspector general for the Troubled Asset Relief Program, or TARP, said.

"Criminals feed on borrower confusion, and frequent changes to the programs provide opportunities for experienced criminal elements to prey on desperate homeowners," inspector general Neil Barofsky wrote in a quarterly report issued Tuesday.

Last month, the Treasury Department revised the $75 billion mortgage assistance program it first rolled out last year. It is intended to prevent 3 million to 4 million home foreclosures by encouraging mortgage lenders to lower monthly payments.

So far only about 170,000 homeowners have qualified for mortgage modifications and critics charge the effort isn't making much headway. In a report last month, Barofsky's office said that a lack of planning and shifting rules on who qualifies has slowed the program's progress.

In response to the criticisms, the administration made several changes. Mortgage lenders will receive incentive payments if they reduce the amount borrowers owe. That would help homeowners with mortgages larger than their homes are worth — a situation known as being "underwater."

In addition, unemployed homeowners can get their mortgage payments cut to 31 percent of their income for three to six months.

In his report, Barofsky called the changes "a potentially important step forward for homeowner relief."

But, while the changes were announced "with great fanfare, little was done at the time to warn borrowers" about potential fraud, the report said.

The administration's existing program has already spawned fraudulent schemes, the report said, such as one in which borrowers are tricked by "thieves" into paying upfront for modifications that never materialize.

Under the changes announced last month, Treasury isn't requiring appraisals to determine a home's value in cases where mortgage principle is reduced, the report said. That could make it easier for mortgage lenders to fraudulently qualify for incentive payments.

Treasury should instead follow the Federal Housing Administration's guidelines, which require the use of an FHA-approved appraiser, the report recommended.

"No program of this type and scale can be considered well-designed without robust protections of taxpayer funds against the predation of criminals," the report said.

In response, Treasury Department officials told the inspector general they will soon initiate a public service campaign warning against fraud. Treasury officials didn't respond to the recommendation that the FHA's guidelines should be followed.