From Distressed to Success? Lawmakers Demand More Info from HUD

The critics of HUD’s distressed loan sale program are making more noise over the Department’s sales of these loans to private equity firms and investors instead of non-profits which they believe will do more to achieve the best outcomes for borrowers and stabilize the neighborhoods in which these properties are located.

Through its Distressed Asset Stabilization Program (DASP) which began in 2010, HUD has sold more than 100,000 non-performing loans totaling more than $17 billion in unpaid principal balance (UPB). About 95 percent of those loans were sold to private investors.

Earlier this week, U.S. Sen. Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee, and U.S. Rep. Elijah Cummings (D-Maryland), Ranking Member of the House Committee on Oversight and Government Reform, wrote a letter to HUD Secretary Julián Castro asking the Secretary for more information on foreclosure prevention options available to the borrowers on loans sold through DASP.

The loans sold through DASP are seriously delinquent and are likely to be foreclosed on without DASP’s intervention, since servicers of loans in DASP pools are required to exhaust all loss mitigation possibilities. The goal of DASP is to maximize recoveries for the Federal Housing Administration, HUD’s parent agency, and help borrowers avoid foreclosure whenever possible.

Recent media reports in the New York Times and the Atlantic suggest, however, that all loss mitigation possibilities are not being exhausted with the mortgage loans sold through DASP.

“Several recent reports indicate that the Federal Housing Authority (FHA) may be selling nonperforming loans for properties located in some of our most vulnerable communities to hedge funds and private equity firms via quarterly auctions without sufficient protections for homeowners and neighborhoods” Brown and Cummings wrote in their letter to Castro.

The information that Brown and Cummings requested includes the following:

• Whether HUD requires that the homeowners are notified when their mortgages are sold through DASP
• How HUD ensures that loss mitigation procedures are followed for mortgages before they are sold
• What protections homeowners have after their mortgages are sold through DASP
• What data HUD makes available to the public about loans sold through DASP
• What percentage of loans sold through DASP are sold to non-profits

“Without the borrower protections guaranteed by HUD, borrowers whose mortgages are sold can be offered modifications that do not yield affordable payments or are not sustainable over the longer term,” Brown and Cummings wrote in the letter. They have requested the information before February 29, 2016.

The letter from Cummings and Brown coincides with rallies and press conferences being held in several cities this week, including New York and San Francisco, to protest Agency sales of non-performing loans to investors, claiming the borrowers in these loans would be better off if the loans were sold to non-profits. The wave of opposition comes as Fannie Mae and Freddie Mac have announced the sales of 10,000 distressed loans totaling more than $3 billion in UPB.

“The foreclosure and mortgage crisis in New Jersey is the worst in the nation,” said Lester Taylor, Mayor of East Orange, New Jersey. “East Orange has taken this crisis very seriously and worked diligently to keep families in their homes and stabilize our hardest hit communities. The City of East Orange can build on our successes, but only if the federal agencies prioritize the sales of delinquent mortgages to local non-profit partners with a commitment to our residents and our communities. I want Fannie Mae to talk with our City and our non-profit partners before selling off one more troubled mortgage to Wall Street.”

The subject of investors buying distressed loans has been contentious one in recent months. In September 2015, Sen. Elizabeth Warren (D-Massachusetts) and Rep. Mike Capuano (D-Massachusetts) led a protest rally in Washington, D.C. over the sales of distressed mortgages by Fannie Mae, Freddie Mac, and HUD to investors and speculators, claiming that private equity firms do not have the borrowers’ best interests at heart. Warren and Capuano met with FHFA Director Mel Watt and HUD Principal Deputy Assistant Secretary Ed Golding, along with community leaders and the heads of non-profits, to discuss the issue.

“Without the borrower protections guaranteed by HUD, borrowers whose mortgages are sold can be offered modifications that do not yield affordable payments or are not sustainable over the longer term.”

Sen. Sherrod Brown and Rep. Elijah Cummings

“This whole process shows just how tilted the playing field is for the big banks and hedge funds,” Warren said in a statement emailed to DS News in September. “Many of these banks and funds were responsible for fueling the housing bubble in the first place—leading to the crash that hit these families like a punch to the gut. Now these same banks and funds are turning around and scooping up these loans at bargain-basement rates so they can profit from them a second time.”

Fannie Mae and Freddie Mac have made a push to sell their distressed loans to non-profits. In early September, Fannie Mae sold a smaller Community Impact Pool of 71 non-performing loans with approximately $10 million in UPB, to non-profit New Jersey Community Capital. Fannie Mae’s Community Impact Pools and Freddie Mac’s Extended Timeline Pool Offerings (EXPO) are specifically geared to engage participation for non-profits, minority- and women-owned businesses and community groups.

“The guidelines require NPL purchasers to evaluate all borrowers for loan modifications and to pursue foreclosure only as a last resort,” an FHFA spokesperson told DS News. “Fannie Mae and Freddie Mac have been very transparent about their NPL sales programs and have hosted training sessions encouraging non-profits and minority- and women-owned businesses to participate as NPL buyers. This is evident by Fannie Mae’s recent sale of NPLs to New Jersey Community Capital.”

Some have questioned whether selling these deeply delinquent mortgage loans to non-profits will provide the best outcomes for borrowers. In January 2016, the Urban Institute published a white paper titled Selling HUD’s Nonperforming Loans: A Win-Win for Borrowers, Investors, and HUD. The authors of the paper, Laurie Goodman (Director of Housing Finance Policy Center with Urban Institute) and Dan Magder (founder of Center Creek Capital Group), concluded that critics of DASP calling for more participation from nonprofits in distressed loan sales are misguided, because “we question whether nonprofits have or can quickly build the capacity to service a significantly larger portion of the HUD portfolio than they are currently servicing—especially if they are working alone, and not in partnership with for-profit investors who have the capacity to conduct servicing at scale.”

Goodman and Magder also stated that “While nonprofits have a role in helping delinquent borrowers, their limited capital and capacity suggests that their ability to significantly increase their share of DASP loan purchases will be limited in the near-term.”

Click here to view the Brown/Cummings letter to HUD.

Click here to view the complete paper by Goodman and Magder.

Click here for more on HUD’s Distressed Asset Stabilization Program.