A group of 45 members of the U.S. House of Representatives led by Rep. Mike Capuano (D-Massachusetts) has written a letter [1] to HUD [2] Secretary Julián Castro and FHFA [3] Director Mel Watt asking the regulators to make changes to improve their respective agencies’ non-performing loan (NPL) sales programs.
These programs have come under criticism in the last year from lawmakers and other various groups because of the large volumes of loans that are being sold to private equity firms and investors. Capuano and Sen. Elizabeth Warren (D-Massachusetts) led a protest to this effect in September in Washington, D.C. [4] and met with housing regulators (including Watt) to discuss possible improvements to agency NPL sales practices.
The group of lawmakers expressed concern in their letter that the agencies’ tendency with NPL sales was to sell thousands of deeply delinquent mortgage loans to the highest bidder “without sufficient attention to potential outcomes for homeowners, communities, and the affordable housing missions,” of both HUD and the FHFA.
“We are concerned that this approach represents a huge missed opportunity to prioritize neighborhood stabilization, help alleviate the affordable housing crisis in communities across the country, and to work with organizations that have a track record of preserving homeownership,” the Representatives wrote.
In the letter, the lawmakers made four recommendations for improving agency NPL sales programs:
- Disqualify participation from “bad actors,” or those who “pay lip service to legitimate loan modification requirements while engaging in unfair and abusive practices towards borrowers.” The lawmakers said these entities “should not be able to use government programs to profit from the continuing legacy of the financial and foreclosure crisis.”
- Make the programs “as transparent as possible,” requesting that the agencies “clearly spell out the criteria you use to determine which properties go into which pools and why.” The lawmakers claim it is impossible to determine how the pools are constructed, how properties are assigned to different pools, and how vacant properties are treated versus occupied properties.
- Recognize the added value provided by purchasers who commit up front to foreclosure prevention efforts and property disposition strategies that prioritize affordable housing. The lawmakers stated that “the work these entities do to rehabilitate these properties and achieve favorable outcomes for neighborhoods should not be discounted as immaterial to the price that your agencies will accept.”
- Bring state and local governments, including state and local housing finance agencies, into the process. The lawmakers said they were concerned that state and local governments “have not to date been consulted in any meaningful way as to how these programs should be structured, what impact bulk sales could have in their jurisdictions, what role states and localities can play in these programs, or at minimum, if there has ever been a process established for notifying states and localities of upcoming sales of properties in their jurisdictions.”
Both Fannie Mae and Freddie Mac feature smaller, geographically-concentrated pools of loans in their NPL auctions that are targeted for participation by non-profits. Fannie Mae has sold two such pools of loans [5] to non-profit New Jersey Community Capital. In their letter, the lawmakers called this a “step in the right direction.”
This letter was not the only one recently written by lawmakers to Castro about agency NPL sales practices. In early February [6], 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 Castro [7] asking the Secretary for more information on foreclosure prevention options available to the borrowers on loans sold through HUD’s Distressed Asset Stabilization Program (DASP).
Also in early February, elected officials and community leaders in cities all over the country rallied to protest the sales [8] of deeply delinquent mortgage loans by Fannie Mae [9], Freddie Mac [10], and HUD [2] to Wall Street investors and speculators. Baltimore, Philadelphia, New York, East Orange, New Jersey, and San Francisco were some of the cities that participated.
“We are concerned that this approach represents a huge missed opportunity to prioritize neighborhood stabilization, help alleviate the affordable housing crisis in communities across the country, and to work with organizations that have a track record of preserving homeownership.”
Both HUD and FHFA, which is the conservator for Fannie Mae and Freddie Mac, announced enhanced rules for the sale of non-performing loans in 2015. HUD now requires the buyer of the loans to delay foreclosure for at least a year and to evaluate the borrower for loss mitigation possibilities. FHFA announced in March 2015 a set of more stringent guidelines [11] for NPL buyers which call for bidders to identify servicing partners at the time of qualification and complete a questionnaire to demonstrate a record of successful loan resolution through foreclosure alternatives. As part of the new requirements, servicers who purchase non-performing Agency loans must apply a "waterfall of resolution tactics" before resorting to foreclosure.
“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 in September. “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.”
Edward Golding, Principal Deputy Assistant Secretary of the Federal Housing Administration, said of the meeting with Warren, Capuano, and advocacy groups in September, “We discussed how HUD and FHA might make better use of one of its tools, the Distressed Asset Stabilization Program (DASP), to further the Department’s goal of stabilizing communities and assisting them as they, and their public-minded partners, work to address severely distressed mortgages that are on the verge of foreclosure. FHA recently made significant changes to this program, including expanding our outreach to participating nonprofit organizations and requiring a 12-month delay in finalizing any foreclosure action to allow struggling families a greater opportunity to remain in their homes or find another sustainable housing solution.”
Click here [1] to view a copy of the letter from the 45 lawmakers.