HUD’s first non-performing loan (NPL) sales program has been the focus of much controversy since it began in 2010. The program later renamed the Distressed Asset Stabilization Program (DASP) in 2012, has, to date, sold approximately 105,000 loans and its single-family loan sales programs totaled about $18 billion in unpaid principal balance (UPB).
An analyzation of 70,000 loans sold in six DASP auctions from April 2012 to June 2014 found that 63 percent of those loans were located in ZIP codes with higher-than-average levels of negative equity; 69 percent of them were located in ZIP codes with higher-than-average unemployment rates; and 84 percent of them were located in ZIP codes with a higher-than-average concentration of minorities.
Conversely, in a report from The Center for American Progress (CAP) it was determined that most notes analyzed were located in areas where job gains were increasing and the share of underwater homeowners was declining.
“Notes sold through DASP tend to be located in communities where large shares of homeowners are ‘underwater,’ or owe more on their home than it’s worth; where unemployment remains high; and with large shares of communities of color, who lost a disproportionate share of wealth during the housing crisis,” said Sarah Edelman, Director of Housing Policy at CAP and co-author of the report.”
CAP’s report made recommendations for improvements that FHA should make and that policymakers should support in order to ensure that DASP is beneficial for both the homeowners and the communities in which the distressed properties are located.
“Assumptions about note purchasers’ economic incentives are not enough to ensure that these companies do not further destabilize communities on the road to recovery,” Edleman said. “DASP needs stronger standards that prioritize homeowners and neighborhood stabilization.”
FHA announced enhancements to DASP last year that included requiring purchasers of DASP loans to suspend foreclosure actions for a year (increased from six months), providing more advanced notice of pending sales, and extending the due diligence periods to accommodate non-profit organizations seeking to participate. The loans sold through DASP were an average of 29 months delinquent, according to FHA. They also created specific pools of mortgages to be offered exclusively to non-profits and local governments.
“FHA is deeply committed to protecting struggling homeowners and making certain they have the greatest opportunities to avoid foreclosure and remain in their homes,” said Ed Golding, HUD’s Principal Deputy Assistant Secretary for the Office of Housing. “While thousands of homeowners avoided foreclosure through this note sales program, we continue to explore new ways to help these families and to offer more opportunities for public-minded organizations to have a seat at the table.”
HUD’s tendency to sell DASP notes to private investors rather than nonprofits has drawn the ire of some advocacy and civil rights groups as well. In April, a coalition of these groups accused HUD and FHA of engaging in a “Wall Street Giveaway” and called for HUD Secretary Julián Castro to cease selling loans through DASP until the program was reformed.
Following these accusations, HUD announced in mid-May that enhancements to DASP were coming soon. The enhancements announced included prohibiting investors from abandoning low-value properties and offering greater opportunities for non-profits and local governments to participate in DASP, according to the Federal Housing Administration. DASP is meant to be used only as a last resort; all FHA loss mitigations must be exhausted before a loan is sold through DASP.
Leaders of the organizations that have been aggressively pressuring HUD for enhancements to DASP expressed their approval of the announcement.
“Cities around the country have been frustrated by a lack of meaningful support from HUD in our foreclosure prevention and affordable housing programs,” said John Avalos, a member of the San Francisco Board of Supervisors. “So it’s a real relief that HUD is going to work more collaboratively with local government and local leaders to make a plan for these troubled mortgages. Up until now, I feel like HUD’s mortgage sale program has been doing more harm than good to our communities.”
After the announcement of these changes, The House Financial Services Committee held a hearing to determine the effect of those changes to DASP on taxpayers—and whether or not those changes were politically motivated, as some critics have accused HUD Secretary Julián Castro of making the changes to appease advocacy and civil rights groups, some of which claimed Castro should disqualify himself from the list of candidates for Vice President because of what they perceived as shortcomings to DASP.
“There has probably been no greater public policy mistake in housing than Washington trying to put people into homes they cannot afford to keep,” said Rep. Jeb Hensarling (R-Texas), Chairman of the Committee, in his opening statement at the hearing. “It was clearly the number one reason our nation suffered the number two worst financial crisis in our history.”
He continued on stating that the changes proposed to DASP, in his opinion, breached the fiduciary duty to taxpayers by offering lower priced preferential bidding options to non-profits and local governments. Hensarling said that he believes these bidders are in fact political allies and by punishing private purchasers if they get stuck with a vacant property, taxpayer recoveries through the DASP will be reduced, further exacerbating the financial stresses placed on the FHA. Hensarling believes that he is witnessing “the gradual transformation of FHA from the mutual insurance program designed to help low income, moderate income, and first time homebuyers, into a social program designed to help special interest groups.”
To conclude his statement before the committee hearing Hensarling stated, “It is surely worth repeating that there is no better foreclosure mitigation program than a job with growing wages and a bright future. Also, a bankrupt FHA and a bankrupt America can help no one stay in their home, much less afford them an opportunity to buy one in the first place.”
Following Hensarling’s remarks, Ranking Member Maxine Waters (D-California) read her opening statement and criticized Republicans for “hijacking a very important topic in order to launch attacks on the Secretary, and the Department, rather than substantively examine the issues impacting working people in this country.”
Waters highlighted the need for changes to the HUD’s Distressed Asset Stabilization Program so that it can better serve borrowers and remarked that HUD “has proposed some modest changes to help ensure that individuals are better protected when their loans are sold, and to help level the playing field when community-based organizations want to place bids.” Waters stated she felt Republican attempts to thwart improvements to the program were only to protect the interests of large corporations.
To conclude her statement, Waters stated, “Make no mistake, this is not only an effort to impair HUD and other agencies from doing their jobs, but also to distract the American public from the real policy issues these agencies are working to address each day.”
Castro, the lone witness at the hearing, began his opening remarks by thanking the committee for the opportunity to discuss the initiative, DASP, which he felt “is making an important, positive difference for American homeowners and their neighborhoods.”
Castro stated that he believes since the Great Recession, the national housing market has made great progress and he believes HUD to have been beneficial in this turnaround by taking a number of steps to ensure the housing market remains positive for the economy.
He continued by stating that since the program’s launch, HUD has modified DASP many times. In regards to the most recent changes to the program, Castro stated that he believes the changes are not politically motivated.
“All of the program changes we will discuss today were designed with input from a broad range of stakeholders, all were assessed for how well they would fulfill our goal of strengthening neighborhoods, and all have been implemented with this Committee’s counsel in mind—including your direction, Chairman Hensarling, that any changes to DASP further protect the health of the MMI Fund,” said Castro.
The hearing continued on with extensive questioning of Castro from both democrats and republicans. Some of the speakers during the hearing commended Castro for the changes made to the program and held fast to the idea that the changes were purely politically influenced. Still others believed though HUD’s changes were important to the program, there was still more changes that could be made to further improve the program.
Politically motivated or not, as these changes are implemented it is safe to say all eyes will be on DASP’s progression towards the future.