A new study by the Urban Institute analyzed the Government Accountability Office's (GAO's) recent evaluation of the Federal Housing Administration's (FHA's) Distressed Asset Stabilization Program (DASP). The study found that while the GAO evaluation has made recommendations to improve the quality control of this program, its conclusions on the DASP's overall effectiveness were "less helpful."
The Urban Institute said the GAO had concluded that “in aggregate sold defaulted loans were more likely to experience foreclosure than comparable unsold defaulted loans.” It had noted the probability of foreclosure 24 months after the loan servicing was transferred to the investor was 43% for sold loans through the program, versus 36% for unsold loans.
"Though this figure appears bleak, and is indeed the subject of criticism in the report, it indicates the program’s success, not its weakness," Laurie Goodman, VP, Housing Finance Policy, Urban Institute; Edward Golding, and Jim Parrott, both Nonresident Fellows at Urban Institute wrote in a blog.
The writers said that the figures that GAO reached compared the outcomes of delinquent borrowers who FHA could no longer help because of which they were put into DASP, with borrowers FHA could still help avoid foreclosure. "Put differently, it shows the program changed the probability of foreclosure in that first group from close to 100% to 43%, only 7% higher than the group of borrowers FHA was still in a position to help on its own," they said.
Some of the ways in which investors who bought loans through the DASP helped delinquent borrowers avoid foreclosure included:
- Extending the loan term to 40 years or cutting the interest rate to below a market rate of interest
- Forgiving the principal on the loans
- Forbearing more than 30% of the loan value, or offering more generous terms for deeds in lieu of foreclosure or short sales
"None of these options is available to FHA given their statutory authority," the researchers pointed out while making a case for the importance of DASP. "Again, borrowers who participate in DASP are basically out of options with FHA."
However, they added that more needs to be done to "ensure borrowers whose loans were sold through this program got the best shot possible and any foreclosures had minimal impact on the community." While the FHA had made changes along these lines to the program in 2016, the researchers wrote that only one auction had taken place after these changes were implemented. Because of this, their full impact has not been studied.
The study, therefore, made some recommendations that could help FHA improve its program. They included using better information systems and monitoring capability and more personnel and funding to manage the program. However, the most important aspect of FHA improving the program would be by releasing much more loan-level data, including data on DASP, "so that independent analysts can help them evaluate their programs. Indeed, periodic public reporting of outcomes would be valuable."
Click here to read the full blog.