The practices surrounding the government’s sales of deeply delinquent, non-performing loans (NPLs) have drawn considerable controversy in the last year or so. Lawmakers and advocacy groups have repeatedly petitioned the heads of housing regulatory agencies for changes to these programs that require them to sell the distressed mortgages to non-profits rather than private investors or equity firms.
In early March, a group of 45 members of the U.S. House of Representatives, led by Rep. Mike Capuano (D-Massachusetts), wrote a letter to FHFA Director Mel Watt and HUD Secretary Julián Castro calling for, among other changes, more transparency and the removal of “bad actors” from the NPL sales.
This week, FHFA announced enhancements to its NPL sales programs that include the requirement that buyers of the NPLs evaluate borrowers for eligibility for modifications that include principal and/or arrearage forgiveness. The FHFA made the announcement the same day as the Agency announced a new principal reduction program for underwater and delinquent borrowers.
"The national housing market has significantly improved in recent years but there are still areas of the country where home values have not recovered and negative equity remains a real problem," FHFA Director Melvin L. Watt said. "The Principal Reduction Modification program we are announcing today, along with the changes we are making to our NPL sales guidelines, will allow an opportunity for delinquent, underwater borrowers in these areas to avoid foreclosure and save their homes.”
The enhancements to the NPL sales announced by the FHFA include the following:
- Establishing that NPL buyers must evaluate borrowers whose MTMLTV (market-to-market loan-to-value) ratio exceeds 115 percent for modifications that include principal reduction and/or arrearage forgiveness;
- Forbidding NPL buyers from unilaterally releasing liens and “walking away” from vacant properties; and
- Establishing more specific proprietary loan modification standards for NPL buyers.
The enhancements may not be the changes the advocates and lawmakers were looking for, but they are still aimed at achieving the best borrower outcomes. Some believe there is more work to be done, however.
“FHFA has listened to the community, and is now putting a higher priority on principal reduction as a key strategy to get struggling homeowners into sustainable mortgage modifications.”
Amy Schur, Campaign Director, ACCE
“FHFA has listened to the community, and is now putting a higher priority on principal reduction as a key strategy to get struggling homeowners into sustainable mortgage modifications,” said Amy Schur, Campaign Director for the Alliance of Californians for Community Empowerment (ACCE), a group that organized a nationwide protest in February over Agency sales of NPLs to Wall Street. “However, it’s still the case that the majority of these mortgages are going to foreclosure, leaving more property in our neighborhoods in the hands of private equity firms and hedge funds, which is not what we need.”
The GSEs are including smaller pools of geographically-focused loans in their NPL sales targeted for participation from non-profits. Fannie Mae included one such Community Impact Pool in an NPL auction announced this week. It is the third Community Impact Pool offered for sale by Fannie Mae since it began selling NPLs last year; the first two were bought by non-profit New Jersey Community Capital.
The changes announced this week are the second set of enhancements that FHFA has announced to its NPL sales program. FHFA announced in March 2015 a set of enhanced guidelines for NPL buyers which call for bidders to, among other requirements, identify servicing partners at the time of qualification and complete a questionnaire to demonstrate a record of successful loan resolution through foreclosure alternatives. Also, servicers who purchase non-performing Agency loans must apply a "waterfall of resolution tactics" before resorting to foreclosure.