On Thursday, the Department of Housing and Urban Development (HUD) announced changes to a program for deeply underwater mortgages after criticism that it’s been helping Wall Street rather than distressed homeowners. The agency is billing the move as the “most significant improvements to date” for the program.
The Federal Housing Authority (FHA) has been running the Distressed Asset Stabilization Program (DASP) for four years, auctioning off the underwater mortgages that the government took on in the midst of the housing crisis. The program’s rules are supposed to ensure that underwater homeowners get a chance to stay in their homes and that communities are protected from foreclosures and vacancies that can drive down surrounding housing prices. The FHA has sold about 100,000 loans through the program and turned a profit on mortgages that had been keeping the agency in the red.
But the success for homeowners and communities has been less straightforward.
The auctions, until now, have primarily benefited private equity firms, hedge funds, and other Wall Street actors over nonprofits and community groups. Wall Street firms sensed an opportunity to rake in profits by buying up these loans, repackaging them — or sometimes pushing them into foreclosure — and then selling them at higher prices to hedge funds and other speculators.
As of September 2014, private investors won bids on nearly 98 percent of all the loans auctioned off through DASP, leaving just 2 percent for nonprofits and a negligible number directly sold to local governments.
One reason is that the nonprofits have a tough time competing with financial firms in the bidding process, given that they receive no preferential treatment and often get outbid. For example, Hogar Hispano, a foreclosure prevention program, offered to pay 61 percent of the value of a loan pool in 2012 but lost to a for-profit company that bid at 66 percent.
That may soon look different under HUD’s announced changes. The FHA will establish a pilot program that offers a preferential option to nonprofits, allowing them to bid on up to 5 percent of loans in a pool and win as long as they pay the lowest bid amount. The agency will also institute a goal of selling 10 percent of assets to nonprofits and local governments, target loans to sell off through DASP based on the interest of nonprofits and governments, and streamline the direct sale process to local governments.
The goal is to eventually expand the pilot program. “The hope is, if it’s successful, we’ll do it on all pools,” Edward Golding, HUD’s principal deputy assistant secretary for the Office of Housing, told ThinkProgress. “I think it’s scalable.”
And the larger end goal is to increase the participation of nonprofit groups. “We’re hopeful that this will be a game-changer and will allow the nonprofits to participate more,” he said. In the end it should “better align market outcomes with communities and individual interests.”
HUD also announced changes that could help homeowners themselves. About 17 percent of loans that were auctioned through DASP and resolved are “reperforming,” meaning that the homeowner started making mortgage payments again. But it’s unclear if that happened because homeowners were given affordable loan modifications or ones that will spell trouble down the road. Just under 10 percent of loans were reperforming with actual modifications, and there have been reports of modifications that change the interest rate only, without affecting the total amount owed, otherwise known as the principal amount. Others simply extend the repayment period or give borrowers “trial” changes that are only temporary.
For example, a loan servicer for Lone Star Funds, a private equity firm that as of 2014 had bought nearly 23 percent of DASP loans, the most of any entity, sent out standard agreements to borrowers that did not reduce the debt the homeowners owed, but instead deferred higher interest payments and payments on the total amount until a later date. At that point, as a report from the National Consumer Law Center explained, “Because the principal balance has increased, the monthly payment for principal interest will likely end up significantly higher.”
On Thursday, HUD announced a new focus on principal reduction to permanently drive down how much underwater homeowners owe. The FHA will require principal forgiveness — reducing the total amount owed — to be the first option an investor offers to a borrower when evaluating him or her for a modification. On top of that, it will begin reporting more detailed data that will show whether or not borrowers had their principal reduced, adding a layer of transparency. The agency will also limit interest rate increases to no more than 1 percent a year after five years where the rate is fixed.
“There’s an expectation that we will see a significant uptick in the use of principal forgiveness,” Golding said of the changes.
Advocates who have called for improvements to the DASP program hailed the announcement as a positive sign. “The changes that HUD announced are really important for the program and many of them are things we have been pushing for for quite a while,” Sarah Edelman, director of housing policy at the Center for American Progress, said. (ThinkProgress is an editorially independent project of the Center for American Progress Action Fund.) “While there is still more that the FHA can do strengthen the program, these changes are really significant and should make a big difference.”
And it’s a difference that will be particularly important for vulnerable communities. CAP just released an analysis finding that the majority of auctioned loans are coming from zip codes that are still crawling out of the housing crisis and haven’t fully recovered in terms of housing values and unemployment. Meanwhile, people of color are most affected: about 84 percent of the auctions were in neighborhoods with higher concentrations of people of color, especially African Americans and Hispanics.
Celisa Calacal and Sydney Pereira contributed additional reporting.