In 2010, HUD launched the mortgage sales program — now known as the Distressed Asset Stabilization Program, or DASP — under intense pressure from Congress to improve its finances. HUD can’t reduce the principal owed on mortgages it holds for homeowners, but it can sell the mortgages in bulk to investors at a steep discount — at times as little as 41 percent of the mortgages’ collective value.
The agency, through the FHA, insures loans to lower-income and first-time homebuyers. During the 2008 financial crisis and subsequent recession, many of those homeowners fell behind on their mortgage payments and foreclosures loomed.
Meanwhile, the FHA, due to an onslaught of claims, was desperately in need of a funding infusion.
The DASP program has a dual purpose: to lessen the impact of FHA insurance claims on defaulted mortgages on HUD’s finances, and according to a statement in April by Genger Charles, then the acting commissioner of HUD’s Office of Housing, to provide borrowers “a second chance at avoiding foreclosure.” Through DASP, lenders cash in on an FHA insurance claim on mortgages that are at least six months delinquent and HUD takes ownership of the mortgages. HUD then sells those mortgages to the highest bidder in bulk auctions.
Over 98,000 loans have been funneled through the DASP system since it began in 2010, with mortgages amounting to more than $16.7 billion in total debt.
The sales have helped the FHA insurance fund become solvent. According to an analysis of HUD’s sales results by the Center for Public Integrity, buyers have paid HUD $11.2 billion over the course of these auctions. The fund currently holds $4.8 billion, after being $16 billion in the red two years ago.
But when it comes to helping homeowners avoid foreclosure, the results are unimpressive. The program, it was hoped, would help homeowners because the investors who bought the loans were expected to offer better terms to borrowers. As part of the initiative, HUD included a stipulation that buyers must wait six months (it has since been bumped up to a full year) to foreclose to allow borrowers a chance to work with their new creditors.
“Once we sell [the mortgage] for something less than the principal balance,” explains HUD spokesperson Brian Sullivan, the lender “has more room to work with the homeowner.”
But the new owners of these mortgages are more likely to flip the homes for a profit or take advantage of the booming rental market, say some advocates. The transactions may make good financial sense, but they can leave struggling homeowners like Julius Uwansc in the dark, and in some cases on the streets.
“The investors are there to make money,” says Diane Cippolone, a mortgage servicing consultant to the National Fair Housing Alliance, a nonprofit organization. “They are not there to do neighborhood revitalization or neighborhood stabilization.
A quarterly report on the program from 2014 reported that 11 percent of borrowers were making payments — meaning the homeowners were still in their homes — after their mortgage was sold through DASP. HUD calls these loans “re-performing.”
But even that paltry success rate is questionable. The definition of “re-performing” is “fairly loose,” says Geoffry Walsh, a staff attorney at the National Consumer Law Center. As HUD defines it, re-performing means payments were received for six months after the sale. “It doesn’t mean that anybody determined what is affordable to the homeowner, just that the buyer was able to extract six monthly payments from the borrower,” he continues.
HUD’s post-sale reports show that 6,427 mortgages, or 16.9 percent of those sold between 2010 and 2013, have successfully avoided foreclosure. But this includes third-party sales or other methods that still result in a homeowner ending up without a home. Only 5.4 percent of the loans sold during that same period were performing.
The amount of principal reductions actually offered to homeowners under the program by the new mortgage owners is unknown. HUD does not require new servicers to report the types of loan modifications given, and it did not respond to questions about reporting requirements.
HUD points to dramatic declines in FHA foreclosures as evidence that the market may be returning to pre-crisis stability. But by selling loans right before the foreclosure process begins, Daren Blomquist, the vice president of RealtyTrac, says HUD may be using DASP to create “ghost inventories” where foreclosures are still likely—they just aren’t immediately visible on the record books.
“This process of selling loans, aside from whether it’s working, it has the added bonus of making the foreclosure numbers look better in the short term,” says Blomquist.