HUD loan investment program draws scrutiny

Congressmen ask about consumer protections in mortgage-selling program

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Seven years after the real estate market crashed, major investors are again buying mortgages by the thousands. This time, they are buying from the government — at a significant discount. 

Emilie Udell for the Center for Public Integrity

Two U.S. congressmen have asked the Department of Housing and Urban Development (HUD) to address concerns that a program to sell mortgages to investors in bulk auctions is harming homeowners.

Sen. Sherrod Brown, D-Ohio, and Rep. Elijah Cummings, D-Md., requested a briefing on the program in a Feb. 1 letter to HUD secretary Julian Castro.

The letter cites the Center for Public Integrity’s investigation of the Distressed Asset Stabilization Program (DASP), a HUD program to sell mortgages insured by the Federal Housing Authority (FHA) to the highest bidder. The story outlined consumer protection shortcomings in the DASP system. The story was co-published on The Atlantic.

Brown is ranking member on the Senate Committee on Banking, Housing and Urban Affairs. Cummings is ranking member of the House Committee on Oversight and Government Reform.

“Several recent reports indicate that the Federal Housing Authority (FHA) may be selling nonperforming loans for properties located in some of our most vulnerable communities to hedge funds and private equity firms via quarterly auctions without sufficient protections for homeowners and neighborhoods,” the letter reads.

Over 98,000 mortgages have been sold through DASP with the stated goal of helping homeowners to avoid foreclosure while also getting troubled loans off the FHA’s books. The Center investigation revealed that the mortgages were sold for as little as 41 percent of their value and that only 16.9 percent of DASP mortgages avoided foreclosures.

In the letter, Brown and Cummings ask HUD several questions:

  • Are homeowners notified of the status of their mortgage before the sale and are they informed of their inclusion in the program? (According to lawyers the Center spoke to last fall, most borrowers learn their loan was sold well after the initial auction — if they become aware at all — after the mortgage has been stripped of FHA protections.)

  • How does HUD ensure required loss mitigation procedures are being followed before the sale? (The Center’s original report explains that HUD relies on banks to self-report the loan’s status without checking with the homeowner.)

  • What protections are provided to homeowners after their mortgages are sold through the program? (Several borrowers reported to the Center that they were repeatedly denied opportunities to negotiate for more affordable loan terms, including terms that would have been available had the mortgages stayed under FHA protection.)

  • What data does HUD provide to the public about the program? (At the time of the Center’s investigation, HUD did not provide or seem to collect detailed information about the mortgages after auction.)

  • What percentage of mortgages are sold to nonprofits? (The Center reported only 2 percent of sales went to nonprofits as of September 2015.)

“Many of these questions we have been trying to get answers to for a long time,” says Alys Cohen, a staff attorney with the National Consumer Law Center. “FHA is supposed to work for homeowners, not just the lending community.”

Cohen adds, “The bottom line is lenders still say these sales are a way to get rid of loans that have no other options but we know many homeowners that are trying to save their homes are having their loan sold without any notice.”

HUD has continued to sell mortgages through DASP after the Center for Public Integrity report. The latest sale took place on Nov. 18, 2015 and put 7,787 mortgages on the auction block. Mortgages were grouped into 24 pools, two of which were bought by nonprofits, according to a post-sale report. Seventeen pools went to the investors at Bayview Acquisitions, LLC. Fannie Mae and Freddie Mac, who together hold the rights to many more mortgages than FHA, have followed with similar sales.

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