(June 2019) Recently, the Federal Housing Administration (FHA) issued an Advance Notice of Proposed Rulemaking (ANPR) related to its Distressed Asset Sale Program (DASP), also known as the Single Family Loan Sales program. In the DASP program, FHA bundles pools of nonperforming FHA-insured mortgage loans together and auctions them off to the highest bidder, usually a private equity fund or other Wall Street entity, after which they are no longer FHA loans.
NCST considers this ANPR highly significant for neighborhoods, homeowners with FHA loans, and anyone working in community development and/or the vacancy/rehab industry, and we would like to encourage you to submit a response to the ANPR. NCST will be circulating a draft comment letter during the last week in June. You can also use the information contained in the draft to assist you with your own letter – we think it’s most useful for HUD to receive comment letters that reflect the individual experience of organizations working in the community development field – or you can sign onto our letter.
Currently, the deadline for a response to the ANPR is July 5, 2019. Please note that some organizations, including NCST, believe HUD should extend the deadline until after FHA has released updated results on the DASP sales that took place between 2012-2016, but for now, assume the deadline will remain as it is.
The ANPR focuses on the DASP program through which HUD sells so-called “forward” mortgages. As described in more detail below, HUD also sells HECM (reverse) mortgages, multifamily loans, and health care facility loans. While those programs were announced by notice in the Federal Register, it does not appear that there was any opportunity for public comment. See 81 FR 84610 (November 23, 2016); 82 FR 26708 (June 8, 2017); and 83 FR 9533 (March 6, 2018).
BACKGROUND
After the foreclosure crisis hit in 2008, the Federal Housing Administration found itself with hundreds of thousands of nonperforming mortgages on its hands. Many FHA servicers did not do a good job of pursuing the loss mitigation strategies that the program required, plus there were certain strategies, such as principal reduction-based loan modifications, that FHA did not permit at all. Consequently, the pipeline of seriously delinquent mortgages began to back up precipitously.
Seeking ways to reduce the pipeline, FHA turned to a program that it had created in 2002 to dispose of mortgages prior to foreclosure, a 2002 program known as the Single Family Loan Sales (“SFLS”) Program. This program had been quite small, commensurate with FHA’s rapidly shrinking footprint during the subprime lending heyday. While FHA had issued an ANPR in 2006 regarding this program, they had withdrawn it in 2007 and the program was proceeding as a so-called demonstration program.
In the summer of 2012, without any new effort at rulemaking, and with no advance notice to homeowners, FHA began to ramp up this program significantly. Renaming the program the Distressed Asset Stabilization Program (“DASP”), FHA began to offer large pools of distressed FHA mortgages for auction. Their rationale was that selling assets in bulk would most effectively minimize losses to the Mutual Mortgage Insurance Fund and also would give those borrowers who had failed to get effective loss mitigation from their original servicers a second and perhaps even better chance of getting assistance, as the new purchasers would be able to offer principal reduction (which FHA believes it does not have the statutory authority to do).
Starting in 2012, DASP offered two types of pools for auction: large pools with no outcome requirements or other rules relating to homeowners or communities; and smaller auctions known as Neighborhood Stabilization Outcome (“NSO”) pools, in which buyers had to meet certain neighborhood-positive outcomes for at least 50 percent of the mortgages. The vast majority of these pools were purchased by private equity funds and other Wall Street firms; nonprofit organizations purchased only about two percent of them.
After a great deal of advocacy by community groups and consumer advocates, HUD added additional protections for both types of DASP sales in mid-2015, improving loss mitigation requirements, providing nonprofits with an opportunity to bid on small portions of larger pools, and establishing nonprofit only auctions that featured much smaller loan pools.
However, soon after these new rules went into place, HUD stopped doing DASP sales, with the last DASP sale occurring in 2016. At that time, HUD began ramping up types of loan sales that did not have the same rules and protections as DASP or the NSO pools. These included multiple auctions of vacant properties that had FHA reverse mortgage (HECM) loans, along with some auctions of multifamily and health care facility loans.
Altogether, approximately 108,000 loans representing $18.4 billion in unpaid principal balance have been sold through DASP. (This large number underscores that the DASP program was no mere “demonstration,” although that is HUD’s reason for not having done rulemaking previously.) Additionally, more than 4,100 HECM mortgages have been sold, worth almost $900 million.
ANPR SUMMARY
The ANPR’s intention is to “inform FHA on potential options to improve program participation, performance, and enforcement. The objective of seeking comments is to gather input from the public that will be used to review current single family forward note sale program requirements, including those pertaining to asset eligibility, the assignment claims process, loan delivery, sale structure, purchaser requirements, and enforcement mechanisms. This information will be applied to develop a regulatory framework for single family forward note sales that provides clarity about the requirements and objectives of the Program for all participants and stakeholders.”
The ANPR directs questions to several different audiences. First, it asks participating servicers who are sellers of loans into the program a series of questions about drawbacks of the loans, administrative issues, and servicing issues. Second, it asks bidders and purchasers of the pools about obstacles to participating, administrative issues, and post-sale servicing issues. Third, it asks a few questions about community impacts. There is also an open-ended question for input on anything else the commenter desires to discuss.
Most of you who read this newsletter will probably have comments either about how nonprofits can participate in purchasing notes or about the effect that these note sales have on communities. At NCST, one question we are particularly interested in is the problem created when HUD sells notes prior to foreclosure so that the properties never enter the HUD REO portfolio and do not pass through HUD’s First Look program. Should note buyers (both for profit and nonprofit) be required to put all their REO through a First Look program for nonprofits if distressed and for homeowners if not distressed before being sold to another investor or retained by the original investor for rental purposes?
There are lots of other important questions as well. These include questions about the quality of the loss mitigation being offered to homeowners, how properties – especially vacant ones – are maintained during the foreclosure and sale process, whether any of the foreclosed homes become owner occupied again, whether any rental of these properties is affordable and responsibly managed, etc. Some of the reports and resources below, especially the ones by the National Consumer Law Center and the Center for American Progress, identify more granular questions to ask.
RESOURCES
Some resources that might be of help as you consider a response to the ANPR include the following. NCST cannot vouch for any of the reports other than the Center for American Progress report (I co-authored this report when I worked there), but I’ve selected them because they represent several different perspectives as well as conclusions.
HUD’s website
Home page for asset sales: https://www.hud.gov/program_offices/housing/comp/asset/hsgloan
Reports on sales (you will see a link to download the latest report from March 2017 as well as others): https://www.hud.gov/program_offices/housing/comp/asset/hsgloan
HUD Inspector General report requiring rulemaking regarding single family loan sales (there are two other IG reports on DASP, which you can also find on the website): https://www.hudoig.gov/reports-publications/audit-reports/hud-did-not-conduct-rulemaking-or-develop-formal-procedures-its
External Analyses/Information
NYU law student paper 2018:
Fair Housing lawsuit against HUD from 2016:
http://mobilizationforjustice.org/wp-content/uploads/Complaint-Washington-et-al-v.-HUD-et-al..pdf
National Consumer Law Center 2016 report: http://www.nclc.org/issues/opportunity-denied.html
Urban Institute 2016 report:
Center for American Progress 2014 report:
https://cdn.americanprogress.org/wp-content/uploads/2014/09/Edelman-DASP-report.pdf
Right to the City Alliance 2014 report:
https://www.housingwire.com/ext/resources/files/Editorial/Documents/HUDDASP_RTC_v15.pdf
Julia Gordon is the President of NCST.