The U.S. Department of Housing and Urban Development has begun selling off thousands of seriously delinquent mortgages insured by the Federal Housing Administration, a move that could save many distressed borrowers from losing their homes. But it also leaves thousands more who are saddled with equally distressed FHA mortgages without any help, raising questions about its fairness.
HUD recently announced that it cut loose 9,400 loans in the first sale under its expanded Distressed Asset Stabilization Program, and the federal agency plans to sell at least 30,000 more over the next year. The mortgages are going at steep discounts to private investors and nonprofit organizations, which are expected to modify many of the loans. That could save a sizable pool of homeowners from foreclosure and help keep the
FHA, which faces a shortfall next year, from seeking a bailout.
While this represents a step forward in combating the foreclosure crisis, HUD’s DASP program touches only a fraction of the distressed homeowners with delinquent FHA-insured loans who are in dire need of assistance. The nearly 40,000 loans that HUD plans to have auctioned off by the end of next year is just a sliver of the 700,000 seriously delinquent mortgages on the FHA’s books.
A seriously delinquent mortgage is classified as a loan that is 90 days or more past due. A large swath of the FHA loans — more than the 40,000 being sold, experts say — are at least six months past due and in foreclosure. That qualifies them for the DASP, assuming that the mortgages’ servicers have exhausted all FHA loss-mitigation programs. So that means that thousands of borrowers with mortgages that are eligible for the DASP — and, arguably, equally as deserving of it — won’t get it and will continue to drift toward eviction.
They won’t benefit, for example, from New Jersey Community Capital’s plan to save underwater homeowners from foreclosure. The nonprofit organization purchased a pool of 399 of HUD’s delinquent loans in the recent sale. Only 275 of them are potentially curable because those borrowers still occupy their homes, but NJCC President Wayne Meyer said that the group believes that it can modify at least half of them. NJCC aims to slash the principal balance of those mortgages down to market value, reducing borrowers’ average monthly payments by at least 45 percent, he said.
For example, in one neighborhood targeted by the pool that NJCC bought, the average mortgage balance is $313,000, Meyer said. Under NJCC’s plan, that would be sliced nearly in half to just $146,000. If NJCC determines that a borrower couldn’t afford a mortgage even after a drastic cut, the nonprofit would offer either an option to rent the property or a nine-month window before it forecloses.
“We’re offering, we think, unprecedented benefits,” Meyer said. He added that he believes that HUD won’t come anywhere close to selling all the FHA loans that are eligible for the DASP, so it’s a stroke of luck for homeowners whose loans got snapped up by NJCC. “If we purchased their loans, it’s going to be their good fortune,” he said.
HUD spokesman Brian Sullivan could not provide an estimate of the total number of FHA-insured loans that would qualify for the DASP. He said only that many of its seriously delinquent loans are eligible. He also couldn’t offer specifics on how HUD chooses to sell certain DASP-eligible loans over others.
There’s also an aspect of the program that could be troubling even to distressed borrowers who qualify for the DASP: Some of the borrowers whose mortgages are sold under the program stand a better shot at receiving relief than others.
HUD is selling the loans in two types of loan pools: “Neighborhood Stabilization Outcome” pools and “national” pools. Investors who purchase NSO pools, which target areas particularly hard hit by foreclosures, cannot market more than 50 percent of those homes as “real estate owned,” or REO.
If they must repossess homes in NSO pools, loan servicers are required to achieve some other “neighborhood stabilizing outcome,” such as holding a property as a rental for at least three years.
But investors who purchase “national” pools don’t have limits on how many homes they can repossess. That raises the possibility that borrowers in national pools will be less likely to receive mortgage relief from the private investors who buy their loans — because such investors do not have a mandate to save a certain portion from foreclosure.
Still, investors in national pools must wait at least six months before resuming the foreclosure process. And because they are purchasing loans for much less than the loans’ outstanding balances, they have a strong incentive to cure many of the mortgages — or at least use other foreclosure alternatives, such as short sales.