The Federal Housing Administration's loan sales are drawing more attention after a recent critical report said it was resulting in vulnerable borrowers losing their homes.
The Department of Housing and Urban Development began the loan sales in 2012 as a way to pare down a growing portfolio of nonperforming loans. But selling them means that borrowers who might qualify for HUD's loss mitigation programs are suddenly no longer eligible.
HUD designed "specific alternatives to foreclosure that lenders and their servicers must consider before they proceed with foreclosures," says a May 10 report by the National Consumer Law Center. But "HUD opted to sell tens of thousands of loans in its foreclosure pipeline, making these loans ineligible for the FHA loss mitigation options."
Meanwhile, the private investors who purchase these loans at a discount were under no obligation to provide options to avoid foreclosure.
HUD initially sold the loans to reduce losses on delayed foreclosures and restore the health of the FHA insurance. But now it is trying to improve the program to help borrowers.
In response to the report, HUD said that "FHA offers a variety of opportunities for a homeowner to remain in their home and ensuring lenders follow the proper procedures."
"In 2014, we made improvements to more accurately review loans that shouldn't be included in a…loan pool and were entitled to the loss mitigation process," a spokesman said in a statement.
HUD piloted nonperforming loan sales in 2010 and launched its Distressed Asset Stabilization Program, called DASP, in 2012. By January 2013, FHA had 738,000 seriously delinquent loans (90 days or more past due) representing 9.5% of its insured single-family loan portfolio. Most of loans sold are delinquent by two to three years.
The loan sales accelerated in 2013 and by the end of 2014, FHA had sold 85,640 nonperforming single-family loans.
Nearly 55% of those loans have been resolved, according to HUD data, including 21,138 loans that were foreclosed upon. Only 9,460 of the loans are reperforming. The remainder of the nearly 15,000 resolved loans avoided foreclosure mainly by deed-in-lieu and short sale transactions, according to a Jan. 22 DASP report by HUD.
Overall, the latest data shows that FHA has sold over 105,000 nonperforming loans with an unpaid principal balance of $18 billion under the program.
In a panel discussion last week, HUD senior adviser Erik Cribbs said the loan sales have helped HUD and homeowners. He also touted the agency's recent changes.
In April 2015, HUD officials announced that buyers will be required to evaluate borrowers to see if they are eligible for the Treasury Department's Home Affordable Modification Program. So far, 10,000 former FHA borrowers have received a HAMP modification, Cribbs said.
"If the loans stay in HUD's portfolio, we see only one alternative and that is foreclosure. There is no other alternative," Cribbs said May 18 during an Urban Institute discussion on nonperforming loans sales. "By selling the loans, we can give these borrowers a second chance."
But the HAMP program is slated to expire at the end of this year.
"At this time a decision has not been made about the rules after HAMP expires for loans sold through the sales program," the HUD spokesman said.
The average FHA loan is 29 months delinquent at the time of sale. In addition, investors that buy these nonperforming loans can't foreclose on owner-occupants for 12 months.
"HUD is committed to constantly evolving the DASP program to improve its effectiveness," the agency's January DASP report said.
FHA currently has 433,435 seriously delinquent loans that are 90 days or more past due, representing 5.5% of its insured single-family loan portfolio.
HUD also sells pools of nonperforming loans that are geographically targeted under its Neighborhood Stabilization Outcome program.
FHA will be "doing more" of these NSO pools so that nonprofit community and housing groups will have more opportunities to bid on these pools, Cribbs said.
"We have held training seminars for nonprofits to get them more involved," he added.
The NPL sales got off on a "wrong foot" because all of the stakeholders were not included in the process," said Julia Gordon, executive vice president of the National Community Stabilization Trust. "That is part of the dynamic," as to "why the NPL sales have been under fire" from housing advocates and community organizations.
"But changes have been made in the right direction," she said at the Urban Institute event. "I still think we have a ways to go. But there are continuous improvements with every sale."
