Deeply delinquent single-family mortgage loans sold through the Federal Housing Administration (FHA)’s Distressed Asset Stabilization Program (DASP) tend to be located in markets that are still in recovery mode eight years after the housing crisis, according to a new report from the Center for American Progress (CAP).
HUD’s first non-performing loan (NPL) sales program began in 2010 and was renamed the Distressed Asset Stabilization Program in 2012. To date, HUD has sold about 105,000 loans through DASP and its single-family loan sales programs totaling about $18 billion in unpaid principal balance (UPB).
An analyzation of 70,000 loans sold in six DASP auctions from April 2012 to June 2014 found that 63 percent of those loans were located in ZIP codes with higher-than-average levels of negative equity; 69 percent of them were located in ZIP codes with higher-than-average unemployment rates; and 84 percent of them were located in ZIP codes with a higher-than-average concentration of minorities.
Conversely, The CAP noted in its report that most notes analyzed were located in areas where job gains were increasing and the share of underwater homeowners was declining.
“Notes sold through DASP tend to be located in communities where large shares of homeowners are ‘underwater,’ or owe more on their home than it’s worth; where unemployment remains high; and with large shares of communities of color, who lost a disproportionate share of wealth during the housing crisis,” said Sarah Edelman, Director of Housing Policy at CAP and co-author of the report.”
CAP’s report makes recommendations for improvements that FHA should make and that policymakers should support in order to ensure that DASP is beneficial for both the homeowners and the communities in which the distressed properties are located. Those recommendations include:
- Ensuring loans sold through DASP have exhausted all loss mitigation options; DASP was intended to be a last resort for loans that are at risk of foreclosure, and loans are supposed to go through DASP only when foreclosure when all other options have been exhausted.
- Strengthening and clarifying the standards for loss mitigation options that the buyers of the distressed loans must offer before foreclosing; in particular, CAP recommends that the purchaser of the loan offer principal reduction.
- Limiting the number of vacant properties sold through DASP.
- Providing data at a more granular level, including types of loan modifications provided and postforeclosure outcomes at the pool level.
- Rewarding buyers who achieve positive outcomes for homeowners and their communities.
- Expanding the Neighborhood Stabilization Auctions, which require investors to achieve certain outcomes that can stabilize communities.
- Engage with local agencies where loans sold through DASP are located to make sure that DASP guidelines are implemented, giving nonprofits and governments the first option to purchase vacant properties sold through DASP.
“Assumptions about note purchasers’ economic incentives are not enough to ensure that these companies do not further destabilize communities on the road to recovery,” Edelman said. “DASP needs stronger standards that prioritize homeowners and neighborhood stabilization.”
Last September, FHA Principal Deputy Assistant Secretary Ed Golding defended DASP, saying that “FHA recently made significant changes to this program, including expanding our outreach to participating nonprofit organizations and requiring a 12-month delay in finalizing any foreclosure action to allow struggling families a greater opportunity to remain in their homes or find another sustainable housing solution.”
HUD’s tendency to sell DASP notes to private investors rather than nonprofits has drawn the ire of some advocacy and civil rights groups; in April, a coalition of these groups accused HUD and FHA of engaging in a “Wall Street Giveaway” and called for HUD Secretary Julián Castro to cease selling loans through DASP until the program is reformed.
Click here to see the complete report from CAP.