FHA Announces Sweeping Changes To Non-Performing Loan Sales Program

Amidst mounting public pressure to do more to keep struggling homeowners in their homes, the Department of Housing and Urban Development and the Federal Housing Administration announced a series of extensive changes to its non-performing loan sale program.

Over the last few years, various interested parties, from prominent figures in the federal government, like Sen. Elizabeth Warren, D-Mass., and Rep. Mike Capuano, D-Mass. loudly criticized the FHA’s Distressed Asset Stabilization Program, under which the FHA sells off deeply delinquent loans to private investors.

Warren and Capuano weren’t alone in criticizing the program. Last year, the U.S. Conference of Mayors and several other groups argued that private investors push foreclosures over attempting to work to keep borrowers in their homes.

And earlier this year, a consortium of progressive groups began targeting HUD Secretary Julián Castro in an attempt to disqualify him as former Secretary of State Hillary Clinton’s vice presidential nominee, using HUD’s practice of selling non-performing loans to private investors as their weapon.

On Thursday, the FHA announced the “most significant improvements to date” for the DASP program.

Include among those changes are the stipulation that buyers of the FHA NPLs must consider principal reduction and capital arrearage forgiveness as the “first option” they must consider when offering the delinquent borrowers a mortgage modification.

According to the FHA announcement, certain families with distressed mortgages insured by the FHA may soon be eligible for a reduction of their outstanding loan amounts if their mortgages are sold through DASP.   

Additionally, the FHA is now requiring that the NPL buyers provide borrowers with “payment shock protection.”

In addition, the new DASP rules prohibit investors from “walking away” from low-value properties in high-foreclosure neighborhoods. 

According to the FHA, it is now offering “greater opportunity” for non-profit organizations, local governments and other governmental entities to participate in DASP.

And loans are not eligible to be sold through DASP unless and until all FHA loss mitigation efforts are exhausted, the FHA said.

“FHA is deeply committed to protecting struggling homeowners and making certain they have the greatest opportunities to avoid foreclosure and remain in their homes,” said Ed Golding, HUD’s Principal Deputy Assistant Secretary for the Office of Housing.  “While thousands of homeowners avoided foreclosure through this note sales program, we continue to explore new ways to help these families and to offer more opportunities for public-minded organizations to have a seat at the table.”

Specifically, the FHA non-performing loan sale program requirements now include:

  • Principal Reduction/Capital Arrearage Forgiveness – Principal forgiveness is the first option investors must consider offering to borrowers when evaluating them for a modification.
  • Payment Shock Protection – FHA will limit interest rate increases to no more than 1% per year after a five-year period where the rate is fixed; which is consistent with the Home Affordable Modification Program.
  • Walk-Away Prohibition – Effective immediately, FHA will prohibit any purchaser of single-family mortgages under DASP from abandoning lower value properties in order to prevent neighborhood blight.
  • Alternative Bidding for Non-Profit Buyers – This enhancement will allow qualified non-profit organizations to bid on a partial pool of notes up to five percent of a National Pool and to pay the reserve price. This alternative offers another opportunity for non-profit organizations and local governments to participate in DASP along with those announced last year (non-profit/government-only NSO pools and direct sales offerings).
  • Streamline Direct Sales to Interested Government Entities – FHA is providing new standard guidance on the sale of distressed mortgages directly to qualified government entities and local governments. This will provide greater education and awareness among these public entities which may be interested in participating in DASP.
  • Target loans for DASP sales based on the interest of non-profits and local governments—FHA will enhance its efforts to identify and offer loans in targeted distressed areas to non-profits and local governments. FHA will continue its outreach to solicit their interest in geographically targeted loan sales. These efforts are aimed at helping vulnerable neighborhoods maintain more stable communities.

Additionally, the FHA said it will now be notifying delinquent borrowers that their loan can be sold. The FHA said that it will revise the current 120-day delinquency notice to advise borrowers that their loan may be sold.

The FHA is also establishing a goal of selling 10% of non-performing loans to non-profits and local governments.

The FHA noted that, on average, mortgages sold through the DASP program are 29 months delinquent at the time of the auction.

These changes build upon further “enhancements” the DASP program that FHA announced in April 2015.

At the time, FHA said that loan servicers will be required to delay foreclosure for a year and to evaluate all borrowers for the Home Affordable Modification Program or a similar loss mitigation program.

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