CAP Report Outlines Concerns with FHA Distressed Asset Stabilization Program
The Center for American Progress (CAP) released a report last week which provides an overview of the Federal Housing Administration’s (FHA) Distressed Asset Stabilization Program (DASP). The report focuses on how DASP facilitates loan sales, who is buying the loans, and the outcomes of the loan purchases. CAP’s analysis of DASP is based on HUD’s recently released post-sale results report, which NCSHA summarized here.
Under DASP, FHA pays claims on delinquent loans before they go through foreclosure. After paying the claim, FHA’s insurance obligation to the loan originator is fulfilled. FHA then bundles loans into pools and sells the pools to private investors though an auction with a competitive bid process. DASP can provide seriously delinquent homeowners with a final opportunity to avoid foreclosure.
To be eligible for DASP, loans must be six-months delinquent and must have exhausted all FHA loss-mitigation requirements. Mortgage servicers may choose which loans are sold through DASP. FHA pools these loans on a quarterly basis and sells them via auction to the highest qualified bidder.
There are currently two different types of auctions FHA uses to sell DASP loans. FHA sells the majority of its DASP loans through national offerings that include loans pooled from across the country. The winning bidders in these auctions are not permitted to foreclose on the loans acquired for at least six months after the settlement date.
The second type of auction, Neighborhood Stabilization Outcomes (NSO), offers loans pooled from specific metropolitan areas that have been hit hard by the foreclosure crisis. These areas include: Atlanta, Phoenix, Chicago, Prince George’s County, Tampa, and Newark. According to the report, NSO auctions account for roughly 20 percent of all loans bid on through DASP, as shown in the chart below. Loans acquired through NSO auctions have the same six-month foreclosure prohibition as nationally acquired loans; however, FHA requires quarterly reports and additional documentation from NSO buyers to demonstrate the loans are meeting at least one of NSO’s stated outcomes. These outcomes are: six-month mortgage re-performance, short sale, sale to rental tenant, held for rental, gift to local government, sale to neighborhood stabilization program grantee or sub-grantee, and borrower pays outstanding mortgage debt.
DASP Loan Buyers
According to the HUD report, 27 entities have bought loans through DASP since the third quarter of 2012. Private investors, including hedge funds and private equity firms, have won bids on roughly 98 percent of all loans auctioned through DASP, with nonprofit organizations with neighborhood stabilization missions winning the remaining loans. According to CAP, for many of the DASP buyers, the most profitable strategy is to modify the loans and then resell them at a higher price once the homeowner begins making regular payments again.
According to the report, since the first DASP auction in 2012, the bidding prices on loans have risen significantly. The bids have risen from an average of 56 percent of the broker price opinion, the estimated value of underlying assets, to about 75 percent in the second quarter of 2014. CAP states that this trend is true for all underperforming loans. They predict that investors will trade roughly $60 billion in distressed mortgages by the end of 2014, up from $25 billion in 2013. CAP attributes this increase to the declining amount of nonperforming loans, meaning investors face more competition for the remaining underperforming loans.
While CAP acknowledges that DASP may be helping FHA strengthen its insurance fund and avoiding a small percentage of foreclosures, its report expresses the view that DASP has more potential than what is it currently achieving. Specifically, the CAP report recommends additional regulations to improve DASP.
CAP recommends FHA take additional steps to make sure mortgage servicers are not using DASP as an alternative to meeting FHA’s loss-mitigation requirements. Additionally, CAP recommends strengthening post-sale requirements to improve outcomes for the homeowners and neighborhoods. In a similar vein, they would like FHA to strengthen and expand NSO auctions while increasing nonprofit participation. CAP envisions DASP as a best-practice model for other investors in the future, specifically Fannie Mae and Freddie Mac.