Tuesday, September 16, 2014

Problems and promise in HUD single family loan sale program

By Rebekah King, National Housing Conference


HUD has released its first report on the performance of loans in the Single Family Loan Sale (SFLS) program. This report highlights some of the program’s successes but also suggests some concerns as the program moves forward. FHA is managing the conflicting objectives of improving its balance sheet to meet congressional demands while serving borrowers and preventing foreclosures. In the last year, FHA has been under tremendous pressure from Congress to address its losses and improve overall performance, as Ethan Handelman discussed in an earlier blog post. FHA’s achievements are noteworthy and should not be discounted. They should also not be accepted as sufficient, when FHA could do more to improve borrower outcomes while still meeting its goal of financial stability.


HUD has been selling the most delinquent loans guaranteed by the Federal Housing Administration (FHA) to private investors. HUD sells the loans at a discount, so private buyers are better able to make loan modifications. Investors who purchase loans from FHA are typically prohibited from foreclosing until at least six months after the purchase. Beginning in 2012, FHA expanded the program and created two pools, national pools and neighborhood stabilization outcome (NSO) pools. The NSO pools are a concentration of loans in hardest-hit areas, and buyers are required to achieve positive and stabilizing outcomes for 50 percent of the loans in the pool. This could include loan re-performance (where the borrower was at least 90 days delinquent but is making loan payments again), becoming a rental, or gifting to a land bank among other options.


This program has received media attention in the last week, highlighting the program’s successes as well as some concerns.


Successes:

  • The program can help borrowers either avoid foreclosure through a short sale or deed in lieu, or allows borrowers to get loan modifications and remain in their homes.
  • FHA loss rates have declined from 63.5 percent in first quarter 2010 to 52.9 percent in second quarter 2014.
  • Bids on these loans have improved from 40 percent of the unpaid principal balance (UPB) to 60 percent.
  • Resolved loans in the NSO pools have achieved a 23.5 percent loan re-performance rate and avoid foreclosure for 58 percent of borrowers.
  • Only one percent of loans in NSO pools have been sold to other investors.
Concerns:
  • 98 percent of all loans have been sold to for-profit investors; only 2 percent of loans have been sold to nonprofit organizations.
  • Almost one-third of loans in the national pools have been resold to other investors; reporting requirements do not stay with the loans so the outcomes for these borrowers are unknown.
  • Borrower outcomes are much better in the NSO pools than in the national pools, but only 20 percent of loans have been sold through NSO pools.
  • Bids are increasing, making it more difficult for nonprofits to participate in the program.
  • To be eligible, loans must exhaust all FHA loss mitigation options, but FHA does not have a way to ensure this before loans are sold.
Significance:
  • FHA still has approximately 500,000 delinquent loans which could be sold.
  • Fannie Mae and Freddie Mac are also starting to sell their nonperforming loans.
  • Growing interest in bonds backed by nonperforming loans, so there is less interest in borrower outcomes and avoiding foreclosure.
  • Some investors are only interested in foreclosing the nonperforming loans to create rental portfolios, which means less focus on borrower outcomes.
  • No requirements on the national pools means no incentive to pursue positive borrower outcomes.

In summary, the Distressed Asset Securitization Program (DASP) is meeting its goal to help FHA financially. Borrowers are also seeing some benefits from the program. However, the program could provide a greater positive benefit to homeowners. FHA could make minor changes to the program to make it more borrower-focused while still benefiting their bottom line, which the Center for American Progress highlights in greater detail in its report. NHC is pleased that FHA has already announced some changes to the program including beginning to audit loan eligibility decisions by servicers, putting more loans in NSO pools, creating smaller pools and allowing buyers more time to assemble capital. NHC hopes that FHA will continue to seek ways to improve the program balance and serve both goals, helping FHA financially and assisting borrowers and communities.

No comments: