The U.S. Department of Housing and Urban Development will revise its auctions of nonperforming mortgages to address concerns that the sales aren’t doing enough to help homeowners in communities hurt by foreclosures.
After winning a bid, buyers will be barred from seizing properties for at least a year and HUD will begin designating some small loan pools for purchase by nonprofit groups under a set of changes announced by the agency on Friday.
The new requirements will take effect for HUD’s next loan auctions, which the agency plans to hold in June and July. The sales will include large pools of loans from around the country as well as one with mortgages concentrated in Detroit, restricted for sale to community groups and local government bidders.
“These changes reflect our desire to make improvements that encourage investors to work with delinquent borrowers,” Genger Charles, acting general deputy assistant secretary of HUD’s Federal Housing Administration, said in a statement.
Previously, all pools were open to all qualified bidders and foreclosures were barred for only six months. Nonprofits will get a first chance to buy homes that end up going through foreclosure.
HUD is also setting a minimum standard for mortgage modifications offered to borrowers by requiring investors to evaluate whether borrowers are eligible for aid under the government’s Home Affordable Modification Program.
The agency, which has sold $3.7 billion of soured loans since late 2012 under a program designed to aid neighborhoods, has faced complaints from nonprofit organizations that its sale terms favored large investors backed by firms such as Oaktree Capital Management and Blackstone Group LP. While the FHA’s mortgage-insurance fund has benefited from the sales, there are few signs the program has helped areas laden with vacant homes.
“This appears to be an impressive suite of changes, most notably the significant improvements to help nonprofits compete for some of the pools and to keep homeowners in their homes, but we still need to review the details of the changes,” said Julia Gordon, director of housing finance and policy at the Center for American Progress, a group linked to Democrats that has pushed for more nonprofit access to the loan sales. More improvements to the sales may still needed, Gordon said.
Borrowers resumed payments on fewer than 13 percent of the mortgages sold as of February, according to a HUD report. Almost half the loans were still in “interim status” because many borrowers, who’ve failed to make payments for an average of three years, have abandoned their properties.
Winning bidders have four years to get at least half the loans in a portfolio into repayment or another approved outcome, such as holding the property for rental or selling to an owner-occupant.
Performance reports by winners of the first three HUD auctions, in which a total of $1.57 billion in debt was sold, show a wide range of outcomes, according to reports obtained by Bloomberg through a Freedom of Information Act request.
HUD has auctioned more than 98,000 nonperforming loans with unpaid balances totaling $16.7 billion since 2010. The majority of the loans -- about $13 billion worth -- were sold in national pools outside the neighborhood-stabilization program. They came with few requirements aimed at improving communities or helping delinquent borrowers.
The loan-auction program was established by HUD as it faced mounting losses to the FHA’s insurance fund stemming from the housing crash. The fund needed a $1.7 billion infusion from the Treasury Department in 2013, the first in the agency’s 80-year history.
Demand for soured mortgages has been increasing as Wall Street firms compete to buy loans at a discount after a real-estate market rebound. Freddie Mac has auctioned about $2 billion in defaulted debt in three separate sales since last year. Fannie Mae announced its first bulk sale this month of 3,200 loans with an unpaid balance of $786 million.