U.S. Seeks to Cut Investor Dominance in Buying Soured Mortgagesby
FHA wants to triple sales of delinquent loans to nonprofits
Agency also announces new steps to help underwater borrowers
U.S. officials want to triple sales of delinquent mortgages to nonprofits and local governments and put new restrictions on foreclosures, following a wave of criticism that purchases by private equity firms and hedge funds have led to borrowers getting kicked out of their homes.
The effort announced Thursday by the U.S. Department of Housing and Urban Development concerns the sale of delinquent loans insured by the Federal Housing Administration. The department in 2013 stepped up the sale of such loans to investors, a practice that officials say helped taxpayers avoid foreclosure-related losses while giving borrowers a chance to receive loan modifications disallowed by the FHA.
But some lawmakers and progressive groups have attacked the effort, claiming that private firms move swiftly to foreclose on borrowers, sell homes or turn properties into rentals. Companies that have bought FHA-insured loans include Lone Star Funds and Bayview Asset Management.
The government is now revising its program to allow nonprofits the chance to bid on a portion of delinquent loan pools before those pools are opened up to offers by for-profit investors. Nonprofits will be able to choose up to five percent of loans in the pool that they want to buy and, as long as they meet the reserve price, can win the loans without competing with other investors.
The goal is to have nonprofits or local governments buy about ten percent of future delinquent loans put up for sale, Edward Golding, who heads the FHA, said in an interview. That would be roughly triple the amount such groups buy now, he said.
Other changes include requiring loan buyers to first consider reducing a borrower’s mortgage principal balance before moving on to other methods of modifying a loan. Investors also will be restricted from modifying mortgages in a way that causes a borrower’s interest rate to rise dramatically after a certain number of years, a situation known as “payment shock” that some borrower advocates say triggers many foreclosures. If a home is foreclosed upon, the new rules prohibit investors from abandoning the property.
U.S. Senator Elizabeth Warren, a Massachusetts Democrat, joined progressive groups last fall to hold a rally aimed at pushing the FHA and mortgage-finance giants Fannie Mae and Freddie Mac to sell more loans to nonprofits. Republican lawmakers, including Texas Representative Jeb Hensarling and Alabama Senator Richard Shelby, counter that some of the changes Warren has sought could harm taxpayers by reducing the amount of money that the FHA recovers.
As of Jan. 22, HUD had sold about 105,500 mortgages through the program. Of the approximately 89,000 loans for which HUD reported data, about 30,500 had been foreclosed upon and 9,600 had borrowers who were paying again. The rest of the loans were still delinquent or had been resolved by some other means.
Golding said the FHA expects to hold its first sale under the new rules in September.
It remains to be seen whether Thursday’s changes will result in fewer purchases by private investors. Some nonprofit officials have said that they lack the capital and speed needed to compete in previous auctions. And some investment firms argue that additional restrictions aren’t necessary because they already help borrowers stay in their homes.
“The notion that nonprofits will fix the non-performing loan market is erroneous,” said Gary McCarthy, managing partner at HMC Assets LLC, whose Corona Asset Management has been buying soured mortgages in HUD auctions since 2012.