Vulture Capital Hits Home
How HUD Is Helping Wall Street and Hurting Our Communities
The financial industry has found yet another way to profit from the distress of homeowners. Investors are trading distressed residential assets – mortgages and vacant properties in severe
arrears — and are building a spectrum of business plans many of which undermine neighborhood and economic stability. There is currently a hot market in severely delinquent mortgages. Banks and government entities are selling them off and investors – particularly hedge funds — are buying them.
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In 2012, the U.S. Department of Housing and Urban Development’s Federal Housing Administration (FHA) significantly increased its sale of pools of distressed FHA-insured mortgages through a program called the Distressed Asset Stabilization Program (DASP). The program has a dual purpose: to return and protect FHA’s Mutual Mortgage Insurance (MMI) capital reserves fund to a positive position and “to encourage public/private partnership to stabilize neighborhoods and home values in critical markets.”
This report focuses on the FHA’s Distressed Asset Stabilization Program (DASP). The DASP has the potential to recuperate needed funds for its mortgage insurance fund, preserve homeownership, and create affordable rental housing. Instead, the FHA has designed DASP in such a way as to severely limit its effectiveness in helping hard-hit neighborhoods recover from the housing crisis. Between the start of the DASP program in 2012 and the middle of 2014, the FHA has auctioned 98,100 mortgages, for bids amounting to $8.8 billion. 97% of the auctioned loans have been won by for-profit entities, largely private equity firms. A fair amount is known about the Wall Street entities trading in “distressed assets.” This report examines their business models and how their business interests are often in direct conflict with the interests of homeowners, renters and their communities.
HUD, the federal government agency with a stated mission to advance affordable housing and sustainable communities is, with the DASP, stoking Wall Street’s buy-up of “distressed” real estate assets with little regard for the impact of these speculators on the struggling homeowners whose mortgages are being bought or on the impacted communities more broadly. FHA is auctioning pools of mortgages to the highest bidder, in most cases without considering the ability of their programs to achieve neighborhood stabilization goals such as homeownership preservation and affordable housing. The result is that other qualified purchasers — including nonprofits with an explicit goal and clear program to modify mortgages with principal reduction and to create affordable rental housing — are being crowded out by Wall Street speculators, most often private equity firms and hedge funds.
HUD’s failure to release adequate program data leaves the public unable to know the precise impact this program is having on homeowners and communities. It hampers the public’s ability to assess the completeness of HUD’s information Executive Summary about the results of this program and whether it is or isn’t meeting neighborhood stabilization goals. In other words, shortcomings in the implementation of the program jeopardize the accomplishment of its mission.
This report focuses on three key problems with the DASP program:
- The current structure of most DASP auctions hampers community stabilization by considering only the highest bid without weighting the bidders’ track record of good outcomes for homeowners and communities.
- The current outcome requirements and reporting structure fails to hold purchases accountable to neighborhood-stabilization goals and provides insufficient transparency and prevents community
- The current pre-sale certification phase does not ensure that the FHA mortgage modification process has been followed before loans are included in DASP pools.
We propose 5 specific, actionable steps the FHA should take to strengthen the program, allow it to continue to replenish the Mutual Mortgage Insurance fund, and better stabilize communities:
- Credit bidders that have stronger neighborhood stabilization plans.
- Strengthen outcome requirements to preserve homeownership and create affordable rental housing.
- Sell more of the loans through the geographically concentrated Neighborhood Stabilization Outcome pools.
- Collect and make public detailed performance data.
- Improve the pre-sale process to better protect homeowners.
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