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Community groups demand halt to HUD distressed loan sales

Claim: Sales to often unnamed buyers benefits Wall Street, not Main Street

Community organizations and struggling homeowners in 10 cities are rallying at local offices of the U.S. Department of Housing and Urban Development to call for a halt to a controversial program that auctions off delinquent loans to investors until problems with the program are fixed.

The community groups are protesting the HUD Distressed Asset Stabilization Program, created in 2012, which is auctioning pools of delinquent loans to the highest bidders.

The groups charge that these sales are detrimental to neighborhood stabilization goals such as homeownership preservation and affordable housing. The report was researched and authored by the Center for Popular Democracy and the Right To The City Alliance.

“We’re seeing an unprecedented rise of the corporate landlord, and HUD’s DASP is just facilitating the process,” said Rachel Laforest, executive director of the Right To The City Alliance. “HUD should employ a credit system that favors nonprofit bidders whose sole mission is community investment — and implement stronger requirements for bid winners that preserve homeownership and give struggling families affordable housing options. With today’s actions, we are making our voices heard across the nation that we want the FHA to put a halt to DASP until it can change to meet its mission.”

The groups put together a report, Vulture Capital Hits Home: How HUD is Helping Wall Street and Hurting Our Communities, that details their allegations. It can be viewed here.

The community organizations may have a point, particularly about the shadowy nature of the distressed loan buyers.

Freddie Mac offloaded $659 million in seriously delinquent loans to a single buyer in August and refused to name the company when asked by HousingWire.

According to Freddie, the sale was conducted via a competitive auction that took place at the end of July and was executed indirectly through Bank of America affiliates.

Freddie selected the winning bidder “on the basis of economics” from a pool of 22 prospective buyers that took part in the auction.

“The transaction was well received by the market and Freddie Mac will continue to look for opportunities to reduce exposure to less liquid assets in its investment portfolio,” Freddie said in a statement, declining to name the buyer.

Corporate winners of the auctioned loans include Lone Star Funds, Bayview Asset Management, and LVS I SPE, whose principal is facing real estate fraud charges brought by the SEC in 2012. However, not all winners of these auctions have been named.

“DASP claims to have two purposes —f und the Mutual Mortgage Insurance fund and aid in the stabilization of distressed American communities; it’s failing to meet its second goal,” said Connie Razza, director of strategic research at the Center for Popular Democracy and report author. “Our analysis found that close to 97% of the loans have gone to private equity firms and other profit-driven entities as opposed to Community Development Financial Institutions that also want to buy them. HUD’s own figures demonstrate less than 3% of the homeowners with resolved loans in the program have managed to keep their homes with the DASP process.”

The report describes how investors are raising billions of dollars to buy distressed residential assets using business strategies and tactics that undermine neighborhood and economic stability. Distressed residential mortgages exist disproportionately in working class communities of color, which the report explains have been systematically targeted for more expensive loans by the predatory lending practices of American financial institutions.

Events throughout the country today call on the FHA and HUD to halt the DASP program until concrete improvements are made in order to strengthen — not hurt — communities.

“We have already seen what unchecked corporate greed can do to communities,” said Gisele Mata, a California community organizer who fought to save her own home from foreclosure. “Many of us are still fighting to keep our homes and stay in the communities we love after the harm done by Wall Street. The federal government has a responsibility to protect our right to housing — not to help sell our homes to the highest bidder.”

The Vulture Capital Hits Home report makes three primary allegations:

  1. The current structure of DASP auctions hampers community stabilization by considering only the highest bid without weighting the bidders’ track record of good outcomes for homeowners and communities.
  2. The current outcome requirements and reporting structure fails to hold purchases accountable to neighborhood-stabilization goals and provides insufficient transparency and prevents community oversight.
  3. The current pre-sale certification phase does not ensure that the FHA mortgage modification process has been followed before loans are included in DASP auction pools.

Just last week, HUD announced that for the sixth time in less than two years, it is preparing to sell a massive portfolio of non-performing mortgage loans, according to DebtX, which is acting as the loan sale advisor.

The loan sale, titled HUD SFLS 2014-2 Part 2, includes roughly 15,000 non-performing single-family mortgage loans with a total unpaid principal balance of $2.3 billion.

According to DebtX, the loans will be sold in eight national pools, with the pools ranging in size from $94.5 million to $804.5 million.

The pools will bid on September 30.

HUD previously sold $4.8 billion in non-performing loans in June as part one of its SFLS 2014-2. That sale itself consisted of two parts.

The first part of the sale was a national offering of approximately 23,200 loans totaling $4 billion in unpaid principal balance. It was offered in 16 pools, ranging in size from $93 million to $1 billion. The loans were collateralized by properties across the U.S., with one pool concentrated in the Southwest. 

The second part of the sale came from a HUD Neighborhood Stabilization Outcomes pool and consisted of approximately 4,800 loans totaling $800 million in unpaid principal balance. The NSO offering comes from eight NSO regions: Philadelphia, Miami, Chicago, Detroit, San Antonio, Atlanta, San Bernardino County, California and Cumberland County, New Jersey.

Lone Star Funds purchased the larger of the two pools in totality, which marked the first time in the history of the Distressed Asset Stabilization Program that a single bidder submitted the highest bid on “each and every pool,” HUD said at the time.

HUD said that there were 68 qualified bidders for that sale and that Lone Star Funds secured all of the pools with a weighted average bid of 77.6% of the collateral value.

“The sale was the most competitive sale to date, drawing a larger number of bidders and bids per pool than previous sales,” HUD said in a statement in June.

3d rendering of a row of luxury townhouses along a street

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