Researchers from the Urban Institute are already on the record with their view that more pools of non-performing loans need to be sold to private investors, but a new article posted Friday on the Urban Institute’s Urban Wire blog on Housing and Housing Finance suggests that more steps need to be taken to ensure a mutually beneficial result for all parties involved in a non-performing loan sale.
Earlier this year, a report from the Urban Institute's Housing Finance Policy Center, co-authored by HFPC Director Laurie Goodman and Center Creek Capital Group's Dan Magder, stated that private investors “can do more for borrowers” than the government, and encouraged the Department of Housing and Urban Development to sell more NPLs to private investors.
Now, the Urban Institute’s Karan Kaul writes that selling delinquent mortgages to investors is a “tough balancing act,” and that despite the success of the previous NPL sales to private investors, more can be done to make future NPL sales even better.
According Kaul’s piece, some have argued that selling NPLs to “profit-seeking investors” pushes many borrowers into foreclosure because of inadequate protections, but Kaul cites the January report from the Urban Institute that claimed that NPL sales to investors help borrowers and investors alike.
“Private investors have greater flexibility to modify nonperforming loans and mitigate losses than HUD or the GSEs, so the sales are a win-win,” Kaul writes.
According to Kaul, HUD has sold more than 105,000 delinquent mortgages out of its portfolio through its Distressed Asset Stabilization Program, while Fannie Mae and Freddie Mac have sold approximately 40,000 NPLs thus far.
Freddie Mac announced its latest NPL sale earlier this week, selling more than 1,700 loans to MTGLQ Investors, L.P., a "significant subsidiary" of Goldman Sachs.
But according to Kaul, HUD and the government-sponsored enterprises collectively hold more than 820,000 severely delinquent loans in their portfolios, so the potential for an expanded NPL sale program exists.
And if the NPL sales are to continue, and perhaps grow, Kaul lists four steps that can be taken to improve the NPL sales program, presented in full below:
Mandatory borrower outcomes: According to Julia Gordon, executive vice president at the National Community Stabilization Trust, “all buyers of delinquent notes should be required to achieve one of several mandatory borrower outcomes for a certain percentage of loans in a pool.” The current requirement to meet mandatory outcomes for 50 percent of notes in a pool is in place only for HUD’s Neighborhood Stabilization Pools, which represent only a small percentage of all sales. These outcomes are reperformance via successful modification, short sale to owner-occupants, conversion to a rental property, sale to a nonprofit entity, or donation to a land bank.
Restrictions on abandoned and very low value homes: When buyers purchase notes backed by vacant, substantially damaged, or very low value homes, they often have to spend time and resources to complete a foreclosure. Often, the less costly alternative for investors is to walk away, to the detriment of the neighborhood.
Ultimately, investors price for this risk by lowering their bids and passing the cost on to taxpayers. Ensuring that loan pools are free from such homes or allowing investors to return such notes would better protect homeowners and neighborhoods, reduce risk for investors, and lead to higher bids. Both HUD and FHFA are exploring ways to reduce the number of notes backed by low-value or abandoned homes. FHFA recently updated its guidelines prohibiting investors from walking away from vacant properties.
More data transparency: Housing researchers, including those at the Housing Finance Policy Center, have urged the government to release detailed performance data that would allow external researchers to study program effectiveness and provide feedback. While HUD has released limited auction-level data, FHFA hasn’t followed suit. According to Stein, the FHFA is “currently working to publicly release performance data on GSE note sales by end of June.”
Greater partnerships between private and nonprofit sectors: Because nonprofits work at the neighborhood level and are mission oriented, they are often better equipped than investors to conduct borrower education and outreach. That said, limited nonprofit capacity to buy loans outright and manage assets on a large scale often act as barriers to such partnerships because investors with large nonperforming loan portfolios are more likely to seek partners with the capacity to handle large loan volumes.
Kaul cautions that placing too many restrictions on the NPL sales parameters could lead to investors turning to Europe’s distressed sales market instead, but adds that selling mortgages with “inadequate protections” could unnecessarily expose borrowers to undesirable outcomes.
“Policymakers should do all they can to further improve outcomes for borrowers and neighborhoods while minimizing taxpayer losses,” Kaul writes. “That said, active investor participation is what makes the program successful. Making sure it works for everyone will always require a careful balance of policy considerations.”