Julián Castro, U.S. Department of Housing and Urban Development secretary, spoke today at a House Committee on Financial Services hearing to defend recent changes made to the Distressed Asset Stabilization Program.
“Without question, our nation’s housing market has made remarkable progress since the Great Recession,” Castro said. “Real residential investment, which includes new housing construction and home improvements, has grown by more than 8% for six straight quarters, and continues to far outpace overall GDP growth.”
“Sales of existing homes have climbed to their highest level in more than nine years,” Castro said. “And homeowners’ equity continues to show sharp gains and is now nearly $7 trillion higher than when President Obama took office, and I’m proud that HUD has helped lead this turnaround.”
Castro credits the creation of DASP, along with other measures, as sharing in the responsibility for some of the positive turnaround.
“It’s innovative. It helps homeowners avoid foreclosure, helps preserve strong neighborhoods, and boosts the health of the Mutual Mortgage Insurance Fund,” Castro said.
“Since its launch in 2012, DASP has helped more than 10,000 families who were on their way to foreclosure remain in their homes,” Castro said. “And it’s helped another 15,000 homeowners avoid foreclosure altogether.”
“That has had a major stabilizing effect for some of the communities that were hardest hit by the Great Recession, and it’s a direct result of our efforts over the last four years to continually improve DASP’s effectiveness,” he said.
Not everyone, however, agrees with the recent changes, or even DASP’s history, for that matter.
“There has probably been no greater public policy mistake in housing than Washington trying to put people into homes they cannot afford to keep,” said Jeb Hensarling, R-Texas, House Financial Services Committee chairman. “It was clearly the No. 1 reason our nation suffered the No. 2 worst financial crisis in our history.”
“Not three weeks ago HUD announced after secret deliberations that it again wants to double down on these failed policies, AND breach its fiduciary duty to hardworking taxpayers while doing so,” Hensaring said.
“Specifically HUD has now announced what it describes as the ‘most significant’ changes ever to the Distressed Asset Stabilization Program known as ‘DASP,’” Hensarling continued. “DASP, as most Committee members know, is a program that allows a pool of delinquent mortgages headed for foreclosure to be sold competitively on the open market. This is done in order to minimize losses to the FHA’s Mutual Mortgage Insurance Fund.”
The recent changes to the DASP program are laid out on HUD’s website:
Principal Reduction/Capital Arrearage Forgiveness: Principal forgiveness is the first option investors must consider offering to borrowers when evaluating them for a modification.
Payment Shock Protection: FHA will limit interest rate increases to no more than 1% per year after a five-year period where the rate is fixed; this is consistent with the Home Affordable Modification Program (HAMP).
Walk-Away Prohibition: Effective immediately, FHA will prohibit any purchaser of single-family mortgages under DASP from abandoning lower value properties in order to prevent neighborhood blight.
Alternative Bidding for Non-Profit Buyers: This enhancement will allow qualified nonprofit organizations to bid on a partial pool of notes up to five percent of a National Pool and to pay the reserve price. This alternative offers another opportunity for nonprofit organizations and local governments to participate in DASP along with those announced last year, nonprofit/government-only NSO pools and direct sales offerings.
Streamline Direct Sales to Interested Government Entities: FHA is providing new standard guidance on the sale of distressed mortgages directly to qualified government entities and local governments. This will provide greater education and awareness among these public entities which may be interested in participating in DASP.
Target loans for DASP sales based on the interest of non-profits and local governments-FHA will enhance its efforts to identify and offer loans in targeted distressed areas to non-profits and local governments: FHA will continue its outreach to solicit their interest in geographically targeted loan sales. These efforts are aimed at helping vulnerable neighborhoods maintain more stable communities.
The Democratic party was quick to respond to the criticism of DASP, throwing their own jabs as they defended the recent changes.
“Thank you, Mr. Chairman, and thank you, Secretary Castro, for joining us today despite being called here by the Majority on such short notice and in such an unprecedented, discourteous way,” Ranking Member Maxine Waters, D-Calif., said. “With this hearing, Committee Republicans are hijacking a very important topic in order to launch attacks on the Secretary, and the Department, rather than substantively examine the issues impacting working people in this country.”
Waters insisted that the recent changes will serve to better protect homeowners, and accused the Republican party of not wanting the administration to support consumers.
“The Administration, recognizing that this situation may not represent the best solution for borrowers, has proposed some modest changes to help ensure that individuals are better protected when their loans are sold, and to help level the playing field when community-based organizations want to place bids,” Waters said.
“Apparently, my Republican colleagues don’t like it when the Administration looks to support consumers,” she said. “In fact, it seems as if the Republicans would like the FHA to act like the same private mortgage companies that cratered the economy, and focus exclusively on the bottom line, but we know that that is not how DASP or the FHA was designed. The FHA has an obligation to the borrowers it serves, and that includes helping them stay in their homes.”
Many nonprofit organizations also expressed their support for the changes. The Leadership Conference on Civil and Human Rights, a coalition of more than 200 national advocacy organizations, wrote to Hensarling and Waters to express its views of the recent changes. In the letter, the coalition wrote that it was “troubled” that some committee members had objected to the changes.
“To date, the housing assets that have been sold through DASP have been heavily located in communities of color, communities that lost a disproportionate share of wealth during the foreclosure crisis,” Coalition President and CEO Wade Henderson wrote.
“According to a study by the Center for American Progress of loans sold through DASP in national auctions between 2012 and 2014, approximately 63% of notes were located in communities with higher-than-average rates of underwater borrowers,” he said. “About 69% of loans came from communities with unemployment rates of more than 8%, and 84% of loans came from communities with a percentage of minority population that is higher than the national median.”
“For some time, The Leadership Conference and its coalition partners have voiced concerns about the implementation of the DASP program,” Henderson continued. “The overwhelming majority of loans sold under the program, more than 98% from 2012 to 2016, have been purchased by for-profit investment firms.”
“During that time, some of these firms have failed to properly maintain foreclosed properties, or have even walked away altogether from some vacancies,” he said. “Such actions contribute to neighborhood blight, reduced property values in neighboring homes, increased rates of crime, and drained local governments of scarce financial resources.”
Others from the community joined in their agreement of the new changes.
“The changes that HUD has undertaken are important, valuable, and substantive,” Boston Community Capital CEO Elyse Cherry said in an email to HousingWire. “By opening up the options available, HUD will be able to ensure that struggling homeowners are much more likely to be able to remain in their homes.”
“It has been clear for some time that the federal government needs to do, and can do, much more to lift the country out of its ongoing housing crisis,” Cherry said. “The FHA’s adoption of anti-foreclosure initiatives like principal reduction will go a long way toward boosting low-income communities across the country, while helping to stimulate the broader economy.”
“After no notice, no public comment period, no public debate, and no transparency, HUD announced it will no longer maximize taxpayer recovery by selling these mortgages through an open and competitive bidding process,” he said. “Instead, it will offer lower priced ‘preferential bidding options’ to nonprofits and local governments, or, many of us believe more accurately, to known political allies.”
“It is surely worth repeating that there is no better foreclosure mitigation program than a job with growing wages and a bright future,” Hensarling said. “Also, a bankrupt FHA and a bankrupt America can help no one stay in their home, much less afford them an opportunity to buy one in the first place. This attack on FHA’s insurance fund must be stopped.”
He even went on to suggest that these new changes were an attempt by Castro to bolster his vice presidential prospects.
“Well, we had a recent report, on April 12, POLITICO published a story entitled Progressive groups target Julián Castro,” Hensarling said. “It stated, in part, ‘a coalition of [progressive groups]…are launching a preemptive strike against [Castro], aimed at disqualifying him from consideration to be Hillary Clinton’s running mate…attacking Castro on the relatively obscure issue of his handling of mortgage sales.’”
“Just a few weeks later, a story appeared in the very same publication entitled Veepstakes: Julian Castro moves to shore up a potential weakness,” he continued. “The story goes on to say: ‘Julian Castro’s Housing and Urban Development Department announced significant changes Thursday to a federal program that sold delinquent mortgages to private investors — a move that mollified progressive critics who threatened to undermine his vice presidential prospects.’”
Castro, however, denied these claims, and even specified in the hearing why HUD made the changes that it did.
“Since the program’s launch, HUD has modified DASP many times,” Castro said. “We’ve implemented a 12-month moratorium on foreclosures, strengthened DASP’s neighborhood stabilization requirements, and made the program more transparent and more competitive.”
“In fact, no DASP note sale has been the same, and all of the program’s changes have helped ensure it continues to meet the needs of our growing housing market,” he continued. “The same is true of the improvements we announced last week, including those aimed at encouraging more non-profit investors to join DASP.”
“Some have tried to single out these changes as being politically motivated,” Castro said. “They were not. Many nonprofit groups have decades of experience in stabilizing neighborhoods, and HUD wants to put that expertise to work on behalf of the homeowners and communities that need it most while also maintaining the rigorous standards that have made DASP a success for the MMI Fund.”