On June 30, the Department of Housing and Urban Development announced important, valuable, and substantive changes to its Distressed Asset Stabilization Program, under which the Federal Housing Administration sells off deeply delinquent loans to private investors.
The reforms will benefit homeowners, entire neighborhoods, and our economy as a whole – and have the potential to transform the way the private sector approaches the housing market.
Some background here: The department introduced DASP in 2010 as a way of dealing with seriously delinquent loans. The program sells underwater mortgages at a discount, which is supposed to offer homeowners “a second chance at avoiding foreclosure,” according to the HUD website.
The thinking was that investors would pass the savings they reaped from buying discounted mortgages to homeowners, who would then be granted more affordable loans. A key component of these renegotiated mortgages was to be principal reduction, which is when an outstanding balance on a loan is reduced.
The program held promise because principal reduction has worked so well in other capacities. My organization, Boston Community Capital, is a non-profit dedicated to supporting low-income communities.
We pioneered a foreclosure relief initiative, Stabilizing Urban Neighborhoods, which has provided over $100 million in mortgage financing to help more than 660 families remain in their homes, reducing homeowners’ principal balances in aggregate by over $50 million.
Nearly all borrowers pay back on time and in full. SUN is delivering results in five states, in large part due to the program’s use of principal reduction.
The nonpartisan Congressional Research Service has found that lenders do better when offering principal reduction rather than simply foreclosing and evicting homeowners. However, most entities that bought discounted mortgages—mostly hedge funds and banks—nonetheless foreclosed.
According to some recent data, more than 98% percent of homes DASP sold went to these private investors, and many American families paid the price.
As of September, HUD will require that principal forgiveness is the first option investors consider offering to borrowers when evaluating them for a modification, making it easier for struggling homeowners to keep their homes.
The anti-foreclosure initiatives that HUD is adopting, including principal reduction, will help alleviate the phenomenon of neighborhood blight and strengthen communities that have been underserved and unsupported in the past —all while helping to stimulate the broader economy.
What’s more, HUD's change in position will echo throughout the housing and financial industries, helping to guide the private sector toward a similar shift. Only by acknowledging the problem can we begin to address it, and HUD has clearly acknowledged the weaknesses of the mortgage sale industry.
This conversation has to occur in both the public and private sectors, and the new HUD rules are a crucial first step toward making that happen.
While there is no silver bullet that will eliminate foreclosures altogether, keeping people in their homes is the ideal outcome, both for their communities and for the bottom line. As such, the reforms to the DASP program are a welcome shift in policy and a harbinger of more change to come.