HUD loan sale program puts consumers in harm's way: GAO

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The Department of Housing and Urban Development's distressed loan sale program is subjecting consumers to financial stress, according to a new U.S. Government Accountability Office report.

Mortgage loans sold through HUD's Distressed Asset Stabilization Program— mainly to private equity firms —are more likely to result in foreclosure than unsold loans, according to the GAO report.

DASP facilitates the bulk sale of large pools of loans insured by the Federal Housing Administration, which insures financing options for low- and moderate-income earners. But homeowners whose loans sell through the program lose protections designed to help them avoid foreclosure.

The program was put in place to help HUD limit its losses from defaults. However, consumers are put more at risk, and 3% of loans auctioned off were discovered to be ineligible, according to the GAO.

Consumer advocates are backing the GAO report.

"While HUD has an obligation to operate a healthy insurance fund, it also must act to stabilize homeownership," said Geoff Walsh, a staff attorney with the National Consumer Law Center, in a press release. "The GAO’s report shows that HUD had no rules in place to ensure that the sales would help homeowners, and in fact, the GAO’s data show that homeowners lost out while private equity companies gained."

HUD admittedly targeted states with more extensive borrower protections to make more loans eligible. These include areas like New York and Illinois, which host mandatory mediation initiatives aimed at keeping more consumers in their homes, according to the NCLC.

"HUD’s policy specifically undermines mediation programs and other consumer protections built into state foreclosure laws, programs proven to help borrowers avoid foreclosure and investors retain performing loans," said Walsh.

HUD has had no measures in place to monitor DASP's effect on borrowers, nor did it have federally required laws to operate the program in the first place, according to the GAO. The latter claim falls in line with findings by HUD's inspector general, who noted the lack of laws in a 2017 report. The agency recently issued notice that it will begin building a ruleset for the program.

In response to its findings on DASP, the GAO has issued nine recommendations for executive action aimed at the Commissioner of FHA. The suggestions target a more comprehensive program with stronger objectives, purposeful planning and better methods for evaluating processes and the borrowers themselves.

While "in aggregate, sold defaulted loans were more likely to experience foreclosure than comparable unsold defaulted loans," there were exceptions, according to the GAO.
"Some purchasers' loans had higher probabilities of avoiding foreclosure, with borrowers making regular payments again by 24 months after the transfer of loans," the report said. "Also, loans sold in 2016 sales were less likely to experience foreclosure compared to unsold loans."

In a response to the report, John Garvin, the general deputy assistant secretary for housing, said, "The FHA's management generally agrees with the Government Accountability Office (GAO) that opportunities exist for improvements to single-family loan sales through more formalized procedures and analysis, as this critical defaulted loan disposition option transitions to a permanent disposition alternative."

But Garvin took issue with HUD's methodology, calling it "invalid for comparative analysis purposes," because the DASP loans all "had to have first been reviewed for loss mitigation" and "all applicable loss mitigation activities must have been completed prior to loans being eligible for sale. It's unclear whether the same could be said of the loans they were compared to, he said.

Garvin accepted HUD recommendations, with some caveats.

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Mortgage defaults Distressed Foreclosures Secondary market Loss mitigation HUD GAO FHA