But soon after closing on the loan, Uwansc began having trouble making payments. He believed he had worked out a loan modification with Bank of America in 2011 after signing paperwork, but the bank disputed the terms Uwansc thought he had secured. When he didn’t pay the amount the bank said he owed, it claimed he was in default.
Uwansc’s mortgage was insured by the Federal Housing Administration, meaning if he failed to make payments, the bank would typically be paid the full value of what was left of the mortgage, plus costs associated with servicing the debt. Bank of America filed for a claim and received payment. The mortgage was then transferred to the Department of Housing and Urban Development, which oversees the FHA.
It was a great deal for Oaktree. The fund bought the pool of mortgages for about two-thirds of the $105.7 million HUD estimated the homes were worth. Uwansc, who now faces foreclosure through the new servicer of the loan, Selene Finance, was unaware that any of this had transpired.
“Whatever deal that went on between Bank of America, Selene and HUD is not known to me,” he says. Uwansc maintains he has complied with the terms of his modification and has filed lawsuits against both Bank of America and Selene.
HUD has sold thousands of mortgages this way. The idea is to shore up FHA’s hemorrhaging finances and give borrowers some breathing room to work things out with a new mortgage-holder so the loans will start “re-performing,” as HUD puts it.
* * *
In 2010, HUD launched the mortgage sales program — now known as the Distressed Asset Stabilization Program, or DASP — under intense pressure from Congress to improve its finances. HUD can’t reduce the principal owed on mortgages it holds for homeowners, but it can sell the mortgages in bulk to investors at a steep discount — at times as little as 41 percent of the mortgages’ collective value.
The agency, through the FHA, insures loans to lower-income and first-time homebuyers. During the 2008 financial crisis and subsequent recession, many of those homeowners fell behind on their mortgage payments and foreclosures loomed. Meanwhile, the FHA, due to an onslaught of claims, was desperately in need of a funding infusion.
The DASP program has a dual purpose: to lessen the impact of FHA insurance claims on defaulted mortgages on HUD’s finances, and according to a statement in April by Genger Charles, then the acting commissioner of HUD’s Office of Housing, to provide borrowers “a second chance at avoiding foreclosure.” Through DASP, lenders cash in on an FHA insurance claim on mortgages that are at least six months delinquent and HUD takes ownership of the mortgages. HUD then sells those mortgages to the highest bidder in bulk auctions.
But the new owners of these mortgages are more likely to flip the homes for a profit or take advantage of the booming rental market, say some advocates. The transactions may make good financial sense, but they can leave struggling homeowners like Julius Uwansc in the dark, and in some cases on the streets.
“The investors are there to make money,” says Diane Cippalone, a mortgage servicing consultant to the National Fair Housing Alliance, a nonprofit organization. “They are not there to do neighborhood revitalization or neighborhood stabilization.”
HUD’s post-sale reports show that 6,427 mortgages, or 16.9 percent of those sold between 2010 and 2013, have successfully avoided foreclosure. But this includes third-party sales or other methods that still result in a homeowner ending up without a home. Only 5.4 percent of the loans sold during that same period were performing.
The amount of principal reductions actually offered to homeowners under the program by the new mortgage owners is unknown. HUD does not require new servicers to report the types of loan modifications given, and it did not respond to questions about reporting requirements.
HUD points to dramatic declines in FHA foreclosures as evidence that the market may be returning to pre-crisis stability. But by selling loans right before the foreclosure process begins, Daren Blomquist, the vice president of RealtyTrac, says HUD may be using DASP to create “ghost inventories” where foreclosures are still likely—they just aren’t immediately visible on the record books. “This process of selling loans, aside from whether it’s working, it has the added bonus of making the foreclosure numbers look better in the short term,” says Blomquist.
* * *
FHA’s insurance fund was depleted when millions of homeowners defaulted on their mortgages during the recent recession. Meanwhile, Wall Street investors developed a thirst for non-performing loans, and DASP was an opportunity to unload mortgages while satisfying that thirst.
These non-performing loans appeal to investors because they are bought at a steep discount. “There’s a substantial amount of profit to be made whether you go to resell those homes, or take a more humanistic approach and convert these loans to performing,” said Jack McCabe, who consults with investors on the real estate market.
In a February, 2014 report for the Federal Reserve Bank of San Francisco, FHA Commissioner Carole Galante calls DASP “a win-win-win situation for all involved”: The FHA washes its hands of bad mortgages, the investor gets a valuable asset, and homeowners stand to benefit from more affordable loan terms from the new buyer.
But consider the December 2013 sale of Julius Uwansc’s mortgage. Oaktree paid $68.6 million for the 803 Baltimore mortgages, about 65 percent of the $105.7 million HUD says they were worth. That means even if the company doesn’t collect a dime on any of the mortgages, even after legal fees and other expenses, it can more than make its money back by foreclosing and selling the homes. (Oaktree declined to comment on the outcomes of loans bought through DASP.)
Many of the loans sold through DASP are indeed close to foreclosure, and many have already started the process. But HUD apparently thought it had put some brakes on the incentive to quickly foreclose and sell the homes with that stipulation that buyers wait six months to foreclose and try to work things out with the borrowers.
* * *
FHA loans by law offer extra protections against foreclosure. In order to obtain that FHA insurance, a loan servicer, the company that collects payments and administers the loan, must make a series of efforts to modify loan terms to help owners keep their homes.
A lender can file a claim and turn the loan over to HUD for sale only when all these efforts have failed. The loans in DASP, according to HUD spokesman Sullivan, “are all headed to foreclosure — 100 percent of them — because they’ve exhausted their loss-mitigation options.”
But legal advocates and several borrowers say they have seen otherwise. The original lender reports that they’ve taken all the necessary steps, and HUD essentially takes their word for it, says the NCLC’s Geoff Walsh. “We’re hearing from a lot of homeowners that were still involved in loss mitigation,” he says, and could avoid foreclosure through normal FHA pathways.
Uwansc says he had no idea his mortgage was up for sale. Walsh says, “The program depends on secrecy. The program depends on the homeowner not knowing that their loan is being sold.”
Walsh says if borrowers are notified that their loan may be sold they can advocate for better terms under FHA protection, before the sale to new creditors without such stipulations. So far, he adds, HUD has rebuffed requests that borrowers be informed of their position before the sale.
* * *
The history of Uwansc’s loan intertwines with the confusion that followed the financial collapses of 2008. After refinancing in 2009, Uwansc’s lender was Countrywide Financial, the nation’s largest subprime lender at the time. Countrywide was bought by Bank of America, which assumed its loan portfolio.
Months after that, Uwansc’s loan was sold through DASP to DC Residential IV, a fund created by the hedge fund firm Oaktree Capital to buy loans from HUD. The servicer hired to collect payments is Selene Finance, whose investors include Lewis Ranieri, one of the pioneers of mortgage securitization.
Selene declined to comment for this article. In sworn testimony a representative said Selene was unaware of the loan modification, but paperwork presented in that same testimony showed Uwansc made Selene aware of the issue as early as March 6, 2014. In the lawsuit, Uwansc explained how he wrote to Selene to formally request that it correct its records and included a copy of his final modification as proof that he had, in fact, been making the payments required.
Selene never recognized the modification and, operating off the terms of his original mortgage from 2009, stopped accepting his payments in December of 2014 and notified him of its intent to foreclose if his family didn’t pay the entire balance of his loan plus interest and fees, adding up to as much as $217,479. Uwansc’s lawsuits against Bank of America and Selene are still pending, but if Selene succeeds in foreclosing, Oaktree will own a home that was valued at $250,000 in 2009.
* * *
HUD has announced changes to its latest rounds of sales meant to address criticism from consumer advocates. In addition to requiring new servicers to evaluate borrowers for modification programs similar to those offered by the government, HUD says it will also strengthen the requirements for loans sold through pools specifically targeted to help neighborhoods with a rash of foreclosures. HUD will also offer smaller pools to incentivize more nonprofits to buy in. Currently just 2 percent of the mortgages sold through DASP have gone to nonprofits. Buyers must now wait one year to complete the foreclosure process on newly acquired loans, double the six-month moratorium in place from 2010-2014.
“These changes reflect our desire to make improvements that encourage investors to work with delinquent borrowers to find the right solutions for dealing with the potential loss of their home,” explained Charles, the temporary FHA chief at the time.
Servicers flocking to DASP, however, have many tools to meet HUD’s re-performing benchmarks and still ensure a quick foreclosure once the one-year waiting period is over. Phillip Robinson is a lawyer with the Maryland Consumer Law Center and represents Julius Uwansc. Robinson says other clients have been offered loan modifications with the provision that they offer interior inspections of the home, something Robinson says he has only seen with loans sold through DASP. “The reason they want interior inspection is that they want to get an idea if they can make money off foreclosing,” says Robinson. “They’re not looking to modify and certainly not looking to do principal reductions.”
* * *
That’s the kind of modification offered to Sandy Lopaz. Lopaz bought her home in Cinnaminson, New Jersey, in 1987, and refinanced in 2008. She lost her job later the next year and asked Chase Home Finance for a loan modification.
Around this time, both Lopaz’s parents were in failing health. Her daughter was suffering through a “mystery diagnosis” that took three years to sort out. Under these circumstances, Lopaz filed for bankruptcy in 2011. In a letter to the Consumer Financial Protection Bureau, Lopaz says Chase didn’t pursue foreclosure because they couldn’t prove they owned her mortgage at the time. She wrote a letter to HUD detailing the problems with her mortgage to that point, asking them to hold off on paying an FHA claim until the issues were resolved. “I applied for a dozen modifications, and begged HUD to investigate,” she says.
Her mortgage was sold to a new trust in March, MART Legal Trust 2015-NPL1, with UMB Bank as a trustee. BSI still services the loan, and according to emails from that company as recently as April, Lopaz still faces an open foreclosure case. BSI said it could not comment on specific mortgages without a release waiver signed. Lopaz signed the waiver, but BSI has yet to respond to requests for an interview.
“I put my kitchen cabinets together from kits when I was eight months pregnant,” Lopaz says. “I know I paid so much more than these people and they are trying to paint me out to be the deadbeat.”
* * *
While Lopaz waits for another day in foreclosure court, HUD continues selling non-performing loans. Their latest round of bidding on July 16, HUD put 7,837 mortgages up for auction with an unpaid principal balance of over $1.37 billion. Fannie Mae and Freddie Mac, two government entities that hold the rights to many more mortgages, have also begun similar programs. Fannie Mae announced the winners of its latest bid on August 20. The highest bidders bought $767 million in unpaid mortgages, about 3,900 loans. Freddie Mac announced a similar sale, $591 million in mortgages totaling 3,577, in July, following a larger sale in March.
“The goal of non-performing loans sales is to be able to offer borrowers additional options to avoid foreclosure, while also reducing the number of seriously delinquent loans in Fannie Mae’s portfolio,” Joy Cianci, Fannie Mae’s senior vice president for credit portfolio management explained in the announcement. The justification for these sales is similar to HUD’s own reasoning that offers no real help to homeowners like Julius Uwansc.
Some legal experts say the requirements for these sales are stricter than the HUD auctions. Considering Fannie Mae and Freddie Mac guarantee nearly half the country’s single family mortgages as of 2014, the sales represent an opportunity for investors to grab an even larger share of the housing market.“This is becoming a significant force in the mortgage market,” Steven Sharpe, an attorney with the Legal Aid Society of Southwest Ohio.
Sharpe says HUD has two obligations. “One is to strengthen homeownership, and two is to do so in a way that bears in mind the fund.” For that reason, housing advocates say programs like DASP need to make sure borrowers voices are heard before, and that mortgage lenders are held accountable after the sale. As Sharpe puts it, “avoiding unnecessary foreclosures is good for everyone.”
http://www.theatlantic.com/business/archive/2015/09/the-government-is-selling-thousands-of-homes-to-hedge-funds-without-their-owners-knowledge/406771/avoid foreclosure, Bank of America, borrowers, Distressed Asset Stabilization Program, fannie mae, Federal Housing Administration, FHA insurance, foreclosure, Freddie Mac, homeowners, homeownership, HUD, oaktree capital, real estate bubble, resell homes, sell mortgages