September 23, 2015
In September, the U.S. Department of Housing and Urban Development announced the latest of its debt sales. This one differs from previous rounds, though, as it is guided by important changes in the agency's Distressed Asset Stabilization Program.
Foreclosing banned for a year
This latest collection of loan pools goes on the auction block on Nov. 18. In rules announced this spring, winning bidders will be required to delay any foreclosures for at least a year. What's more, buyers must evaluate all borrowers for participation in loss-mitigation initiatives like the federal Home Affordable Modification Program.
The changes don't end there. HUD is setting aside some of the debt portfolios for sale for non-profits and local governments only. That means no Wall Street investors, who have flocked to previous HUD debt sales.
Despite recovery, opportunities remain
Writing in American Banker, two housing policy analysts at the left-leaning Center for American Progress say these sales can be a boon not only for investors, but also for the homeowners and the neighborhood.
"Distressed mortgage sale programs, if designed responsibly, can limit the damage of the foreclosure crisis by helping homeowners to access foreclosure alternatives, supporting neighborhood home prices, and limiting losses to taxpayers," wrote Sarah Edelman and Julia Gordon.
While the economy as a whole has been rising from its knees, Edelman and Gordon highlighted that, as of last fall, almost 2 million homeowners were still behind on their mortgages. At that time, 10 million homeowners were underwater and in danger of falling into the foreclosure pipeline. So there remains a great deal of opportunity for investors in this type of security.
Mixed record on foreclosure avoidance
There's a line of argument that buyers of distressed assets get an unfair advantage over the homeowners. The Center for Public Integrity recently made a deep dive into the major investors' renewed appetite for at-risk residential loan sales. They calculated that investors were able to nab these assets for a median of three-quarters of their value while struggling homeowners forked over 124 percent of those values to stay under their own roofs. While helping homeowners out of their financial mess is a stated goal of HUD's efforts, only 1 in 6 of mortgages bought from HUD by investors have managed to stay out of foreclosure, the report noted.
Fannie and Freddie jump in
Among government agencies and government-sponsored enterprises, it isn't just HUD that's offering pools of seriously-delinquent loans. Freddie Mac sold its first bundle of what Bloomberg called "soured mortgages" for a hefty $659 million back last August. This summer, Fannie Mae announced the winners on bids for portfolios of nearly 4,000 loans carrying balances totaling $765 million.
Shifts in regulations and possible further changes to the HUD Distressed Asset Stabilization Program are a key part of the ecosystem for residential loan sales. Any questions or concerns about how your bank can profitably deal with distressed assets can be discussed with loan sale advisory firm Garnet Capital Advisors.