The Federal Housing Administration started selling distressed loans in 2012 to help communities hit hard by foreclosures while also reducing losses to its taxpayer-backed insurance fund.
Two years later, the first reports on the loan sales show the program has benefited the insurance fund more than the communities, as hedge funds and private equity-backed investors drive up prices for the loans they buy with few strings attached.
Firms such as Bayview Asset Management, a portfolio company of Blackstone Group LP, and billionaire John Grayken’s Lone Star Funds have won auctions for almost half of the $15.8 billion in nonperforming loans sold since 2010 by the FHA, according to an Aug. 28 report by the U.S. Department of Housing and Urban Development. Not-for-profit groups that want to buy the pools of mortgages say the current system favors financial buyers over those whose primary mission is aiding borrowers and communities.
“Large pools allow the Lone Stars and Bayviews to marginalize small, neighborhood-focused bidders,” said Sharon Pratt, a former mayor of Washington D.C. and chief executive officer of Home Preservation Exchange, a nonprofit focused on neighborhood stabilization. “The present-day auction system makes it very difficult for small enterprises to compete and every bit as important have an impact on targeted neighborhoods.”
Nonperforming loan prices have risen as investors compete to cash in on the housing recovery by turning the properties into rentals or reselling them with a markup after repossession. Rising prices for the FHA’s delinquent loans helped cut its insurance fund losses to about 53% of the value of the debt from 63.5% in 2010, according to the HUD report.
“We think it’s doing what it’s intended to do,” FHA Commissioner Carol Galante said in an interview last week. “Which is both get better recoveries for the FHA fund and at the same time give borrowers and communities additional opportunities to either stay in their home or have better outcomes than if the loans went through the foreclosure process.”
The government mortgage insurer, which focuses on backing low-down-payment loans for first-time home buyers, has been under pressure to improve its bottom line as losses on delinquent house payments depleted its reserves after the housing bubble burst. Losses of more than $50 billion on mortgages it insured caused the FHA to take a taxpayer subsidy of $1.7 billion last year, the first in its 80-year history.
About 80% of the FHA mortgages were sold in national pools with few restrictions on how the debt is resolved. The rest of the nonperforming loans were auctioned in Neighborhood Stabilization Outcome portfolios, which require winning bidders to offer modifications and other foreclosure alternatives on at least half of the loans.
The neighborhood stabilization pools outperformed the national ones by having more reperforming loans, more resales to new owners and a smaller share of foreclosures for mortgages resolved through May, according to the HUD report.
Nearly a quarter of the neighborhood loans resumed payments after a modification while 8.7% of the national mortgages reperformed.
Almost 21% of the neighborhood loans compared with 11.6% of the national ones ended with short sales, when the loan holder agreed to sell the home for less than the balance of the debt. Those transactions are less damaging to a borrower’s credit record and keep the house occupied.
About 41% of national loans ended with foreclosures, compared with 29% of the neighborhood mortgages.
Almost 23% of the national loans were resold to third parties that no longer report outcomes. Less than 1% of the neighborhood mortgages were resold.
“The results are pretty stunning,” said Gary McCarthy, a partner in HMC Assets LLC, a winner of six HUD neighborhood stabilization portfolios with an unpaid balance of $496 million. “The NSO pools had far superior results.”
HMC, which buys loans as Corona Asset Management, has rehabilitated dozens of abandoned homes in North Las Vegas, Nev., from a portfolio of 217 mortgages purchased this year, many of which have become rentals for families serving at Nellis Air Force Base, he said.
“It’s not just about recovering dollars,” McCarthy said in an interview from his office in Redondo Beach, Calif. “It’s about trying to see real estate recover and to lessen the impact of default on communities.”
HUD plans to auction 15,000 loans with an unpaid balance of $2.3 billion this month, according to Debt Exchange, which manages the sales. Those are all national without the neighborhood stabilization requirements.
FHA “would love to be doing more” neighborhood sales “where it makes sense,” because they have better outcomes for more borrowers, Galante said. That’s not always feasible, because the loans must be in geographically concentrated areas with a small number of servicers, she said.
“It’s just having enough in an area that you get to a reasonable economy of scale,” she said.
The FHA insured more than 437,000 seriously delinquent loans as of June 30, meaning they were at least 90 days late or in foreclosure, according to the Mortgage Bankers Association. The 91,114 mortgages sold so far averaged 31 months delinquent.
When the FHA announced the neighborhood stabilization program, it pledged to work with for-profit and nonprofit investors who “have shown great interest in using this program to help borrowers in their community find affordable solutions as quickly as possible,” Galante said in a 2012 press release.
Nonprofits and community development organizations have won auctions for 1.4% of the soured debt, mostly in early rounds of the sales. They didn’t win any of the 10 neighborhood stabilization pools sold in June with $695 million in debt on 4,224 homes.
“This market has become uber competitive,” said Wayne Meyer, president of New Jersey Community Capital, a not-for-profit community-development financial firm, which won two auctions in 2012 and none since.
Even small deals were awarded to for-profit buyers. New Jersey Community Capital lost its bid for 108 loans in Cumberland County, New Jersey, with an unpaid balance of $16.2 million. Kondaur Capital Corp., a mortgage investor and servicer affiliated with hedge fund manager Tourmalet Advisors LP, was the winning bidder on that group as well as pools in Chicago and Detroit this year.