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October 08, 2014
Federal Program Helps Wall Street, not Homeowners
    by Robert Kropp

Distressed mortgages insured by the Federal Housing Administration are being sold to the highest bidder without regard to neighborhood stabilization. First of a two-part series.

The focus of this year's Wells Fargo NEXT Awards for Opportunity Finance, awarded annually to community development financial institutions (CDFIs) for their efforts to provide financial services to underserved communities, was not picked out of a hat. As recently as February of this year, home foreclosures were still at a rate double that of before the financial crisis. And the low-income communities served by CDFIs have been the hardest hit.

One of this year's awardees—New Jersey Community Capital (NJCC)—was recognized for its plan to to expand ReStart, which, NJCC states, ““acquires pools of underwater mortgages and provides homeowners with principal reductions and one-on-one counseling to protect them from displacement.”

One source of the aforementioned pools of underwater mortgages has been the Federal Housing Administration's (FHA) Distressed Asset Stabilization Program (DASP), which, according to a recent report, “has the potential to recuperate needed funds for its mortgage insurance fund, preserve homeownership, and create affordable rental housing.”

“Community Development Financial Institutions (CDFIs) are much better suited than alternative-investment funds to further HUD’s community stabilization goals,” the report, authored by Connie Razza of the Center for Popular Democracy and entitled Vulture Capital Hits Home, continues.

However, “the FHA has designed DASP in such a way as to severely limit its effectiveness in helping hard-hit neighborhoods recover from the housing crisis,” the report found. By mid-2014, “97% of the auctioned loans have been won by for-profit entities, largely private equity firms,” which have the capital to outbid the CDFIs whose purchase of the mortgages would be done to help the communities set back severely by the frequency of foreclosures.

“The financial industry has found yet another way to profit from the distress of homeowners,” the report charges, finding three key problems with the DASP program:
1. The current structure of most DASP auctions hampers community stabilization by considering only the highest bid without weighting the bidders’ track record of good outcomes for homeowners and communities;
2. The current outcome requirements and reporting structure fails to hold purchases accountable to neighborhood-stabilization goals and provides insufficient transparency and prevents community oversight; and
3. The current pre-sale certification phase does not ensure that the FHA mortgage modification process has been followed before loans are included in DASP pools.

To address the systemic problems of the program, the report recommends the following:
1. Credit bidders that have stronger neighborhood stabilization plans;
2. Strengthen outcome requirements to preserve homeownership and create affordable rental housing;
3. Sell more of the loans through the geographically concentrated Neighborhood Stabilization Outcome (NSO) pools, which require buyers of the mortgages to contribute to the stabilization of the neighborhoods hit hardest by foreclosures;
4. Collect and make public detailed performance data; and
5. Improve the pre-sale process to better protect homeowners.

“Further sales of FHA insured mortgages should be halted until these reforms in the DASP are implemented,” the report concludes. “Investors are trading distressed residential assets – mortgages and vacant properties in severe arrears — and are building a spectrum of business plans many of which undermine neighborhood and economic stability.”

Next: the Center for American Progress analyzes the effects of FHA's Neighborhood Stabilization Outcome program.


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