Recently, the Federal Housing Administration (FHA) and Housing and Urban Development (HUD) jointly announced the Distressed Asset Stabilization Program (DASP), whereby private investors can purchase pools of mortgages headed for foreclosure with the hope of moving these loans out of default. FHA/HUD’s intended goal is not only to help borrowers out of foreclosure, but also to avoid massive declines in property values, which normally occur with distressed properties. The DASP pilot was originally commissioned back in 2010, resulting in more than 2,000 loans being purchased. Now, the FHA hopes to take the program to a larger scale and help even more homeowners, but will it be successful?
From the outset, it should be noted that not everyone will get into a mortgage pool. The stipulations are as follows: first, the underlying loan has to be insured by the FHA. Second, the borrower needs to be more than six months delinquent. Third, the servicer must exhaust all other options for a loan modification. Fourth, the foreclosure process has been started. Finally, the borrower has not filed for bankruptcy. Based on the preceding criteria, many delinquent homeowners are rendered ineligible right from the start. However, for those who qualify, there may be a “new lease on life.” Upon completion of the sale of a mortgage to a private investor, a six-month reprieve from foreclosure is immediately instituted. Now, the investor has the option to restructure the note and collect principal and interest payments on a go-forward basis, thus becoming a lender/landlord of sorts, negotiate a short sale to maximize their returns, or as a last resort (and only after all other options have been exhausted) foreclose on the property. Foreclosure is truly a last resort, as the FHA will require investors to hold properties for three years following the completion of the foreclosure process.
Indeed, this is a good attempt by the FHA to address the problem of delinquent FHA-insured notes on the rise. Just as with most administrative organizations, the FHA has no expertise in “workouts.” The FHA’s mission is to insure loans, not to structure modifications or knock on doors to collect past due mortgage payments. Accordingly, shifting this burden to private investors is a good way to place the responsibility onto firms and individuals who have a core competency in working with the underlying borrowers. They can either modify their loans to terms that are both suitable and sustainable, structure short sales that allow borrowers to arrange for an orderly disposition, convert owners into renters, or foreclose as a last resort.
The challenge with the DASP program is that the number of delinquencies is vastly higher than the number of note sales. To date, just over 2,000 note sales have been completed for the entire country. The FHA only has plans to sell 5,000 notes per quarter. With over 400,000 delinquent FHA mortgage notes, the rate of sales will have to increase rapidly to keep up with the demand. Otherwise, the perpetuation of blight and decimation of property values with continue as the rate of foreclosures increase.
Can private industry help to alleviate an overworked and understaffed government? Absolutely, as long as there is money to be made, investors will chase returns, especially when stocks are gyrating and 10-year treasuries are only paying a paltry 1.6%. Public/private partnerships have been structured before, and can be structured again. Investors of all pocket sizes are sitting on the sidelines with over $6 trillion dollars, looking to put their investable capital into a worthwhile investment, and buying a piece of the debt underlying the American dream is just as good a place as any to start investing as any other. Therefore, if the FHA can engage the investing public on a large scale, a sufficient number of hedge funds, investment groups, along with mom-and-pops will be interested the potential to earn some decent returns on their money, by investing in an asset class that is universally understood.
In the end, DASP is currently too small to make a big dent. It is a good concept to move a lot of bad loans off of the taxpayer’s books. It also provides a capitalistic engine for stabilizing property values while looking altruistic at the same time. The program is there. The incentives and the controls are in place. Now, we just need the size and scale to make it successful.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at email@example.com.