While some prominent figures in the federal government, including Sen. Elizabeth Warren, D-Mass., and Rep. Mike Capuano, D-Mass, have loudly criticized the government’s practice of selling non-performing loans to private investors, a new report from the Urban Institute suggests that selling NPLs to the private sector is actually a good thing.
The report, which comes from the Urban Institute’s Housing Finance Policy Center and is co-authored by HFPC Director Laurie Goodman and Center Creek Capital Group‘s Dan Magder, shows that private investors “can do more for borrowers” than the government.
While Fannie Mae and Freddie Mac also sell non-performing loans to private investors, the Urban Institute’s report focuses on the Department of Housing and Urban Development’s non-performing loan sale program, called the Distressed Asset Stabilization Program.
The Distressed Asset Stabilization Program has had its fair share of detractors.
Last year, the U.S. Conference of Mayors passed a resolution “urging the sale of severely delinquent mortgages to nonprofits for foreclosure prevention and affordable housing strategies.”
The mayors cited a study released last year by the Center for Popular Democracy and the ACCE Institute, entitled “Do Hedge Funds Make Good Neighbors?: How Fannie Mae, Freddie Mac and HUD are Selling Off Our Neighborhoods to Wall Street.”
The report states that nearly all of the roughly 130,000 mortgages that HUD has auctioned off since 2012 have been sold to Wall Street hedge funds and private equities firms, which the groups say have a history of “defrauding taxpayers and harming homeowners, tenants and neighborhoods.”
But the Urban Institute report shows that private investors are actually more likely to do more for borrowers than the FHA can, including reducing the principal on their mortgage.
According to the Urban Institute report, the DASP helps to prevent borrowers from going into foreclosure.
“The loans sold are already very delinquent,” Goodman and Magder write.
“Servicers of loans in the DASP pools are required to have exhausted the HUD loss mitigation waterfall, so the loans are otherwise likely to be foreclosed upon,” they continue. “The impact of the program is, therefore, measurably positive for any borrower who is able to obtain a modification or foreclosure alternative as a result of the loan sale.”
Goodman and Magder also write that the DASP encourages investors to pursue foreclosure alternatives.
“For the investor (as for the borrower), foreclosure is the worst financial outcome. And unlike the servicer of a mortgage that remains in the FHA portfolio, the investor will retain the upside financial benefit from achieving an alternative to foreclosure, thus aligning the investors’ and borrowers’ interests,” they write.
“Investors who purchase the loans have a wider range of options for pursuing short sales and implementing loan modifications that better align home values and payments than do servicers acting on behalf of HUD,” they continue. “Importantly, these investors can reduce the loan’s principal. While servicers often pursue other types of loss mitigation before principal reduction, at least some of the loans that are sold can get these mods – an outcome unavailable to loans remaining in HUD’s portfolio.”
The government doesn’t just sell non-performing loans to private investors. Non-profits have also been chosen as the buyers of non-performing loan pools, but Goodman and Magder write that non-profits are limited in what they can do for borrowers.
“While non-profits have a role in helping delinquent borrowers, their limited capital and capacity suggests that their ability to significantly increase their share of DASP loan purchases will be limited in the near-term,” they write.
But there are concerns about selling to private investors, as noted in by the U.S. Conference of Mayors and others, including that private investors are too quick to push borrowers into foreclosure; private investors are making “too much money” from non-performing loan pool sales; and that borrowers would be better served by selling more non-performing loans to non-profits.
But according to Goodman and Magder, those fears are unfounded.
“In aggregate, the loan sales programs are a win for all parties, including the borrowers,” they write. “There is no question that there have been servicing abuses in the past and current servicing is not perfect. But the data show that the loans sales are producing far better outcomes for borrowers than foreclosure in the absence of the DASP.”
And as for non-profits, Goodman and Magder again question their ability to operate at a larger scale due to the financial burden that would be placed on them.
But Goodman and Magder note that the DASP is not without its issues, writing that some changes are necessary.
“In particular, the DASP program should be refined to ensure that investors cannot walk away from the most distressed properties, burdening municipalities and neighbors,” they write.
“We also urge HUD to collect and publicly release data to provide more transparency on the amount and types of foreclosure alternatives that investors provide,” they continue.
“Better disclosure will not only help all parties more accurately evaluate the impact of the program, but should also pressure servicers who are less borrower-friendly,” they write. “Finally, we support increasing and deepening partnerships between investors and non-profits to work with delinquent borrowers to resolve the non-performing loans.”
May 24, 2010
The Federal Deposit Insurance Corp. (FDIC) sold $233m in notes backed by performing and non-performing commercial real estate loans from 22 financial institutions under receivership. The underlying mortgages bear an aggregate unpaid principal balance of $1bn. The FDIC was appointed receiver during the period from August 2008 to March 2009. The notes were originally issued in January 2010 to the FDIC as receiver, in connection with the creation of a limited liability company (LLC) to hold the assets. The $222m in proceeds generated from the sale of the notes will go to the respective failed bank receiverships. That way, the sale of the notes will increase recoveries for the receiverships and recover funds for the FDIC’s Deposit Insurance Fund. The timely payment on the notes is guaranteed by the FDIC, which still retains its 60% equity interest in the LLC. ColFin DB Funding, formed by entities affiliated with Colony Capital, still owns the 40% equity interest sold to it by the FDIC in January 2010. Barclays Capital served as the sole bookrunner, restructuring agent, and financial advisor to the FDIC on the sale of Structured Sale Guaranteed Notes (SSGN 2010-L3):
The sale features three classes of notes with maturities of approximately 1.6 years, 2.6 years, and 3.6 years from the closing date, according to a statement on the transaction’s structure. The Class A1 worth $58.1m priced at 98.19% to yield approximately 1.12% per annum with maturity of Jan. 7, 2012. The Class A2 notes worth $117m priced at 95.73% to yield approximately 1.66% per annum with maturity of Jan. 7, 2013. The Class A3 notes worth $58m priced at 92.32% to yield approximately 2.21% per annum with maturity of Jan. 7, 2014. The notes do not accrue interest or make payments prior to maturity. Instead, they are sold at a discount to their principal balance, allowing investors to earn the difference between the sale price and the principal balance paid at maturity. The latest sale marks the fourth sale of structured notes by the FDIC since the early 1990s, and the fourth sale of FDIC-guaranteed debt backed by the full faith and credit of the US government.