Some Americans were left worse off after their mortgages were sold to private-equity firms by the Department of Housing and Urban Development.
That’s according to a report released by the U.S. Government Accountability Office, which this month released a new analysis of HUD’s Distress Asset Stabilization Program. That program has overseen the sale of roughly 111,000 loans insured by the Federal Housing Administration, which were valued at around $19 billion, between 2010 and 2016.
“The GAO’s report shows that HUD had no rules in place to ensure that the sales would help homeowners, and in fact, the GAO’s data show that homeowners lost out while private equity companies gained,” said Geoff Walsh, a staff attorney with the National Consumer Law Center, in a statement following the report’s release.
The loans, which were in default at the time of the various auctions run by HUD, were auctioned off in bulk sales. The buyers of the loans were largely comprised of private-equity firms and hedge funds.
In more recent years, however, the FHA altered the program to sell a greater number of loans to nonprofits in addition to private-equity firms and hedge funds. The logic behind this move: Nonprofits are more interested in keeping people in their homes, consumer advocates say. What’s more, studies show foreclosures can hurt house prices in the community.
The federal government’s program is intended to reduce the effect they could have on the HUD’s insurance fund if the loans went into foreclosure.
The GAO found that these loan sales generally don’t benefit the homeowners whose mortgages are being auctioned off. Overall, the sold loans were more likely to experience foreclosure than defaulted loans that the FHA did not sell off. Notably, the GAO pointed out that the FHA doesn’t evaluate the outcomes for sold loans in this manner.
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The National Consumer Law Center has previously criticized the department’s loan-sale program as benefiting mortgage servicers and private-equity firms at the expense of homeowners.
HUD did not return a request for comment on the GAO’s findings.
Whether or not a loan went into foreclosure largely depended on who bought it. Some purchasers’ loans were far more likely to go into foreclosure than others. Another concern for borrowers: The loss-mitigation options the purchasers make available to borrowers can vary widely, while the FHA’s are more consistent.
The National Consumer Law Center warned that, once loans are sold, the borrowers lose their rights to certain protections afforded by the FHA to help them avoid foreclosure. The GAO’s report notes that changes the FHA made to eligibility criteria led to an increased likelihood that a sold loan was located in a state with a longer foreclosure process, such as New York or Illinois.
“HUD’s policy specifically undermines mediation programs and other consumer protections built into state foreclosure laws, programs proven to help borrowers avoid foreclosure and investors retain performing loans,” Walsh argued.
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Additionally, the GAO’s examination found that around 2.67% of the loans the department sold did not meet its established eligibility criteria. These loans were ineligible for many reasons — some were not delinquent long enough or involved in a bankruptcy, while others were undergoing loss mitigation and should have remained under FHA protection.
HUD relies on loan servicers to verify eligibility. But as the GAO notes, delinquency can be fluid, so these loans’ status could have changed in the time between a servicer identified them as eligible and when they were sold.
The GAO’s report provided nine recommendations for how HUD could improve its loan-sale program, including by evaluating loan performance after they are sold and reviewing eligibility criteria and the process by which loans are chosen for sale.