Crit­ics fault HUD’s sales of delin­quent mort­gages

Baltimore Sun - - FRONT PAGE - By Natalie Sher­man

The fed­eral gov­ern­ment has sold thou­sands of delin­quent Mary­land mort­gages to pri­vate in­vestors through a con­tro­ver­sial pro­gram that crit­ics ar­gue hurts home­own­ers and con­trib­utes to Bal­ti­more’s va­cancy prob­lem.

Nowthey’re mount­ing a cam­paign to try to change the pro­gram es­tab­lished by the U.S. De­part­ment of Hous­ing and Ur­ban De­vel­op­ment in 2010 partly to get bad fed­er­ally in­sured loans off the gov­ern­ment’s books.

Crit­ics say the buy­ers, who pur­chased the mort­gages at steep dis­counts off the un­paid bal­ances, aren’t us­ing those dis­counts to be more flex­i­ble with home­own­ers, as the pro­gram also in­tended.

In­stead, ad­vo­cates say, the buy­ers are fore­clos­ing on home­own­ers or of­fer­ing new mort­gages that add decades to mort­gage terms and re­quire bor­row­ers to make bal­loon pay­ments at the end of those terms to cover missed pay­ments and penal­ties.

“We’re sup­posed to be ad­dress­ing the is­sue of these loans rather than adding to the prob­lem,” said in­com­ing City Coun­cil­man John Bul­lock at a news con­fer­ence about the pro­gram at City Hall on Wed­nes­day. “We have enough va­cant houses in Bal­ti­more.”

Since 2010, HUD has sold about 105,000

loans na­tion­wide through what is known as the Dis­tressed As­set Sales Pro­gram, or DASP. In Mary­land, about 3,800 loans worth more than $845 mil­lion have been sold, ac­cord­ing to a re­port is­sued in Jan­uary.

The pro­gram is con­sid­ered a last resort for deal­ing with thou­sands of de­faulted, fed­er­ally in­sured mort­gages for which banks have ex­hausted other op­tions for home­own­ers and turned to HUD for re­lief. Af­ter pay­ing off the lender, HUD re­sells the loans at a dis­count to in­vestors.

Many of the loans sold are very delin­quent, an av­er­age of 28 months be­hind on pay­ments, ac­cord­ing to an Oc­to­ber HUD re­port.

But con­sumer ad­vo­cates worry that some loans were sold with­out banks and mort­gage ser­vicers go­ing through all the steps re­quired by the Fed­eral Hous­ing Ad­min­is­tra­tion to help home­own­ers ad­dress their FHA-in­sured mort­gage debt.

And they ar­gue that the new mort­gage own­ers are not re­cep­tive to home­own­ers’ re­quests for mod­i­fi­ca­tions, even though they ac­quired the loans at dis­counts of 40 per­cent or more, ac­cord­ing to HUD.

“They’re not get­ting any answers from their ser­vicers, and then the loan is sold into DASP, and it’s only down­hill from there,” said Phillip Robinson, an at­tor­ney with the Con­sumer Law Cen­ter in Mont­gomery County, one of those who has raised concerns about the pro­gram.

Michelle Pat­ter­son, 49, is one of the home­own­ers whose loan was sold through DASP about two years ago. She pur­chased her home in North­east Bal­ti­more in 2010 for $89,000, but fell be­hind on the mort­gage af­ter a car ac­ci­dent in 2011 forced her to stop work­ing tem­po­rar­ily, she said.

Pat­ter­son, now back on her feet and work­ing, said her fam­ily can af­ford to make monthly pay­ments, but ef­forts to mod­ify the loan were re­buffed in a seem­ingly end­less ex­change of pa­per­work. This month she re­ceived a no­tice say­ing she must leave her house Nov. 28 af­ter a fore­clo­sure.

“We can af­ford the mort­gage. That’s not the prob­lem,” Pat­ter­son said. “If you’re work­ing, you’re mak­ing the money, you’re sup- Michelle Pat­ter­son, who has to leave her home by Nov. 28, says, “We can af­ford the mort­gage. That’s not the prob­lem. If you’re work­ing, you’re mak­ing the money, you’re sup­posed to be able to stay in your home.” posed to be able to stay in your home.”

While 79 per­cent of the loans sold through DASP were for homes oc­cu­pied at the time of the auc­tion, fewer than 8,000 bor­row­ers re­main in their homes, ac­cord­ing to HUD’s Oc­to­ber re­port. About 37 per­cent of the loans went to fore­clo­sure, while another 33 per­cent re­main in delin­quent ser­vic­ing.

HUD spokesman Brian Sul­li­van said those home­own­ers would not be in their homes with­out the sales pro­gram.

An Ur­ban In­sti­tute anal­y­sis of the pro­gram called it a “win-win,” say­ing it im­proved chances for bor­row­ers, while re­duc­ing costs for the fed­eral gov­ern­ment. Fore­clo­sure is costly to the new mort­gage hold­ers, and a short sale or loan mod­i­fi­ca­tion is typ­i­cally the more cost-ef­fec­tive route, even for in­vestors, the anal­y­sis found.

“With­out ques­tion, there have been ser­vic­ing abuses in the past, and cur­rent ser­vic­ing is im­per­fect. But the data show that bor­rower out­comes are far bet­ter un­der the non­per­form­ing loan sales than they would be with­out these pro­grams,” the re­searchers, Lau­rie Good­man of the Ur­ban In­sti­tute and Dan Magder of Cen­ter Creek Cap­i­tal Group, wrote in the re­port, pub­lished in Jan­uary.

Good­man and Magder called many of the cri­tiques of DASP too sim­plis­tic.

“We must rec­og­nize that many of these bor­row­ers sim­ply can no longer af­ford their homes be­cause of job loss, in­come re­duc­tion, or hav­ing taken on an overly am­bi­tious loan,” they wrote.

HUD has tried to ad­dress the concerns. In June, it an­nounced a series of pro­gram changes de­signed to en­cour­age re­duc­tions in prin­ci­pal, pro­hibit pur­chasers from walk­ing away from homes and al­low more loans to be pur­chased by non­prof­its.

“We’ve heard the crit­i­cisms loud and clear,” HUD’s Sul­li­van said. “But lest there be any con­fu­sion — had it not been for this note sales pro­gram, thou­sands of fam­i­lies wouldn’t be in their homes today.”

Con­sumer ad­vo­cates are mov­ing to pres­sure in­vestors di­rectly.

Rep­re­sen­ta­tives from the Unite Here union, which rep­re­sents work­ers in the ho­tel and other in­dus­tries, have trav­eled with home­own­ers to four states to tes­tify at meet­ings of pub­lic pen­sion funds to raise aware­ness of the prac­tices of com­pa­nies in­volved in the pro­gram.

They in­tend to speak at a meet­ing of Mary­land’s State Re­tire­ment and Pen­sion Sys­tem today.

In ad­vance of the meet­ing, the union is­sued a re­port fo­cused on Oak­tree Cap­i­tal Man­age­ment, a Los An­ge­les-based in­vest­ment com­pany that has pur­chased nearly 4,800 loans through the pro­gram, in­clud­ing hun­dreds in the Bal­ti­more area. (Oak­tree also owns nearly 15 per­cent of The Bal­ti­more Sun’s par­ent com­pany.)

About 40 per­cent of Bal­ti­more­area loans tied to Oak­tree re­sulted in fore­clo­sures, ac­cord­ing to the union re­port, cit­ing HUD data for a 2013 sale. Oak­tree mod­i­fied about 14 per­cent of the loans, but did not change the prin­ci­pal on any of them — un­like other firms, ac­cord­ing to the re­port.

Vis­its by union rep­re­sen­ta­tives to 320 homes in the Bal­ti­more area linked to the mort­gages pur­chased by Oak­tree found that 45 per­cent were va­cant.

Of­fi­cials at Oak­tree de­clined to be in­ter­viewed.

But in a writ­ten state­ment, the firm dis­puted the union’s facts, say­ing it has for­given up to $4.5 mil­lion in prin­ci­pal on 44 loans in the Bal­ti­more area. The firm is also in the process of sell­ing more than 150 fore­closed homes “at a loss” to a com­mu­nity hous­ing or­ga­ni­za­tion that will put the houses back in use, it said.

“The truth is that Oak­tree is in full com­pli­ance with HUD’s [neigh­bor­hood sta­bi­liza­tion out­come] pro­gram and ex­pects to re­main so. The Oak­tree-man­aged funds that pur­chased the HUD loans in the Bal­ti­more area are pur­su­ing home re­ten­tion first in all cases,” the firm said.

“HUD was seek­ing part­ners ca­pa­ble of in­ject­ing new cap­i­tal and ex­per­tise into these dif­fi­cult sit­u­a­tions and help­ing bor­row­ers re­tain their homes, and we’re proud to have been able to do so.”

Eileen O’Grady, a Bal­ti­more­based an­a­lyst for Unite Here, said she’s aware of Oak­tree’s claims but has been un­able to ver­ify the num­bers in­de­pen­dently through HUD.

Mem­bers of the in­com­ing City Coun­cil, in­clud­ing Bul­lock, Mary Pat Clarke and Zeke Co­hen, called on Wed­nes­day for Oak­tree of­fi­cials to at­tend a hear­ing in Bal­ti­more on the firm’s man­age­ment of the pro­gram.

Rep. Eli­jah Cum­mings, who has pressed HUD for changes to DASP, also sent a let­ter to Oak­tree in re­sponse to the re­port. He said in a state­ment that he found the Unite Here re­search “dev­as­tat­ing and shock­ing to the con­science.”

“It is un­con­scionable that a pro­gram meant to help fam­i­lies stay in their homes ap­par­ently is be­ing used to evict them, and I will do every­thing in my power to get to the bot­tom of this and en­sure they are made whole,” he said.

Unite Here and the hous­ing ad­vo­cacy coali­tion Bal­ti­more Hous­ing Roundtable want to con­vince the city to par­tic­i­pate in the DASP sales or back non­prof­its will­ing to bid on the loans, pos­si­bly through a land bank or another tool.

“We think this is some­thing the city could be proac­tive on,” said Peter Sabo­nis, an at­tor­ney and mem­ber of the hous­ing roundtable coali­tion.

Pat­ter­son is now work­ing with Le­gal Aid to try to post­pone her evic­tion by Oak­tree, but she has given up hope that she can stay in her house, which she said she and her hus­band spent thou­sands to fix up.

On a re­cent week­day, bags packed with toys and other be­long­ings filled the liv­ing room. Pat­ter­son said she’s look­ing at fil­ing bank­ruptcy to try to clear the debt and she’s not sure where the fam­ily will go.

“I ac­cept the fact that I have to move,” Pat­ter­son said.

“I just hope no­body else has to go through any­thing like this.”


Michelle Pat­ter­son, who fell be­hind on mort­gage pay­ments af­ter an ac­ci­dent, is pic­tured at her home, which is be­ing fore­closed. The mort­gage com­pany did not work with her to re­fi­nance the mort­gage or make other ar­range­ments.


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