This story was co-published with The Atlantic.
Julius Uwansc was in trouble with his mortgage after refinancing in 2009, just after the real estate bubble popped. Like millions of others, he found himself owing more on his house than it was worth.
The Nigerian-born father of four moved into his house on Richardson Road in Gwynn Oak, Maryland, in 2005. “We loved it because it has this big yard where the kids can play,” Uwansc says.
But soon after closing on the loan, Uwansc began having trouble making payments. He believed he had worked out a loan modification with Bank of America in 2011 after signing paperwork, but the bank disputed the terms Uwansc thought he had secured. When he didn’t pay the amount the bank said he owed, it claimed he was in default.
Uwansc’s mortgage was insured by the Federal Housing Administration, meaning if he failed to make payments, the bank would typically be paid the full value of what was left of the mortgage, plus costs associated with servicing the debt.
Bank of America filed for a claim and received payment. The mortgage was then transferred to the Department of Housing and Urban Development, which oversees the FHA.
Normally at this point, instead of taking over the mortgage, HUD regulations would require the bank to work with the borrower during a pre-foreclosure stage. If there’s no way to keep the homeowner in the home, HUD shepherds the property through the foreclosure process.
But not in this case.
Seven years after the real estate market crashed and took the economy down with it, major investors are again buying mortgages by the thousands. But instead of dealing with shady subprime lenders, they are buying many of those same shaky loans from the government — at a significant discount.
(Update, Sept. 29, 2015, 2:52 p.m.: Winning bids have been placed by hedge funds sponsored by Angelo, Gordon & Co., Ellington Management Group and One William Street Capital as well as other private equity backed investors,” according to published reports.)
It was a great deal for Oaktree. The fund bought the pool of mortgages for about two-thirds of the $105.7 million HUD estimated the homes were worth. Uwansc, who now faces foreclosure through the new servicer of the loan, Selene Finance, was unaware that any of this had transpired.
“Whatever deal that went on between Bank of America, Selene and HUD is not known to me,” he says. Uwansc maintains he has complied with the terms of his modification and has filed lawsuits against both Bank of America and Selene.
HUD has sold thousands of mortgages this way. The idea is to shore up FHA’s hemorrhaging finances and give borrowers some breathing room to work things out with a new mortgage-holder so the loans will start “re-performing,” as HUD puts it.
But some housing advocates claim that only the first goal seems to have been met. They claim that HUD, tasked with creating strong communities and affordable housing, is instead primarily facilitating a massive wealth transfer, with thousands of homes going from distressed borrowers to wealthy investors simply looking to profit. Fannie Mae and Freddie Mac, who together with HUD directly or indirectly insure 70 percent of the country’s mortgages, began similar sales this summer.
In 2010, HUD launched the mortgage sales program — now known as the Distressed Asset Stabilization Program, or DASP — under intense pressure from Congress to improve its finances. HUD can’t reduce the principal owed on mortgages it holds for homeowners, but it can sell the mortgages in bulk to investors at a steep discount — at times as little as 41 percent of the mortgages’ collective value.
The agency, through the FHA, insures loans to lower-income and first-time homebuyers. During the 2008 financial crisis and subsequent recession, many of those homeowners fell behind on their mortgage payments and foreclosures loomed.
Meanwhile, the FHA, due to an onslaught of claims, was desperately in need of a funding infusion.
The DASP program has a dual purpose: to lessen the impact of FHA insurance claims on defaulted mortgages on HUD’s finances, and according to a statement in April by Genger Charles, then the acting commissioner of HUD’s Office of Housing, to provide borrowers “a second chance at avoiding foreclosure.” Through DASP, lenders cash in on an FHA insurance claim on mortgages that are at least six months delinquent and HUD takes ownership of the mortgages. HUD then sells those mortgages to the highest bidder in bulk auctions.
Over 98,000 loans have been funneled through the DASP system since it began in 2010, with mortgages amounting to more than $16.7 billion in total debt.
The sales have helped the FHA insurance fund become solvent. According to an analysis of HUD’s sales results by the Center for Public Integrity, buyers have paid HUD $11.2 billion over the course of these auctions. The fund currently holds $4.8 billion, after being $16 billion in the red two years ago.
But when it comes to helping homeowners avoid foreclosure, the results are unimpressive. The program, it was hoped, would help homeowners because the investors who bought the loans were expected to offer better terms to borrowers. As part of the initiative, HUD included a stipulation that buyers must wait six months (it has since been bumped up to a full year) to foreclose to allow borrowers a chance to work with their new creditors.
“Once we sell [the mortgage] for something less than the principal balance,” explains HUD spokesperson Brian Sullivan, the lender “has more room to work with the homeowner.”
But the new owners of these mortgages are more likely to flip the homes for a profit or take advantage of the booming rental market, say some advocates. The transactions may make good financial sense, but they can leave struggling homeowners like Julius Uwansc in the dark, and in some cases on the streets.
“The investors are there to make money,” says Diane Cippolone, a mortgage servicing consultant to the National Fair Housing Alliance, a nonprofit organization. “They are not there to do neighborhood revitalization or neighborhood stabilization.
A quarterly report on the program from 2014 reported that 11 percent of borrowers were making payments — meaning the homeowners were still in their homes — after their mortgage was sold through DASP. HUD calls these loans “re-performing.”
But even that paltry success rate is questionable. The definition of “re-performing” is “fairly loose,” says Geoffry Walsh, a staff attorney at the National Consumer Law Center. As HUD defines it, re-performing means payments were received for six months after the sale. “It doesn’t mean that anybody determined what is affordable to the homeowner, just that the buyer was able to extract six monthly payments from the borrower,” he continues.
HUD’s post-sale reports show that 6,427 mortgages, or 16.9 percent of those sold between 2010 and 2013, have successfully avoided foreclosure. But this includes third-party sales or other methods that still result in a homeowner ending up without a home. Only 5.4 percent of the loans sold during that same period were performing.
The amount of principal reductions actually offered to homeowners under the program by the new mortgage owners is unknown. HUD does not require new servicers to report the types of loan modifications given, and it did not respond to questions about reporting requirements.
HUD points to dramatic declines in FHA foreclosures as evidence that the market may be returning to pre-crisis stability. But by selling loans right before the foreclosure process begins, Daren Blomquist, the vice president of RealtyTrac, says HUD may be using DASP to create “ghost inventories” where foreclosures are still likely—they just aren’t immediately visible on the record books.
“This process of selling loans, aside from whether it’s working, it has the added bonus of making the foreclosure numbers look better in the short term,” says Blomquist.
FHA’s insurance fund was depleted when millions of homeowners defaulted on their mortgages during the recent recession. Meanwhile, Wall Street investors developed a thirst for non-performing loans, and DASP was an opportunity to unload mortgages while satisfying that thirst.
These non-performing loans appeal to investors because they are bought at a steep discount.
“There’s a substantial amount of profit to be made whether you go to resell those homes, or take a more humanistic approach and convert these loans to performing,” said Jack McCabe, who consults with investors on the real estate market.
In a February, 2014 report for the Federal Reserve Bank of San Francisco, FHA Commissioner Carole Galante calls DASP “a win-win-win situation for all involved”: The FHA washes its hands of bad mortgages, the investor gets a valuable asset, and homeowners stand to benefit from more affordable loan terms from the new buyer.
But consider the December 2013 sale of Julius Uwansc’s mortgage. Oaktree paid $68.6 million for the 803 Baltimore mortgages, about 65 percent of the $105.7 million HUD says they were worth. That means even if the company doesn’t collect a dime on any of the mortgages, even after legal fees and other expenses, it can more than make its money back by foreclosing and selling the homes. (Oaktree declined to comment on the outcomes of loans bought through DASP.)
Many of the loans sold through DASP are indeed close to foreclosure, and many have already started the process. But HUD apparently thought it had put some brakes on the incentive to quickly foreclose and sell the homes with that stipulation that buyers wait six months to foreclose and try to work things out with the borrowers.
Depending on secrecy
FHA loans by law offer extra protections against foreclosure. In order to obtain that FHA insurance, a loan servicer, the company that collects payments and administers the loan, must make a series of efforts to modify loan terms to help owners keep their homes.
A lender can file a claim and turn the loan over to HUD for sale only when all these efforts have failed. The loans in DASP, according to HUD spokesman Sullivan, “are all headed to foreclosure — 100 percent of them — because they’ve exhausted their loss-mitigation options.”
But legal advocates and several borrowers say they have seen otherwise. The original lender reports that they’ve taken all the necessary steps, and HUD essentially takes their word for it, says the NCLC’s Geoff Walsh. “We’re hearing from a lot of homeowners that were still involved in loss mitigation,” he says, and could avoid foreclosure through normal FHA pathways.
Uwansc says he had no idea his mortgage was up for sale. Walsh says, “The program depends on secrecy. The program depends on the homeowner not knowing that their loan is being sold.”
Walsh says if borrowers are notified that their loan may be sold they can advocate for better terms under FHA protection, before the sale to new creditors without such stipulations. So far, he adds, HUD has rebuffed requests that borrowers be informed of their position before the sale.
The history of Uwansc’s loan intertwines with the confusion that followed the financial collapses of 2008. After refinancing in 2009, Uwansc’s lender was Countrywide Financial, the nation’s largest subprime lender at the time. Countrywide was bought by Bank of America, which assumed its loan portfolio.
Bank of America approved Uwansc for a trial loan modification in 2011, but the bank disputed its validity. An offer of a permanent loan modification claimed he was in default, despite the fact he never missed a payment during the trial period, Uwansc said. Bank of America declined to comment on the case, but says in court documents he signed the loan modification paperwork but with alterations, making the contract invalid. He was able to make payments during the trial period under the new terms. The bank, however, held him responsible for the original mortgage terms, and claimed he owed as much as $37,000. Meanwhile, a letter from Bank of America’s “Office of the CEO and President” assured Uwansc he was current with his payments and explained that notices of debt were standard procedure that would be corrected once his modification was finalized.
Uwansc says he doesn’t remember altering the first contract, but the bank sent another set of documents, still claiming Uwansc had defaulted on the his mortgage. Despite the default language, he signed the contract. Bank of America acknowledges receiving the signed agreement needed to finalize the modification, this time with no alterations. A few months later, Uwansc’s mortgage ended up on HUD’s auction block for distressed loans, even though Uwansc and people inside Bank of America thought it was current.
Months after that, Uwansc’s loan was sold through DASP to DC Residential IV, a fund created by the hedge fund manager Oaktree Capital to buy loans from HUD. The servicer hired to collect payments is Selene Finance, whose investors include Lewis Ranieri, one of the pioneers of mortgage securitization.
Selene treated the Uwansc mortgage as in default, and Uwansc alleges in a complaint against Selene in a Maryland Circuit Court that it “continued to threaten him with foreclosure and it never conducted any reasonable investigation” into the mortgage.
“The first discussion that took place between me and Selene wasn’t cordial at all,” says Uwansc. “They didn’t want to hear from me. All they wanted to know was when I was going to pay…. I knew from the word go that I have not defaulted in any way.”
Selene declined to comment for this article. In sworn testimony a representative said Selene was unaware of the loan modification, but paperwork presented in that same testimony showed Uwansc made Selene aware of the issue as early as March 6, 2014.
In the lawsuit, Uwansc explained how he wrote to Selene to formally request that it correct its records and included a copy of his final modification as proof that he had, in fact, been making the payments required.
Selene never recognized the modification and, operating off the terms of his original mortgage from 2009, stopped accepting his payments in December of 2014 and notified him of its intent to foreclose if his family didn’t pay the entire balance of his loan plus interest and fees, adding up to as much as $217,479. Uwansc’s lawsuits against Bank of America and Selene are still pending, but if Selene succeeds in foreclosing, Oaktree will own a home that was valued at $250,000 in 2009.
‘The right solutions’
HUD has announced changes to its latest rounds of sales meant to address criticism from consumer advocates. In addition to requiring new servicers to evaluate borrowers for modification programs similar to those offered by the government, HUD says it will also strengthen the requirements for loans sold through pools specifically targeted to help neighborhoods with a rash of foreclosures. HUD will also offer smaller pools to incentivize more nonprofits to buy in. Currently just 2 percent of the mortgages sold through DASP have gone to nonprofits. Buyers must now wait one year to complete the foreclosure process on newly acquired loans, double the six-month moratorium in place from 2010-2014.
“These changes reflect our desire to make improvements that encourage investors to work with delinquent borrowers to find the right solutions for dealing with the potential loss of their home,” explained Charles, the temporary FHA chief at the time.
Servicers flocking to DASP, however, have many tools to meet HUD’s re-performing benchmarks and still ensure a quick foreclosure once the one-year waiting period is over. Phillip Robinson is a lawyer with the Maryland Consumer Law Center and represents Julius Uwansc. Robinson says other clients have been offered loan modifications with the provision that they offer interior inspections of the home, something Robinson says he has only seen with loans sold through DASP. “The reason they want interior inspection is that they want to get an idea if they can make money off foreclosing,” says Robinson. “They’re not looking to modify and certainly not looking to do principal reductions.”
Other loan modification offers made by servicers on behalf of DASP buyers look like a good deal for homeowners looking for smaller payments immediately, but dig a hole too large to climb out once a trial payment period is over. Many modification offers from DASP buyers create a large “balloon payment” due after the trial period while permanent changes are under consideration, or are contingent on an up-front payment, a practice which wouldn’t be allowed if the mortgages were still under the protection of FHA regulations.
Diane Cippalone has collected about 20 examples of these modifications. “Its completely unrealistic to ask someone who’s had a financial mishap to think that they could have in the meantime saved thousands of dollars to pay the up-front amounts to the servicers,” Cippalone says.
No help from HUD
That’s the kind of modification offered to Sandy Lopaz.
Lopaz bought her home in Cinnaminson, New Jersey, in 1987, and refinanced in 2008. She lost her job later the next year and asked Chase Home Finance for a loan modification.
Around this time, both Lopaz’s parents were in failing health. Her daughter was suffering through a “mystery diagnosis” that took three years to sort out. Under these circumstances, Lopaz filed for bankruptcy in 2011. In a letter to the Consumer Financial Protection Bureau, Lopaz says Chase didn’t pursue foreclosure because they couldn’t prove they owned her mortgage at the time. She wrote a letter to HUD detailing the problems with her mortgage to that point, asking them to hold off on paying an FHA claim until the issues were resolved. “I applied for a dozen modifications, and begged HUD to investigate,” she says.
Chase sent Lopaz a notice of foreclosure in 2012, but later gave the mortgage to HUD in exchange for a $190,356.49 insurance claim. On October 30, 2013 HUD auctioned her mortgage through DASP. LVS Title Trust I, a fund started by PIMCO but administered by US Bank, placed the winning bid. Her new servicer, BSI, denied Lopaz’s requests for loan modifications that would include principal reductions.
US Bank filed for foreclosure in June and then in September offered Lopaz a modification. A New Jersey court held a mediation session with Lopaz and the law firm handling her foreclosure case by phone. A summary of that conversation, prepared by a court officer, says the new plan would lead to a balloon payment of over $70,000. “That’s financial suicide,” says Lopaz. “I want to save my home, I don’t want to make a few payments then go into foreclosure again.” She rejected the offer.
Her mortgage was sold to a new trust in March, MART Legal Trust 2015-NPL1, with UMB Bank as a trustee. BSI still services the loan, and according to emails from that company as recently as April, Lopaz still faces an open foreclosure case. BSI said it could not comment on specific mortgages without a release waiver signed. Lopaz signed the waiver, but BSI has yet to respond to requests for an interview.
“I put my kitchen cabinets together from kits when I was eight months pregnant,” Lopaz says. “I know I paid so much more than these people and they are trying to paint me out to be the deadbeat.”
The tip of the iceberg
While Lopaz waits for another day in foreclosure court, HUD continues selling non-performing loans. Their latest round of bidding on July 16, HUD put 7,837 mortgages up for auction with an unpaid principal balance of over $1.37 billion. Fannie Mae and Freddie Mac, two government entities that hold the rights to many more mortgages, have also begun similar programs. Fannie Mae announced the winners of its latest bid on August 20. The highest bidders bought $767 million in unpaid mortgages, about 3,900 loans. Freddie Mac announced a similar sale, $591 million in mortgages totaling 3,577, in July, following a larger sale in March.
“The goal of non-performing loans sales is to be able to offer borrowers additional options to avoid foreclosure, while also reducing the number of seriously delinquent loans in Fannie Mae’s portfolio,” Joy Cianci, Fannie Mae’s senior vice president for credit portfolio management explained in the announcement. The justification for these sales is similar to HUD’s own reasoning that offers no real help to homeowners like Julius Uwansc.
Some legal experts say the requirements for these sales are stricter than the HUD auctions. Considering Fannie Mae and Freddie Mac guarantee nearly half the country’s single family mortgages as of 2014, the sales represent an opportunity for investors to grab an even larger share of the housing market.“This is becoming a significant force in the mortgage market,” Steven Sharpe, an attorney with the Legal Aid Society of Southwest Ohio.
Sharpe says HUD has two obligations. “One is to strengthen homeownership, and two is to do so in a way that bears in mind the fund.” For that reason, housing advocates say programs like DASP need to make sure borrowers voices are heard before, and that mortgage lenders are held accountable after the sale. As Sharpe puts it, “avoiding unnecessary foreclosures is good for everyone.”
Alison Fitzgerald contributed to this report.
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