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. Under a special government program, in December 2013, HUD sold Uwansc’s mortgage along with 802 others to a fund created by Oaktree Capital, a hedge fund.
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.
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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.