After learning that his home was in foreclosure in July 2013, James Cheeseman received an even more unpleasant surprise when he showed up in court the following January. He was told that his mortgage loan had been sold by JP Morgan Chase and purchased by a company he had never heard of before - LVS Financial.
Cheeseman had already applied for a loan modification from Chase and says he was still awaiting a response when the loan sale occurred - a move that he and his attorney argue violates New York State foreclosure laws. Cheeseman says that the new servicer, BSI Financial, then required him to fill out a whole new loan modification application. In mid-September, he learned that he had been denied.
Though he is asking the court for another shot at a modification, this curveball has caused considerable distress for Cheeseman, 47, and his mother Constance, 75, who have resided in the New York home that they co-own for five years.
"I was shocked; I thought that [the resale of bundles of bad loans] was over," he says. "That's what got the country into trouble in the 2008 [mortgage crisis]. But lo and behold, it's still going on."
Legal advocates, however, say that significant abuses by servicers may already have taken place.
In fact, the Cheesemans and their attorney believe that the sale of their loan was part of a recently expanded federal program ostensibly intended to provide relief to homeowners on the brink of foreclosure. Though foreclosure rates have been falling nationwide, 2 million homeowners are still behind on their mortgages and headed for foreclosure and another 10 million are underwater on their mortgages and at risk of the same in the future. About half a million of those seriously delinquent loans are insured by the Federal Housing Administration (FHA), representing a drain on the agency's taxpayer-backed insurance fund.
In 2012, the FHA expanded a program to auction off pools of "nonperforming loans" - those on which homeowners are at least six months delinquent on their mortgage payments - to both for-profit and nonprofit bidders. To date, nearly 100,000 loans have been sold through the Distressed Asset Stabilization Program (DASP), bringing $8.8 billion into the FHA's coffers. The agency asserts that the program can also help reduce foreclosures, as private loan-buyers not hemmed in by the same restrictions as the government agency should be able to pursue a wider range of avenues to keep residents in their homes.
Perhaps the most troubling aspect of DASP is where loans sold through it are ending up. HUD's own data reveals that 98 percent of these loans were purchased by private investors.
But citing stories like Cheeseman's, some housing-rights organizations are telling a different story about DASP. They contest that the program has deepened the pain of homeowners and tenants by handing their fates over to hedge funds and investment groups that often have no interest in pursuing loan modifications or other options that would allow residents to remain in their homes. On September 9, community groups in more than 10 cities nationwide protested at local offices of the US Department of Housing and Urban Development (HUD), which oversees the FHA and DASP. Noting that, by HUD's own numbers, private investors - including private equity firms, hedge funds, specialty servicers and single-family rental companies - have won bids on close to 98 percent of all loans auctioned through DASP, many housing advocates are calling for a halt to the program until it can be overhauled.
Asked about criticisms of DASP, HUD told Truthout that it is exploring several changes to the program. But on September 30, the FHA proceeded with the sale of another pools of loans totaling $2.3 billion in unpaid principal balances.
The Devil's in the Details
HUD did not release data on DASP to the public until August, though housing advocates have for some time been requesting information on the program's outcomes. In its first report on DASP, HUD concluded that the loan-sales program has "met its intention" of mitigating losses to the FHA, thereby minimizing risks to taxpayers. The agency touts sales made through DASP as a way to stabilize its taxpayer-backed insurance fund, which, following losses of more than $50 billion on mortgages it insures, required a federal subsidy of $1.7 billion for the first time in its 80-year history. HUD projects that in the coming years, DASP and other loss-mitigation strategies will add $5 billion to the FHA's insurance fund.
"By selling homes to private equity giants and vulture capitalists, DASP is fueling the rise of the Wall Street landlord."
The report concludes that DASP may be beneficial for homeowners as well, citing the fact that, while about half of the loans sold had not yet been resolved, of those that had, 34 percent of homeowners were able to avoid foreclosure. In a statement provided to Truthout by HUD, FHA Commissioner Carol Galante said:
We consider the Distressed Assets Sales Program to be very successful in accomplishing what we intended it to do. This program not only achieves significant cost savings for FHA's insurance fund, but offers borrowers a final opportunity to avoid foreclosure, which they wouldn't otherwise have. The results speak for themselves. Based on our initial data, an encouraging share of families are now re-performing and others have achieved a graceful exit from an unsustainable mortgage. It's important to note that all these families would be foreclosed upon if not for this program, which, in one way or another, has offered many of these borrowers another path.
But community groups say that this characterization lumps together dramatically different outcomes for homeowners. A September report released by the community groups Right to the City Alliance and Center for Popular Democracy (CPD) notes that of loans that were counted as having avoided foreclosure, many had been sold to a third party or resulted in a short-sale. Though homeowners were able to avoid foreclosure in 34 percent of loans resolved to date, they were able to gain modifications or otherwise begin making payments again in just 10.9 percent of the resolved cases.
"What we want to see is people being able to stay in their homes. And this category of 'foreclosure avoidance' includes a lot of outcomes in which [they] were absolutely not able to stay in their homes," Connie Razza, CPD's director of strategic research and author of the report, titled "Vulture Capital Hits Home: How HUD is Helping Wall Street and Hurting Our Communities," told Truthout.
Homeowners Claim Abuses
That's not the only bone housing activists have to pick with the program. Only loans that are not eligible for standard FHA loss mitigation - those, that, for example, have failed to qualify for loan modifications or other measures - are supposed to be included in the program. But some legal and housing advocates believe that mortgage servicers, for whom a quick insurance payout may be more attractive than a lengthy foreclosure process, could be flouting this requirement.
"When speculators heat up the market for 'distressed mortgages' they make it harder for anyone who acquires them - whether for profit or nonprofit - to make win-win deals that preserve homeownership and stabilize communities."
For example, James Cheeseman says he was beginning a settlement conference with Chase Bank, a step required under New York law to determine whether a modification, short sale or other alternative agreement can be reached before a lender proceeds with foreclosure, when his attorney learned that his loan had been sold in January. Cheeseman says that he was never notified of the sale - instead, he says, his attorney noticed the change during the discovery phase of the settlement conference.
"Our suspicion is that once [Chase] found out that [the foreclosure] was going to be an extended process, they sold their note," says Cheeseman. "The've been hit with fines for shady practices in the past, but they’re still doing it. But HUD is a government agency - it's like we're paying for those shady practices."
James and Constance Cheeseman's house went into foreclosure in 2013 after James was laid off from his job as an auto claims examiner. He says that he and his mother fell victim to a loan-modification scam at the hands of the Templeton Group, against whom the New York District attorney recently filed a suit over such abuses. But the Cheesemans applied for another modification last year, hopeful that the result would be different, given that James had found work again, and they also had additional income through a renter. They believe that the loan's sale has restricted their options: After purchase by an investor, the Cheesemans' loan was no longer insured by the Federal Housing Administration (FHA), disqualifying them from the federal Home Affordable Modification Program (HAMP). BSI Financial, the loan's new servicer, is attempting to continue with the foreclosure.
Nonprofits have been unsuccessful in buying loans through DASP after being outbid by for-profit competitors.
Banks selling loans to the FHA for auction through DASP receive an insurance payout equal to the unpaid principal balance of the loan. Housing-policy advocates fear that this could create an incentive for mortgage servicers to cut through judicial red tape by simply selling loans to the FHA for auction through DASP. Another report, released in September by the progressive think-tank the Center for American Progress (CAP), notes that roughly 76 percent of the loans auctioned through DASP between 2013 and 2014 were sold off by Bank of America, JP Morgan Chase, or Wells Fargo - three banks that have become notorious for loan-servicing abuses.
"Servicers stand to make out very well from this program," says Sarah Edelman, a researcher at CAP and one of the authors of the report.
HUD tells Truthout that, in response to concerns from CAP and other housing advocates, it has recently changed the process through which it verifies that servicers have fully exhausted loss-mitigations options. Previously, servicers were permitted to self-report that they had completed all the mandatory steps, and HUD program officers conducted checks on a sample of the loans submitted for auction. In advance of the auction on September 30, according to HUD, program officers checked all loans and removed a small number for which loss mitigation records were unclear.
Legal advocates, however, say that significant abuses by servicers may already have taken place. In May, the National Fair Housing Alliance, together with several other consumer and legal-aid organizations, wrote a letter to Commissioner Galante to express concern with "significant servicer noncompliance with HUD loss mitigation protocol" and call for stronger protections for homeowners affected by DASP. The letter detailed several cases in which homeowners had already been accepted for FHA-HAMP modifications and were making trial payments when new servicers stepped in and said they were no longer honoring the modifications. In several cases, like the Cheesemans, homeowners say they received no notice that their loans had been sold.
Under current policy, community organizations that have a real interest in preserving affordable housing often get the least help in acquiring distressed properties.
Vicente and Guadalupe Salgado, residents of Chicago's Albany Park neighborhood, believe they may be one more such case. After the couple fell behind on their mortgage in 2011, they fell victim to a mortgage modification scam and entered foreclosure. Since then, they say that they have applied for FHA loan modifications several times and were awaiting a response in July 2014 when they were contacted by a new servicer, who told them that they had been denied. The Salgados say they were told that they could not apply again unless they could pay one-third of the remaining principle balance up front, which amounted to $22,000.
"If I had that much money, I'd just find a new place to live," says Guadalupe Salgado.
The Salgados were among the homeowners who protested at HUD offices nationwide to call for an end to the resale of FHA loans, and they are seeking a meeting with HUD to try and determine whether the loan was, in fact, sold through DASP.
HUD says that in cases where a loan has been sold through DASP erroneously, the agency is able to return the mortgage note to the original lender and reverse the insurance claim. However, the agency says that this has been discovered in post-sale reviews of records, rather than through complaints by borrowers, and has happened in a very small number of cases.
Rise of the Wall Street Landlord
Perhaps the most troubling aspect of DASP is where loans sold through it are ending up. HUD's own data reveals that 98 percent of these loans were purchased by private investors; just three investment and private-equity firms - Lone Star Funds, Bayview Asset Management, and Serene Investment Partners - won nearly half of all loans.
The market for distressed loans isn't the only asset class to emerge from the ashes of the foreclosure crisis. During the past two years, investors have bought up more than 200,000 mostly foreclosed homes. After scooping up properties at bargain-basement prices, groups such as Invitation Homes, a subsidiary of private-equity giant the Blackstone Group, have built a new industry specializing in the rental of single-family homes, and even begun securitizing tenants' rental payments to sell billions of dollars in "rent-backed securities,"a financial product similar to mortgage-backed securities that taps tenants' rent checks as an income stream for investors.
Critics of DASP worry that the program may, for some investors, amount to little more than another means of acquiring cheap rental properties. At least two DASP buyers also operate single-family-home rental firms. The Blackstone Group - which through its subsidiary Invitation Homes is now the largest owner of single-family homes nationwide - owns a controlling stake in Bayview Asset Management, which has won nearly 20,000 loans through DASP.
"By selling homes to private equity giants and vulture capitalists, DASP is fueling the rise of the Wall Street landlord," says Kevin Whelan, national campaign director of the National Home Defenders League, which helped coordinate the September protests against DASP.
There's another troubling trend associated with DASP: The accelerating sale of bad loans has helped give rise to a "distressed-mortgage securities market." At least 11 buyers who have won loans through DASP have securitized some or all of the loans purchased through the program, and analysts estimate that investors will trade roughly $60 billion in distressed mortgage assets by the end of 2014, compared with just $25 billion in 2013, according to the report by the Right to the City Alliance and the Center for Popular Democracy. CPD's Razza also notes that firms that securitize distressed loans may be most likely to continue winning them in the future - according to her report, securities have enabled for-profits to bid 15 - 20 percent higher on loans than their competitors.
This trend is undermining DASP's ostensible goal of helping homeowners and "contributing to a new speculative housing bubble," says Whelan, noting that the price of distressed mortgages has been driven upward by investor demand. "When speculators heat up the market for "distressed mortgages" they make it harder for anyone who acquires them - whether for profit or non-profit - to make win-win deals that preserve homeownership and stabilize communities."
Community Groups Left Out
Indeed, though DASP was initially billed as a means of involving more community organizations with a solid track record in foreclosure prevention, nonprofit organizations have won just 2 percent of loans sold through the program, according to the Center for American Progress’ report.
HUD stresses that because all of the loans sold through the program were headed for foreclosure, DASP is a last shot for homeowners to achieve an alternative outcome. But Whelman says this amounts to a "beggars-can't-be-choosers" rationale that does not necessarily bear out. "HUD's own figures show that the vast majority of families whose loans are sold off to investors lose their homes, whether via foreclosures, short sales, or other mechanisms," he says. "But there are nonprofits that can buy these loans that have a track record of keeping more than half the families in deeply distressed loans in their homes."
Several such nonprofits have been unsuccessful in buying loans through DASP after being outbid by for-profit competitors. New Jersey Community Capital (NJCC), a community-development group, has successfully purchased loans in New Jersey and Florida through DASP's "Neighborhood Stabilization Outcome" (NSO) pools, which are area-specific and require that buyers achieve a set of goals that enhance community stability - including reperformance of a loan wherein a borrower is able to begin making payments again, or a property's rental to a borrower - in at least half of loans purchased.
In an email to Truthout, NJCC said that it had been able to modify 45 percent of the loans in owner-occupied homes, a rate much higher than the industry standard. Nevertheless, the organization has been unable to scale up its purchases through DASP - in June, it was outbid on an NSO pool of loans in New Jersey by a for-profit investor. Even in NSO pools, nonprofits have won just 12 percent of loans, but outcomes are slightly better, with nearly 25 percent of residents able to remain in their homes.
NJCC and other nonprofits are calling on HUD to enable the participation of more mission-driven nonprofits, including by expanding the NSO pools, which currently constitute just 20 percent of DASP sales, or creating nonprofit specific pools. "This could be a very effective program, if FHA can get loans in the hands of buyers who are committed to neighborhood stabilization - that's if," says CAP's Edelman.
In a statement provided by HUD, Galante said: "HUD is also exploring every option to increase nonprofit participation in our program, including allowing more time for these organizations to perform the necessary due diligence and to assemble sufficient capital." The agency also told Truthout that in an upcoming November DASP auction, it will offer more NSO pools, including several that are smaller and more geographically concentrated.
But other housing-rights organizations believe that even farther-reaching measures are needed. The Chicago-based Autonomous Center of Albany Park, which is working with Guadalupe and Vicente Salgado to help fight their foreclosure, also operates Casas del Pueblo, a 501(c)3 community land trust that holds titles to properties and believes that federal policy should require more banks and investors that profited from the mortgage crisis to donate properties to community organizations outright.
Donation to a land bank is one option that buyers of loans in NSO pools may take to fulfill their obligations to the program's requirements, and some banks have chosen to donate properties to nonprofits in small number to receive a tax write-off. But Antonio Gutierrez, housing coordinator at Casas del Pueblo, says that under current policy, community organizations that have a real interest in preserving affordable housing often get the least help in acquiring distressed properties. The land trust, for example, is currently in negotiations with Fannie Mae to purchase the home of a domestic violence survivor who went into foreclosure after her abusive husband left the home and has been fighting to remain in it for four years. Though DASP buyers can obtain properties at an average of between 40 and 60 percent of the remaining principal balance on a mortgage, Fannie Mae has asked Casas del Pueblo to pay the full market value of $250,000 to obtain their member's home, even though she had already made a decade of mortgage payments on her mortgage.
"The DASP program isn't really providing neighborhood stabilization, it's actually contributing to the displacement of existing communities" when investors buy loans with the intent of foreclosing on properties and finding higher-income renters, says Gutierrez. Even the loan modifications provided by commercial banks and investment groups may merely be "prolonging the process of foreclosure," he says. "If we want a permanent solution and true neighborhood stabilization," he says, "we need federal policies that say that principal reductions, buybacks and donations to community land trusts are not optional. They need to be priorities."
In the meantime, the Autonomous Center is part of a national coalition calling on HUD to halt DASP outright until it can be overhauled. The Center for Popular Democracy, the Home Defenders League and other housing organizations say they gathered 11,000 signatures on a petition calling for an end to sales through DASP, and are planning further protests if they don't receive a response. Among those watching HUD's next move are the Salgados, who believe their house could be auctioned later this year.
"I'm waiting and trying to investigate who owns the loan," says Guadalupe Salgado. "But this is my house, because I've fought for it."