Beginning with its next sale in June 2015, HUD will have new, stricter requirements for entities that purchase distressed loans as part of the Distressed Asset Stabilization Program (“DASP”), a development we initially covered here. Initially conceived as a way to lower losses suffered by the FHA from troubled loans, DASP is also supposed to reduce the number of foreclosures by providing servicers with requirements and incentives to engage in loss mitigation activities. Despite HUD’s stated goals to help borrowers through DASP, some advocacy groups had previously complained that DASP was being used by Wall Street to further profit from distressed mortgage loans, rather than as a tool to help borrowers. HUD’s new requirements are a response to those criticisms.
Specifically, HUD will now prevent servicers from foreclosing on properties for one year, up from six months. In addition, HUD will also demand (instead of merely encouraging) that servicers engage in some loss mitigation efforts when they purchase DASP loans, by evaluating all homeowners for HAMP or a similar program. Finally, HUD has also increased the reporting requirements and penalties where DASP participants fail to comply with its requirements.
In addition, HUD also made changes its Neighborhood Stabilizing Outcome program, a part of DASP, which offers for sale pools containing only loans from specific areas hit hard by the foreclosure crisis. For these loans, HUD is trying to increase non-profit participation by giving non-profits the first opportunity to purchase vacant properties, allowing resales of notes to non-profits, and offering a non-profit only pool.
FHA servicers wishing to participate in DASP can place qualifying loans (namely loans that are 6 months or more delinquent that have exhausted the FHA loss mitigation process) in a pool to be sold to qualified bidders. Placing the loans in the pool can be a less expensive option for the original loan servicers than a foreclosure, if they are willing to make all the required representations. The qualified purchasers are supposed to work with the borrowers to avoid foreclosure through various loss mitigation avenues, which can include a typical loan modification to serving as a landlord for an extended period of time.