Fed Auctions of Troubled Mortgage Loans Hurts Homeowners, Yet Again

In 2013, the U.S. Department of Housing and Urban Development (HUD), the federal agency historically charged with increasing homeownership among working families, ramped up its sale at auctions of distressed mortgage loans for the purchase of single-family homes. A year later, Fannie Mae and Freddie Mac, the two giant government-sponsored entities responsible for maintaining the liquidity of the nation’s housing markets, followed with their own auctions.

Since HUD first started auctioning distressed loans in 2010, the three federal organizations charged with safeguarding the health of the housing market have sold approximately 148,000 soured loans worth nearly $27.4 billion. [1] Those loans have sold at a 41 percent discount from value. [2]

That steep a discount raises a serious question as to why the three agencies would resort to a method designed to generate profits for investment banks and hedge funds, and players in the real estate market in subsequent sales. This is especially the case because one outgrowth of the government’s bailout of the nation’s economy in 2008 was the federal government’s Home Affordable Mortgage Program (HAMP), which requires most mortgage holders to work with strapped homeowners to restructure their loans to lower payment levels within their reach.

U.S. Representative Yvette Clarke, whose Ninth Congressional District in central Brooklyn has been particularly hard hit by the foreclosure crisis, said she is pushing the Federal Housing Finance Agency (FHFA), which oversees both Fannie and Freddie, “to consider principal reductions in amounts comparable to the discounts being offered to private investors to achieve neighborhood stability in districts like my own.” To that end, she is seeking a meeting between FHFA Director Melvin L. Watt and representatives from other districts, which have been hit hard by the foreclosure crisis.

As part of the Troubled Assets Relief Program (TARP), the U.S. Treasury Department issued a comprehensive set of rules defining how lenders should determine which of their borrowers qualified for mortgage relief under HAMP and, if so, how much. The Treasury Department put Fannie Mae in charge of administering the program. [3]

From the outset, the home loan industry resisted compliance with HAMP rules. Many thousands of homeowners were wrongfully denied modifications. Others were buried in a maze of paperwork.

These problems led all 50 states to sue the nation’s top banks; among them Wells Fargo, JPMorgan Chase, Bank of America and Citigroup. The lawsuit resulted in a $26 billion settlement to provide redress to homeowners, who had been foiled by the modification process. The settlement also bound the banks to adhere to strict rules for the processing of loan-modification applications. (New York Times, Feb. 9, 2012)

That settlement did not end continued resistance to HAMP. In 2013, the New York State Attorney General’s Office sued Wells Fargo claiming that it committed nearly 200 violations of standards, incorporated into the 2011 settlement, in processing applications from 97 New York families for loan modifications.[4] After years of resistance, HAMP will end on Dec. 31 unless Congress acts to extend it.

Problems have certainly continued in the Ninth District, Representative Clarke said. She called the 12,000 foreclosure cases pending in Brooklyn an “extremely alarming number,” adding that research based upon 2013 data from the Federal Reserve Board of New York shows that four zip codes within the 9th District, all of them heavily populated by minorities, were among the ten hardest hit districts in New York State.[5]

Moreover, Clarke cited a 2016 report from the TARP Special Inspector General’s Office (pp.73-74), which found “staggering” problems with the manner in which six of the seven largest servers had terminated homeowners, who had previously been granted modifications during the 12 months that ended in March 2015. Based upon on-site testing of samples of the major servicers processing of modification terminations, the authors of the report concluded, “These homeowners were forced out of HAMP through no fault of their own. Mortgage servicers did not give these homeowners a fair shot.” (Emphasis added)

Ironically, the nation’s largest banks, which were named as defendants in the 50-state lawsuit, were held responsible under HAMP rules for compliance with the program’s standards and procedures. The rules bound them because they were all in the business of acting as agents for mortgage holders in their dealings with their borrowers. In that capacity, as loan servicers (industry lingo), one of the bank’s most important responsibilities was the handling of loan modifications sought by homeowners. The net result was that the banks, which had gummed up the modification process in the first place, dominated the ranks of those putting up loans for sale at HUD auctions.[6]

In another striking anomaly, the Treasury Department had put Fannie Mae in charge of overseeing the HAMP program.[7] That raised a direct conflict of interest, because Fannie, in its capacity as owner of billions in troubled loans, moved to foreclose homes in its portfolio or acquire them directly without a lawsuit by having owners sign over title to their homes. Strict enforcement of HAMP-like rules would require closely monitoring its own servicers, who were the same servicers managing the bulk of the nation’s distressed loans.

The 41 percent “discount,” which emerged from by my analysis of HUD data, represents the spread between what the winning bidders at the auctions paid and the value of the loans they acquired. That spread amounted to $5.9 billion[8] for the loans auctioned by HUD. As explained in the article and chart, which set forth my methodology in obtaining the 41 percent figure, Fannie and Freddie did not disclose sufficient information to derive the discount from their published data.

The $5.9 billion spread is significant because it shows that the winning bidders stood to reap substantial profits from the loans they purchased. “As astute financiers and businessmen, it is unlikely that the banks were unaware that there was gold in those mortgages,” said Yolande Nicholson, the president of the New York State Foreclosure Defense Bar. “In Brooklyn,” she added, there has been a gold rush in communities of color like East New York, Bedford Stuyvesant, Crown Heights and Flatbush to the detriment of homeowners.”

The banks handling of their servicing obligations in the first instance had harmed homeowners, and then years later they rushed to join a process, which put them in the hands of real estate investors operating outside of key legal protections for homeowners and government oversight.

The Auctions Thwart Homeowners’ Legal Rights

The harms the HUD auctions posed for homeowners were closely examined in an excellent report, entitled “Opportunity Denied,” which was researched and written by the National Consumer Law Center (NCLC) (See pp. 13-15). One of the most damaging consequences, cited in the NCLC report, stems from HUD’s legal position that homeowners are no longer protected by HUD/FHA rules once their home loans are sold at auction.

That position is particularly troubling, NCLC reported, because it forces an immediate halt in ongoing, court-supervised negotiations between lenders and homeowners. About 20 state and local jurisdictions, including New York, Ohio and New Jersey have either laws or court rules requiring supervised mediation BEFORE a lender can proceed with foreclosure proceedings.

The NCLC report presented the results of a study conducted of all cases appearing for supervised mediation sessions on two separate days in 2014 as a part of a court-run program in Philadelphia, Pa. Those two days had been set aside for cases handled solely by Bank of America.

In follow-up research, the study discovered that Bank of America had subsequently removed 23 of the cases from the settlement program. By examining land records the authors of the study ascertained that those loans had been sold at HUD auctions shortly after they had appeared on the calendars for the two days studied.

None of the affected homeowners were informed in advance that their loans would be sold, but they were subsequently advised that in future dealings with the new owners they would not be protected by HUD rules requiring efforts to restructure the loans, according to the NCLC report. Moreover, the auction sales cut short the modification process after some of the homeowners had appeared at numerous mediation sessions—nine times in the worst instance.

The NCLC Report (p. 17) report contains two other illustrations of the problem, which occurred as court-supervised mediations were in progress in New York. A Brooklyn owner, whose home loan was sold at a HUD auction, was told by the new owner when she appeared for a court conference that she would not be considered for a loan modification unless she made an upfront payment of 25 percent of the amount she was in arrears. Because the auction sale terminated participation in the loan program, the owner could no longer claim the protection of a FHA rule prohibiting payment of a lump sum as a condition of negotiating for a loan modification.

The new owner of a mortgage loan purchased in the second New York case brought all settlement efforts to an abrupt halt when it offered a faux modification, which, rather than offering new mortgage terms, provided for suspended payment of principal for five years. The offer would have required the owner to pay $70,000 in interest until the lull ended when he would have been responsible for resuming payment at the original loan level, which he had been unable to handle.

The National Consumer Law Center (NCLC) (p. 35) has obtained documents related to a similar interest-only loan, offered by the same servicer, Caliber Home Loan. As quoted in the NCLC report, the documents informed the borrower that “your request for a loan modification has been approved” and contained a form for the homeowner to sign entitled “Modification Agreement.” Amidst a technical discussion of the offer’s terms, there was a statement that your payment “may increase.” According to the NCLC report, Caliber’s “standard loan” leaves open the possibility that a balloon payment would be required once Caliber elected to end the deferral of principal. NCLC 35. Caliber’s aggressive tactics were cited in a letter sent by 45 lawmakers to the heads of HUD, Fannie and Freddie earlier this year (New York Times, March 1, 2016).

The HUD Auctions Are at Odds with its Statutory Mission

HUD’s resort to the auctions is particularly jarring because it is at odds with HUD’s statutory purpose, which is to promote ownership of “a decent home and a suitable housing environment for every American family.” [9]

Depression-era legislation established the Federal Housing Administration (FHA) to insure home loans issued to persons of modest means. With the added layer of insurance, lenders were able to issue loans on more lenient terms to working families by reducing the down payment required to secure a conventional loan from 20 percent to 3 to 6 percent on average, said Nicholson, the foreclosure defense bar president. FHA continues to operate the program but is now part of HUD. In 2014, 43 percent of all homes bought by African Americans and 44 percent of those acquired by Hispanic Americans were financed with FHA-insured loans. As a part of FHA’s mission it has issued stringent rules[10] requiring modification efforts and protecting homeowners from predatory practices. [11]

Fannie and Freddie likewise face similar problems in reining in the behavior of buyers who purchase troubled loans that they auction. Unlike HUD, which sells loans lenders send to it, Fannie and Freddie auction loans that they are directly responsible for. As guardians of liquidity in the nation’s housing markets, for instance, Fannie and Freddie received $187.5 billion in TARP funds (New York Times, May 20, 2016), which they then used to buy troubled loans held in investment pools that were overloaded with sub-prime loans

Although HAMP procedures do not apply to Frannie and Freddie, both government-backed entities had issued rules governing efforts to work out accommodations with homeowners. Nonetheless, as is the case with HUD, serious questions remain as to whether the two government-backed entities can successfully bind the future behavior of the winning bidders at their auctions.

Further worrisome issues arise from a perusal of the list of top buyers (p. 8) at the HUD auctions, which reveals the presence of firms linked to companies headed by executives, who figured prominently in the subprime crisis, and others owned by top-tier Wall Street firms.

The Number 2 company on the list of top buyers at HUD auctions is Lone Star Funds, which uses Caliber loans as its servicer. Caliber, which, as discussed above, offered troublesome “interest only” loans under the guise of being “loan modifications,” has as its chief executive, Joe Anderson, who was a top executive of Countywide Mortgage, the poster company for bad practices that led to the subprime crisis. [12]

The NCLC report further noted that the third largest purchaser of HUD loans is Selene Residential Partners, a division of Ranieri Partners. The chairman of Ranieri is Lewis Ranieri, who was “a key promoter of mortgage backed securities during the subprime boom.” [13]

Additionally, the Blackstone Group, the largest buyer of distressed mortgages in the country according to the New York Times June 27, 2014, has a controlling interest in the top buyer at HUD’s auctions, Bayview Asset Management.

The Results of the HUD Auctions Were Not As Rosy as Reported

HUD concluded in its January 2016 p.11 report that foreclosures had been “successfully avoided” on 43.3 percent of more than 57,000 loans that had been sold at the 13 auctions it had held as of July 16, 2015.

On its face, the 43.3 percent figure looks more impressive than it is because the percentage was only calculated for those loans where the bidders had reported the dispositions of the loans they had acquired. Bidders had not yet reported results for more than 31,000 loans sold at auctions or about 35 percent of the total. [14]

The flip side of the 43.3 percent figure is that homes had been foreclosed upon in 53.3 percent of the cases. Additionally, nearly 25 percent of the loans, which HUD described (p.1) as having “positive” outcomes, in fact, had a contrary result. Two of the methods— a short sale or signing a deed in lieu of foreclosure—which HUD categorized as avoiding foreclosure had the same result: homeowners lost their homes. [15]

Far from being “positive” outcomes for homeowners and local communities, the HUD auctions—and Frannie and Freddie’s—represent a crucial turning point in what has been a long and torturous path to help homeowners threatened with the loss of their homes and life savings. From its outset in 2009, HAMP was crippled by the negligence and design of the banks servicing the bulk of the nation’s home loans. Both Fannie and Freddie, neither of which is covered by HAMP, refused to forgive principal as did most servicers.

Then, when HUD began auctioning loans, the same servicers, which had fought modifications tooth and nail, elected to put their troubled loans up for auction. That was a move that would put homes in the hands of real-estate speculators and developers, seeking to make a profit off the spreads to be realized at the auctions. The result: homeowners were left in the hands of new creditors, who were beyond the reach of FHA’s protective rules and HAMP guidelines, and, whose interest was making a profit, not promoting the American-dream of homeownership.

©2016 DanielJWise

Discounts at HUD Auctions from
June 11, 2013 to May 18, 2016*

Sale Name and Date Number of Loans Sold Value Based on Amount Still Due on Mortgages (UPB) Fn.1 Amount Winning Bidders Paid Percentage of Value Paid by Winning Bidders Discount Off Full Value
2014-1 National; Oct. 30 and Dec. 17, 2013 17,149 $3.0 Billion $1.6 Billion 53% 47%
2014-1 Neighborhood Stabilization Outcome (NSO); Dec. 19, 2013 Fn. 2 3,188 $657.3 Million $403.8 Million 61% 39%
2014-2 National; June 11 and Sept. 30, 2013 27,580 $4.5 Billion $2.9 Billion 64% 36%
2014-2 NSO; June 25 and Nov. 19, 2014 6,847 $1.2 Billion $703.3 Million 59% 41%
2015-1 National; July 16, 2015 3,752 $582.5 Million $339 Million 58% 42%
2015-1 NSO; July 16, 2015 1,501 $343.7 Million $187.8 Million 55% 45%
2016-1 National and NSO combined; Nov. 18, 2015 Fn.3 7,644 $1.2 Billion $616.6 Million 51% 49%
Aged Delinquent Portfolio Sale; May 18, 2016 Fn.4 7,892 $1.4 Billion $776.5 Million 55% 45%
Total Fn.5 73,811 $12.9 Billion $7.6 Billion 59% 41%
*Source: Material in this chart for auctions held between Oct. 30, 2013 and July 16, 2015 came from HUD’s Report to the Commissioner dated Jan. 22, 2016 at pp. 39, 41, 44, 46 and 49. Data for the auction held on Nov. 18, 2016 is found in HUD’s “Sales Report Summary” for that auction pp.1-3 to 1-5. The data for the sale dated May 18, 2015 is contained in the “Sales Results Summary.” Link pp.1-3 and 1-4 for the auction on that date.
Fn.1: In real estatate jargon, the method is called “Unpaid Principal Balance” (UPO).
Fn.2: Sale of pools of mortgages that are subject to more stringent rules requiring winning bidders to meet goals to improve neighborhoods.
Fn.3: The number and value of the sales at the Nov. 18, 2015 auction have been reduced because one pool (# 301), though listed, was not sold. Sales Result Summary, Nov. 18, 2015, p 1-3.
Fn.4: The number and value of the sales at the May 18, 2016 sale have been reduced because one pool (#408) was listed but not sold. Sales Results Summary, Jan. 18, 2016, p. 1-4.
Fn.5: The figure of 59% for the ratio of winning bids to value was obtained by dividing $7.6 Billion by $12.9 Billion. The amount of the discount was derived by subtracting 59% from 100%.

 

Main Story Footnotes

[1] Source: Tally of values reported by HUD, Frannie and Freddie relating to 24 auctions the three government-related entities held between Oct. 30, 2013 and May 18, 2016.
[2] The three agencies use two different methods of valuation: Unpaid Principal Balance (UPB) or Broker Price Opinion (BPO). I have used UPB since that is the method used in HUD’s survey of all of its auctions conducted from Sept. 22, 2010 through May 18, 2016. The most commonly used method was the amount of unpaid principal remaining on the loans being auctioned, referred to as UPB for “unpaid principal balance.”
[3] Article on website maintained by the Center for Public Integrity, dated Aug. 6, 2010.
[4] U.S. District Court Judge Rosemary Collyer denied the NY Attorney General’s Office’s motion to hold Wells Fargo in violation of the terms of the settlement because 97 families was too small a sample upon which to claim a violation. (U.S. v. Bank of America, 12 cv 00361), dated Feb. 2, 2015.
[5] The New York State Foreclosure Defense Bar (NYSFB) correlated 2013 data from the Federal Reserve Board of New York on the number of foreclosures by zip code in New York State with 2010 U.S. Census data on racial composition by zip code. The result: Of the 171 zip codes with New York State, four within the Ninth District were ranked within the 10 zip codes with the highest foreclosure rates. The four were ranked 2nd, 3rd, 7th, and 8th and had minority populations ranging from 85 to 96 percent.
[6] “Opportunity Denied,” a report prepared by the National Consumer Law Center at p.36.
[7] See footnote 3.
[8] The difference between the value of the mortgages sold at the auction, using the UPB method (see footnote 2) and what the winning bidders paid for the loans they purchased.
[9] 42 USC Section 1441
[10] For instance, HUD requires lenders to commence a review to see if a modification is possible within 45 days of default and to complete it within 90 days. NCLC Report at pp.18 and 23.
[11]NCLC Report p.37
[12] Ibid
[13] HUD report p. 11.
[14] An example is the rule FHA has issued against demanding upfront payments as a condition of negotiating a loan modification. (This fact pattern was at issue in one of the situations involving a New York homeowner described above.)
[15] HUD report p.11. In a short sale, Fannie releases the homeowner from liability for any arrearages in excess of the sale price. A “deed in lieu of foreclosure” is the name of the document homeowners must sign to transfer ownership of their homes to Fannie without litigation.

A SPECIAL THANKS TO:

Jared Bennett, digital editor and investigative reporter with The Center for Public Integrity, and Steven Sharpe, a senior attorney with the Legal Aid Society of Southwest Ohio—for assistance in dealing government data and legal nuances.
Laura Ciporen—for help in formatting the story and chart.
Jeremy Wise, my brother—for teaching me how to use Microsoft Excel to present and compile the data in the chart.
Robert Golub and Dana Kasarsky, my wife, for proofreading.

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