HUD Changes Distressed Loan Sale Requirements

The Department of Housing and Urban Development (HUD) is tweaking its bulk loan sales program to give distressed borrowers a better shot at staying in their homes.  HUD announced today that investors who purchase delinquent mortgages through the Department's Distressed Asset Stabilization Program (DASP) will have to delay foreclosures for one year after purchase rather than the six month hiatus that had previously been required.

In addition loan servicers will have to evaluate all borrowers in the loan pool for eligibility for the Home Affordable Modification Program (HAMP) or a similar loss mitigation program.  In the past the assessment of borrowers for loan modifications was encouraged but not required.

HUD is also making improvements to the Neighborhood Stabilization Outcome (NSO) sales portion of DASP aimed at increasing non-profit participation.  Non-profit organization will be given the first look at vacant properties, purchasers will be allowed to re-sell notes to non-profits and there will be a non-profit only pool.

HUD will continue to require that purchasers of the geographically targeted neighborhood stabilization pools ensure that at least 50 percent of the loans in a pool achieve outcomes to help hard hit areas avoid the neighborhood decline that comes with numerous vacant properties.  If the servicer and borrower are unable to prevent a foreclosure, the servicer must achieve some other neighborhood stabilizing outcome such as holding the property for rental for at least three years.

"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 and encourage greater non-profit participation in our sales," said Genger Charles, Acting General Deputy Assistant Secretary, Office of Housing. "The improvements not only strengthen the program but help to ensure it continues to serve its intended purposes of supporting the MMI Fund and offering borrowers a second chance at avoiding foreclosure."

All of these changes will be subject to stronger reporting requirements including tougher penalties for not complying with quarterly reporting responsibilities and a new requirement to report on borrower outcomes, even when a note is sold after the original purchase.

DASP allows pools of mortgages headed for foreclosure to be sold to qualified bidders and encourages them to work with borrowers to help bring the loan out of default. In many cases, this is a less expensive alternative to foreclosure and sale as a real estate-owned (REO) property.  An FHA servicer can place a loan into the loan pool if the following criteria are met:

• The borrower is at least six months delinquent on their mortgage
• The servicer has exhausted all steps in the FHA loss mitigation process.

HUD plans its next loan sale, the first of 2015, for June.