Investors who hold mortgages periodically sell them through auctions and direct sales. Those that are delinquent for long periods of time are generally foreclosed upon and either sold or rented to another investor. More recently the Federal Housing Administration (FHA) created the Distressed Asset Sales Program (DASP) an FHA program which has resulted in the sale of distressed mortgages valued at 8.8 billion dollars over the last two years. DASP auctions loans in two kinds of pools: National pools and Neighborhood Stabilization Outcome (NSO) pools. National pools group mortgages from across the country and carry few restrictions after the sale, except the 6-month moratorium on foreclosure and semi-annual reports to HUD regarding the status of the sale portfolio. The NSO pools require that no more than half of the loans within a pool can be sold as real-estate owned properties (REOs) to investors.
HUD/FHA is not the only one conducting these sales. Servicers and private banks are also selling off distressed loans to capitalize their operations and reinvest in newly originated loans and other ventures. This is an ongoing business model that is gaining national attention because of the housing crisis. Most sales go to the highest bidder and as a non-profit with limited financial resources; we are not able to bid on the larger pools. And although the HUD/FHA N.S.O model reduces the size of the pool(s), it is still a competitive market designed for the highest bidder. This is an advantage for private investors who can mitigate the risk associated with the low value distressed mortgage notes in the pool and have the funds to withstand the resolution time associated with the Judicial States foreclosure process.
Hundreds of thousands of loans have been sold and loans are being sold every year but unfortunately, the higher purchase price, the holding cost and the cost associated with the nonprofits programs and additional services and efforts to modify loans and preserve homeownership makes it difficult for organizations like HHI to compete, “But we do”.
Hogar Hispano Inc.’s unique partnership with private capital allowed us to acquire non-performing loans directly from Citi Mortgage. We have also completed some one-off acquisitions to further our foreclosure prevention program. With support from the NCLR Housing Network (NHN) of HUD Certified Housing Counselors we were able contact the majority of the homeowners and offer loan modifications that included principle forgiveness, term modifications to fit the homeowners’ needs and no cost reinstatements. We also outreached to the abandoned homes homeowners and were able to locate a small percentage them and offered them the option of: Short Sale, Deed-in-Lieu and cash for keys. Our overall success was greater than 60% foreclosure preventions outcomes.
HHI was able to partner with one of our nation’s largest bank to conduct a pilot program to prove to the powers-that-be that some non-profits have the capacity to raise funds and the ability to manage distressed portfolios if provided the opportunity to acquire these loan pools at reasonable price points.
Through Second Opportunity of America (SOA), an LLC formed by HHI in 2013, HHI successfully acquired 467 loans in 31 states. All of the loans were delinquent and/or severely delinquent and might have been foreclosed on or sold to an investor or other buyer had they remained unresolved.
Our program was designed to work with groups like National Council of La Raza’s Housing Counseling Network to insure that every homeowner was closely evaluated to determine their ability to remain in their homes as homeowners. HUD-certified housing counselors were assigned to each homeowner and was asked to provide the homeowner’s income and other data and to advise us on the amount the homeowner was able to pay. Armed with this knowledge we were able to provide actual principal forgiveness and/or waivers of legal, late and other fees hindering the homeowners ability to reinstate their loans.
This pilot would not have been successful were it not for our private capital partner’s willingness to invest in our model. They found that not only was it a good investment for them but it was also good for the homeowners, the surrounding communities, and offered another solution to the country’s problem of delinquent borrowers impacted by collapsed real estate markets and a weakening economy. Our success also hinged on our ability to identify a servicer that was willing to work with our network of housing counselors and to implement HHI’s program parameters designed again, to preserve homeownership.
Thanks to our participating bank, who was willing to take the risk to run the “Pilot”, HHI was able to achieve a greater community outcome than many of the investors who purchase these loan pools for maximum profit and minimal concern for the homeowners.
The underlying truth is that “we forgave more than four-million dollars of principal” and proved that if loans are sold to “good actors” (Investors that realize homeownership preservation = high net positive returns), families can stay in their homes as homeowners. None of the families that went through our program remain a statistic of ‘Underwater Homeowners’.