New CAP report: Loans sold through DASP tend to be located in communities still recovering from the housing crisis and economic downturn.
Washington, D.C. — Loans sold through the Distressed Asset Stabilization Program, or DASP—which allows the Federal Housing Administration, or FHA, to bundle and sell mortgage loans at risk of foreclosure to investors—tend to be located in communities still recovering from the economic crisis, a new report released today by the Center for American Progress shows. Stronger standards are critical to ensuring that the program protects these communities’ chances at economic recovery, the report says.
“Notes sold through DASP tend to be located in communities where large shares of homeowners are ‘underwater,’ or owe more on their home than it’s worth; where unemployment remains high; and with large shares of communities of color, who lost a disproportionate share of wealth during the housing crisis,” said Sarah Edelman, Director of Housing Policy at CAP and co-author of the report. “Assumptions about note purchasers’ economic incentives are not enough to ensure that these companies do not further destabilize communities on the road to recovery. DASP needs stronger standards that prioritize homeowners and neighborhood stabilization.”
In its new report, CAP analyzed data from more than 70,000 loans sold across six national auctions through DASP from April 2012 to June 2014, obtained from the Legal Aid Society of Southwest Ohio LLC, which filed a Freedom of Information Act request with the U.S. Department of Housing and Urban Development to retrieve the data. CAP’s analysis shows that about 63 percent of notes in the sample are located in ZIP codes that have higher-than-average levels of negative equity, about 69 percent of loans are located in ZIP codes with high unemployment rates, and about 84 percent are located in ZIP codes with a higher concentration of people of color than the national median. At the same time, most notes are located in communities experiencing job gains, and most notes are located in neighborhoods where negative equity rates are decreasing—whether the negative equity rates were higher or lower than the national average.
CAP’s report debunks claims that economic incentives alone are enough to ensure that note purchasers handle notes responsibly. The report makes recommendations for improvements the FHA should make—and that policymakers should support—to DASP in order to ensure that the program is beneficial for homeowners and vulnerable communities:
- Ensure loans sold through DASP have exhausted all FHA loss mitigation options. DASP is intended to be a last resort for home loans at risk of foreclosure; servicers are required to exhaust a number of loss mitigation requirements before selling a loan through the program. The FHA should strengthen its auction process to ensure that loans only go through DASP after exhausting all other options.
- Strengthen and clarify postsale loss mitigation standards. The FHA should clarify and strengthen its standards for loss mitigation that note purchasers must offer before foreclosing on a property. In particular, the FHA should require note purchasers to consider borrowers for principal reduction, a process that lowers the balance on an underwater homeowner’s loan in order to help them avoid foreclosure.
- Strengthen standards on vacant properties. The FHA should limit the number of vacant properties sold through DASP and establish standards for buyers to properly maintain properties that become vacant.
- Strengthen reporting standards. The FHA should provide data at a more granular level and include information on the types of loan modifications provided, as well as postforeclosure outcomes at the pool level.
- Reward buyers who prioritize neighborhood stabilization. The FHA should increase nonprofits’ access to notes sold through DASP and reward note purchasers that achieve positive outcomes for homeowners and communities.
- Expand neighborhood stabilization outcome, or NSO, auctions. The FHA groups loans into pools and sells them through two different types of auctions—national auctions, which were analyzed in this report, and NSO auctions. The FHA should expand DASP’s NSO auctions, which require investors to achieve certain outcomes that can help homeowners and stabilize communities.
- Engage with local agencies. The FHA should work with local agencies where notes sold through DASP are located to help them better target code enforcement efforts and to help ensure implementation of DASP guidelines that allow nonprofits and governments the first option to purchase vacant properties attached to notes sold through DASP.
Click here to read “Protecting Communities on the Road to Recovery: Why Strong Standards Are Critical for the Distressed Asset Stabilization Program” by Sarah Edelman, Michela Zonta, and Shiv Rawal.
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For more information on this topic or to speak with an expert, contact Allison Preiss at [email protected] or 202.478.6331.