by By Rachel Labush*
I am a staff attorney at Community Legal Services of Philadelphia where I defend low income homeowners in foreclosure. By saving my client’s homes through loan modifications, I am holding the mortgage companies to the contracts that they have signed and the laws that govern their conduct.
Federal Housing Administration (FHA) loans help provide safe, affordable access to homeownership for low- to moderate-income and minority borrowers, as well as first time homebuyers. The system is meant to benefit both parties: The lender is insured against the risk of default by the FHA insurance, which borrowers pay for through premiums. FHA loans also protect borrowers; before the lender can foreclose and make a claim on the insurance, they are required by federal regulation and U.S. Department of Housing and Urban Development (HUD) guidance to review the homeowner for loan modifications and other “loss mitigation” options including forbearance and repayment plans. Under the Distressed Asset Sales Program (DASP), a mortgage company may assign FHA loans to HUD and cash in on the FHA insurance before completing a foreclosure. After taking assignment of the mortgage, HUD strips it of its FHA insurance and protections and auctions it off to private investors.
Before foreclosure, or the use of DASP, the mortgage company is supposed to certify that the homeowner does not qualify for any modification. Over and over I see homeowners in foreclosure, with loans stripped of protection, who qualify for loan modifications, but who were not properly reviewed, or who fell behind on payments but qualified for a forbearance or repayment plan. Lenders who fail to follow through with their legal obligations deny borrowers their legal right to a modification, and in the same fell swoop remove the loan protections central to the FHA loan program.
It’s not just my clients who are falling through the cracks of HUD’s failure to conduct meaningful quality control of FHA servicers. Over 400 properties in Philadelphia have gone through DASP. None of these homeowners received advance notice that their loan was being stripped of the FHA insurance that they had paid for, and many were in the middle of applying for FHA loss mitigation that they were entitled to under federal law. Each one I spoke to was shocked that it was even possible to take away their FHA insurance and protections. To date, HUD has sold over 101,000 formerly FHA-insured loans through DASP.
As DASP exists now, HUD is rewarding bad servicing with insurance payouts while facilitating the dumping of these borrowers’ loans onto rapacious investors, with no advance notice. Because of the broken loss mitigation review by the FHA servicers, loans are going through DASP despite the borrowers’ eligibility for loan modifications. The abusive practices of these DASP loan buyers have caught the attention of members of Congress and the mainstream media. Here in Philadelphia, we have seen the new investors deny people loan modifications without explanation, require huge down payments to even be considered for a modification, demand twelve months of trial payments before any modification can be made, and refuse to reduce or defer any part of the debt, even though they are buying the loans at a steep discount from HUD. When they do offer loan modifications, the terms are inferior to FHA loan modifications.
I am still litigating the first wave of DASP foreclosures to come through my office, and all of my DASP clients are still in their homes. But most FHA borrowers do not have lawyers, and they shouldn’t need them to get the loan modifications they qualify for under FHA guidelines.
I agree with the recommendations of a broad range of civil rights, consumer, housing, and legal services organizations.[1] HUD should require servicers to provide notice to borrowers prior to including a loan in a DASP sale, and an opportunity to challenge it. There should also be a mechanism for borrowers to provide feedback to HUD on post-DASP servicing. HUD should collect and make available more detailed data on post-DASP outcomes and bar abusive investors from future auctions. To ameliorate the impact on homeowners and communities, HUD should increase the participation of non-profits in DASP by making smaller, more geographically based pools. Philadelphia City Council endorsed this last goal, unanimously passing Resolution 160106 on February 11th.[2] But the most important change would be holding FHA servicers to their contractual and legal obligations to offer loss mitigation to qualifying borrowers.
To each of my clients, their home is of the utmost importance, and its loss would be devastating. FHA servicers must improve their loss mitigation, and should be penalized by HUD for their widespread failure to evaluate borrowers for help before filing foreclosure. The effective use of loss mitigation by servicers also saves money for the insurance fund by reducing claims on it. Getting it right the first time – before a foreclosure, before a claim on the insurance fund, before a DASP sale – would be a better outcome for HUD, the taxpayers, and local governments. But most importantly to me, it would greatly help my clients and the thousands of low income homeowners like them who are fighting to save their homes.
* Rachel Labush is a staff attorney at Community Legal Services of Philadelphia , where her practice focuses on defending low income homeowners in foreclosure, fraud, and mortgage servicing abuse cases. She earned her J.D. cum laude from Harvard Law School, where she was a member of the student-run Harvard Legal Aid Bureau.
[1] See consensus recommendations at https://cdn.americanprogress.org/wp-content/uploads/sites/89/2015/02/DASP-Consensus-Recommendations.pdf
[2] See https://clsphila.org/news/philadelphia-city-council-passes-resolution-preserve-homeownership
Image by respres – http://www.flickr.com/photos/respres/2539334956/, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=6694382