Could the Sale of Distressed Loans Decrease Foreclosures?
December 6, 2016
A report by the Federal Housing Administration (FHA) reveals that two-thirds of distressed loans in HUD’s single-family sales program (SLFS) have been resolved by selling to investors with 42 percent of those loans avoiding foreclosure. Distressed or nonperforming (NPL) loans are about 28 months delinquent on average when purchased by investors.
Approximately 28 percent of the 104,000 loans, both resolved and unresolved, avoided foreclosure through one of the six ways: reperformance, forbearance, short sale, deed in lieu of foreclosure, paid in full, and short payoff. Short sales and deeds in lieu of foreclosure were the most common alternatives to foreclosure. Approximately 37 percent of the loans have been foreclosed upon, and 3 percent are being held as rentals. Still, one-third of the distressed loans remain in delinquency.
Laurie Goodman, the Director of the Housing Finance Policy Center at Urban Institute, encourages investors to not change their practices. “Keep in mind what they’ve always kept in mind,” she said. “Investors can do a lot more for the borrower. The GSEs have lost HAMP as a tool, and they’ll be going forward with their own modification program. Investors are going to keep doing what they’ve always done, nothing much will change. Lots of questions need to be asked. What’s the outcome? What’s the probability of success? What will the evaluation methods be?”
The Federal Housing Finance Agency (FHFA) reported a decline in foreclosures because Freddie Mac and Fannie Mae sold fewer NPLs prior to 2015. Only 31 percent of the 25,612 NPL sales that were settled at the end of 2015 were resolved by June 2016. Results show that 16 percent were resolved without a foreclosure, and 15 percent were foreclosed upon.
Approximately 29 percent of the NPLs that had been with the new servicers the longest amount of time avoided foreclosure, compared to the 19 percent of distressed loans that were not sold. The longest amount of time recorded was 14 months. However, fewer of the sold distressed loans were foreclosed upon (26 percent versus 30 percent of the benchmark). These results are especially dramatic considering that the loans that were sold were more delinquent and had a higher loan-to-value ratio than the loans that were not sold.
Investors should be aware of the changes that federal agencies have made in regards to distressed loans and NPLs. “There will be more dispositions than what you saw in 2016, not less,” said Goodman. “HUD has made changes to become more advocate friendly. They’re not going to be held back by administrations. FHFA research displays that loans owned by private investors have better outcomes than our own loans.”
Source: DS News