Although I often come down on the New York Times for its politically skewed reporting, here the Grey Lady makes clear that the Department of Housing and Urban Development is, after years of pressure, finally changing its rules on sales of distressed mortgages for what looks to be the hope for career advancement of HUD Secretary Julian Castro. However, this story does appear in Dealbook, so the intended message could be “Private equity looting is being inconvenienced out of the Democratic Party’s need for better optics.”
Since 2010, HUD has had a program for the sale of distressed mortgages. And by that, we mean really distressed: “extremely delinquent,” as in no payment for 48 months. 105,000 loans have been sold, with private equity firms Loan Star and Bayview (a Blackstone fund) the biggest buyers.
There are cases of borrowers in high-end homes being left in place despite years of delinquency. Readers told us of entire neighborhoods of tony homes in Las Vegas where hardly anyone was paying. The theory seemed to be that no one would buy those houses at that time, and those houses would be costly to secure and maintain until the market recovered. The apparent logic was better to leave them in place to keep the home in adequate shape.
Now one has to wonder why these loans have not been foreclosed upon or modifications attempted. Remember, HUD now controls these loans (the agency guaranteed loans provided by banks). But instead of modifying them on its own, HUD instead entered into a private investor enrichment program of loan sales. The neoliberal logic was that private equity firms would be more “nimble” than banks, with “nimble” meaning they could somehow find a better approach. But as the Times wrote in 2015, in the case of Loan Star, “nimble” turned out to mean they’d start foreclosing even faster.
The new Times piece points out that the pressure to fix the mortgage sale program is long-standing:
Housing advocates are not the only ones who have pushed for major changes to the loan sale program. Dozens of public officials, including member of Congress, have written to HUD officials, criticizing the program for leading to increased foreclosures and profit for private equity. Two of the more outspoken legislative critics have been Senator Elizabeth Warren, the Massachusetts Democrat, who is known for her support of liberal causes, and Representative Michael E. Capuano, a Massachusetts Democrat and former mayor of Somerville, Mass.
The HUD scheme required the private equity firms to offer mortgage modifications, but it didn’t set parameters tightly enough. Even though the mortgage were auctioned off at large discounts, meaning the investors would have lots of room to restructure the loans so that borrowers with adequate income could become viable, the modifications typically kept the original loan balance in place. Again from the Times:
This month, the National Consumer Law Center issued a report analyzing the loan sale program and specifically criticized private buyers for interest-only modifications that did not reduce the overall amount of debt a homeowner owed and reverted back to the original loan terms after a five-year period.
The report said, “there is no evidence from the sales over the past four years that the speculative investors gave homeowners loan modifications that reduced the principal of the loans at any significant rate or that sustainable modifications were provided in substantial numbers.”
And the political motivation to finally address this long-standing problem?
This year, housing advocates have stepped up their calls for reforms in the loan sale program and singled out Julian Castro, the HUD secretary, for what they said was his slow response to heeding the criticisms. The advocates made no secret that they were stepping up their campaign as Mr. Castro’s name has been floated as a potential vice presidential running mate for Hillary Clinton, who is seeking the Democratic presidential nomination.
Mr. French, the HUD spokesman, alluded to the pressure from housing advocates by saying in his statement: “It has always been our goal to get the policy right, regardless of arbitrary deadlines.”
“Arbitrary deadlines”? How about a sense of urgency to prevent homeowners who could be salvaged from losing their homes?
This sadly is business as usual for the Obama Administration: support the interests of the financial services industry and throw a few bones to members of the public at large, ideally as elections approach. And assuming Clinton wins the nomination, if she taps Castro as her VP, it will be one more example of her use of identity politics to mask her fealty to Big Finance.