Risk & Opportunity: the Distressed Asset Stabilization Program (DASP)
April 07, 2015
By Aashna Desai, SAS & Wharton ’16
Under the DASP program, FHA pays claims on selected delinquent loans before those loans go through foreclosure and then sells those loans, which are stripped of their FHA insurance guarantee, to private investors who buy them at discounted rates. The entity that buys the loan through DASP either services the loan or hires a new mortgage servicer to service the loan. After the investor buys the loan, it must fulfill any requirements that FHA has specified. FHA claims that the program also helps underwater borrowers, because the new buyers of the loans might have more options to help homeowners, including providing principal reduction, which FHA cannot do under its statutory limitations. Nearly 100,000 loans have been sold through DASP since 2012, and the program continues to operate.
Currently, FHA sells loans through two types of auctions: national offerings and neighborhood stabilization outcome auctions. The loans sold through the national offerings are from all over the country, while the loans sold through the neighborhood stabilization outcome auctions tend to be concentrated in metropolitan areas that were hard-hit during the foreclosure crisis, such as Atlanta, Prince George’s County in Maryland, or Chicago. Bidders for loans sold through national offerings pledge to wait at least six months before foreclosing on a borrower in the hope that the new owner can provide loss mitigation opportunities that FHA could not. After six months, a buyer of a loan through a national offering can resolve it in any way they choose. On the other hand, buyers of neighborhood stabilization loans must handle at least half of the loans they buy in a way that stabilizes the surrounding neighborhood. Common purchasers of both national and NSO bulk sales are single-family rental companies, private equity firms, and investment companies seeking to buy cheap mortgages. A few buyers of NSO pools are community-based nonprofits, which are trying to keep homeowners in their homes to stabilize hard hit communities.
While DASP may be beneficial to homeowners, FHA has not published any data on the results of the auctioned off loans. To ensure that DASP is actually improving prospects for homeowners, FHA should be more transparent about where these loans end up and what happens to them. Moreover, given the high private sector demand for non-performing loans, HUD may be well positioned to improve the FHA insurance fund through the DASP program and to ask more of DASP buyers so that the program can offer greater opportunity to homeowners and neighborhoods.
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