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1.2.5.3 The Effects of Bulk Sales of Government Insured or GSE Guaranteed Loans

Troubled government-insured mortgage loans not yet in foreclosure were sold in increasing numbers and at significant discounts to private equity and hedge funds that, in turn, may be too quick to push homes into foreclosure or may be unhelpful in negotiating loan modifications. Some of these hedge funds, such as Lone Star Funds, are funded by public pension money and use it to buy Federal Housing Administration (FHA) mortgage loans at Department of Housing and Urban Development auctions.162 In the case of the FHA’s Distressed Asset Stabilization Program (DASP), the agency pays off the FHA insurance before the auction.163 Following the sale, homeowners are no longer entitled to any of the FHA loss mitigation options available during the time the FHA insurance was in effect, even though homeowners pay for the insurance. From 2010–2016, the FHA had auctioned off 108,000 loans valued at $18.4 billion.164 The average percentage of the estimated outstanding principal balance remaining due on the loans received through these sales in 2014–2015 was only 52% to 66%.165 HUD, however, has not conducted any sales since 2017 when HUD’s Inspector General reported that HUD had failed to finalize regulations or issue formal guidance and procedures governing the DASP program.166

The secondary mortgage market giants, Fannie Mae and Freddie Mac, followed the FHA’s example and have auctioned off residential non-performing loans since 2014.167 In California, community groups have seen an explosion of Wall Street, institutional, and cash-investor bulk purchases of post-foreclosure, real-estate-owned properties, particularly in low-income neighborhoods of color that had experienced high rates of foreclosures.168 These bulk cash purchases are financed by banks, including Bank of America and JPMorgan Chase.169 The bank loans are secured by the purchased homes and the loans are, in turn, securitized. This lowers the cost of funds for the purchasers to buy in bulk. The new property owners then rent out these properties. The effect in California has been the “transformation of the last vestiges of neighborhood ownership and wealth out of community residents and into the pockets of Wall Street firms, banks, hedge funds and other investor groups.”170 This trend has resulted in higher rents for renters and created obstacles for prospective first-time homebuyers who find it difficult to compete with all-cash investor offers.171 There are reports that these landlords charge higher than area median rents and do not adequately maintain some properties.172

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