Hedge Funds Buy HUD Homes For 65% Of Value; Evict Families

Hedge Funds Buy HUD Homes For 65% Of Value; Evict Families

The U.S. government has been selling hedge funds occupied homes for 65 cents on the dollar, and then turning a blind eye when the hedge funds kick the hapless homeowners out six months later. The Federal Housing Administration (FHA) (which is part of HUD) introduced a low-profile special program to sell homes in the foreclosure process to private investors almost five years now. Billions of dollars worth of mortgages all across the country have been sold to hedge funds and other private investors under the program.

The buyers of the mortgages are supposed to negotiate with the current homeowners and try to keep them in their homes if at all possible, and they cannot sell or rent the properties for six months after they buy them. After six months, however, all bets are off, and the buyer of mortgage can legally move forward with foreclosure and take possession of the home.

A September 23rd report from The Center for Public Integrity exposes how hedge funds are exploiting the FHA program by buying homes cheap and selling them for a fat profit a few months later after they foreclose on the homeowner.

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Home sale program to hedge funds was designed to “recapitalize” the FHA

HUD began the Distressed Asset Stabilization Program (DASP) when it was under strong pressure from Congress to improve its finances. By law, HUD cannot reduce the principal owed on mortgages it holds, but it can sell the mortgages to investors in bundles at a discount.


HUD’s main mission is to insure loans to lower-income and first-time homebuyers. But in the 2008 financial crisis and the recession that followed, many of these homeowners could not make their mortgage payments and thousands of foreclosures were on the horizon.

The DASP program was designed to both improve HUD/FHA’s finances, and as explained in a statement in April by Genger Charles, the now former commissioner of HUD’s Office of Housing, to give distressed homeowners “a second chance at avoiding foreclosure.”

More than 98,000 loans have been sold through DASP since it started five years ago, amounting to over $16.7 billion in total mortgages.

The cash infusion from the bulk home sales has helped the FHA insurance fund become solvent. The Center for Public Integrity notes that buyers have paid HUD $11.2 billion in these auctions, and the FHA fund currently totals $4.8 billion, after being over $16 billion in the red in 2013.

It was hoped the program would help homeowners stay in their homes, because the hedge funds and otherinvestors who bought the loans were expected to offer better terms to borrowers because they bought the mortgages so cheap). HUD included a requirement in DASP that buyers must wait six months to foreclose so borrowers could negotiate with their new creditors.

Many consumer advocates say, however, that the new owners of these mortgages are frequently flipping the foreclosed homes for a profit or taking advantage of the booming rental market across the country.

“The investors are there to make money,” argues Diane Cippolone, a mortgage servicing consultant with the nonprofit National Fair Housing Alliance. “They are not there to do neighborhood revitalization or neighborhood stabilization.”

Of note, a quarterly report on the program in late 2014 reported that only 11% of borrowers in DASP homes were still making payments (ie, still in their homes). HUD calls these loans “re-performing.” That figure is likely inflated in terms of people remaining in their homes, as any borrower who has made six payments in the last year is considered “re-performing,” and many of these homes were or will eventually be repossessed.

HUD data shows that 16.9% of those sold between 2010 and 2013 have successfully avoided foreclosure. This figure, however, also includes third-party sales or other outcomes that still result in a homeowner leaving a home. It turns out that a mere 5.4% of the DASP loans sold during that same period were actually “performing” where the homeowner was still in the house and on track to stay in it.

HUD revising plans for sales of foreclosed homes

HUD announced it had made several changes to its latest rounds of DASP sales designed to answer criticism from consumer advocates. First, buyers must now wait a full year (instead of just six months) before foreclosing on the homeowners.

Moreover, as well as requiring new servicers to evaluate borrowers for modification programs like those offered by the government, the agency is also strengthening the requirements for loans sold through pools targeted to help neighborhoods with numerous foreclosures. Under its new DASP guidelines, HUD will also put up smaller pools of homes for sale to attract more nonprofits. To date, a paltry 2% of DASP sales have been to nonprofits, and the other 98% to hedge funds and others looking to make a profit asap.

“These changes reflect our desire to make improvements that encourage investors to work with delinquent borrowers to find the right solutions for dealing with the potential loss of their home,” Charles said in April when he announced the modifications to DASP.


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