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51 » VISIT US ONLINE @ DSNEWS.COM HUD'S DISTRESSED SALES PROGRAM WEATHERS CRITICISM HUD began its Distressed Asset Stabilization Program (DASP) in 2010 in response to the massive amount of foreclosures brought on by the crisis as a way to sell those distressed or nonperforming loans to investors. Critics of DASP claim that HUD should sell more of these distressed or nonperforming loans to nonprofits rather than profit-seeking investors. However, researchers from the Urban Institute concluded that all parties— HUD, the borrowers, and investors—stand to benefit when distressed loans are sold through DASP in a paper titled Selling HUD's Nonperforming Loans: A Win-Win for Borrowers, Investors, and HUD released Wednesday. e loans sold through DASP are seriously delinquent and are likely to be foreclosed on without DASP's intervention, since servicers of loans in DASP pools are required to exhaust all loss mitigation possibilities. e goal of DASP is to maximize recoveries for the Federal Housing Administration, HUD's parent agency, and help borrowers avoid foreclosure whenever possible. HUD has sold more than 100,000 distressed or nonperforming loans to private investors through DASP since the program's inception in 2010. e authors of the paper, Laurie Goodman (Director of Housing Finance Policy Center with Urban Institute) and Dan Magder (founder of Center Creek Capital Group), state that to properly evaluate DASP loan sales, one must keep in mind that DASP helps borrowers avoid foreclosure and encourages investors to pursue foreclosure alternatives, and that investors are able to better help borrowers than non-profits are. "While nonprofits have a role in helping delinquent borrowers, their limited capital and capacity suggests that their ability to significantly increase their share of DASP loan purchases will be limited in the near-term," the authors wrote. Goodman and Magder concluded that critics of DASP calling for more participation from nonprofits in distressed loan sales are misguided, because "we question whether nonprofits have or can quickly build the capacity to service a significantly larger portion of the HUD portfolio than they are currently servicing—especially if they are working alone, and not in partnership with for-profit investors who have the capacity to conduct servicing at scale." Critics of DASP also hold what the authors say are misconceptions that the purchasers of these nonperforming loans often quickly push borrowers to foreclosure and that HUD is facilitating a "massive wealth transfer" from distressed borrowers to investors. Goodman and Magder say that while current servicing is not perfect and there have been servicing abuses, the aggregate data shows that loan sales through DASP produce far better outcomes for borrowers than foreclosure when DASP is not present. Since DASP is not perfect, some changes are needed, according to Goodman and Magder. Among the changes they recommend are a refinement to the program to ensure that investors do not walk away from the most distressed properties, which makes it more burdensome for neighbors and more costly for municipalities who have to foot the bill. e authors also said they support increasing partnerships between investors and nonprofits to ensure the best outcomes for borrowers. Also, they encourage more transparency from HUD with regard to data and foreclosure alternatives. "Better disclosure will not only help all parties more accurately evaluate the impact of the program, but should also pressure servicers who are less borrower-friendly," the authors wrote. MARKET PERSPECTIVE: IT'S NOT THE KNOWNS, IT'S THE UNKNOWNS THAT WORRY YOU e Federal Reserve finally commenced monetary tightening in December, raising the federal funds target rate for the first time in nine years. e nation's central bank believes the economy is back on track following the slowest economic recovery post-World War II—but are we taking all the proper precautions to prevent another financial crisis similar to the one the nation experienced in 2007-08? e government and policymakers put in some safeguards—but it's the unknown that we need to worry about, according to Bankrate. com Senior Economic Analyst Mark Hamrick. "I would make an analogy about financial crises and boxing," Hamrick said. "e punch that a boxer is most worried about is the one that he doesn't see coming. Essentially, the same thing has to do with the risk in the global economy and financial markets." e 2007-08 crisis was unique because it was the participation of many different types of stakeholders that allowed it to happen, Hamrick said, ranging from politicians to were not vigilant about promoting regulation to politicians who promoted the idea that everyone who wants to own a home should be able to own one, as well as financial markets that encouraged the securitization of mortgages. "I think it's appropriate for regulators, central bankers, elected officials, people in industry, consumers, and investors, to have an idea about what the appropriate risks are and obviously for certain regulators in the United States to be taking all measures possible to try to guard against the next financial crisis," Hamrick said. "But history tells us that what we tend to see is that regulators try to stop the repeat of the most recent financial crisis instead of have an ability to essentially be omniscient to stop all potential financial crises. ese could be things that we just right now could not possibly anticipate." Possible causes for concern that cannot be fully anticipated range from concern over China's economy, a large scale war or natural disaster, an accident of some kind, something technical in the financial markets, or even a compromise of financial markets by hackers, Hamrick said, but could include virtually anything. e Financial Stability Oversight Council (FSOC), which was created out of the Dodd-Frank Wall Street Reform Act of 2010, has addressed some of the causes of the crisis, "but the concern is that what we don't know is what's going to hurt us," Hamrick said. "We know that we've tackled some of the problems that occurred last time around, but it's the problems we haven't quite defined yet that are probably the most worrisome."

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