Garnet Capital Advisors Blog

Activists and politicians have launched a fresh campaign to restrict nonperforming loan sales to private equity and hedge funds. But they're getting pushback not only from the firms who argue the benefits of them buying up the distressed assets, but also by the housing officials who say the sale programs help neighborhoods.

HUD sales top $17B since 2010
Sen. Elizabeth Warren, D-Massachusetts, joined her fellow Bay State Democrat in the Congress, Rep. Michael Capuano, at a recent protest in Washington. At issue are debt portfolios for sale under the Distressed Asset Stabilization program of the Department of Housing and Urban Development and loan portfolio sales by Freddie Mac and Fannie Mae.

"The agencies package these loans in a way that is nearly impossible for nonprofits to compete," Warren told Bloomberg Business in a phone interview. "The heart of it is these loan sales need to come with strings attached with basic outcomes for homeowners."

HUD has marketed huge amounts of soured loans in recent years. The department sold $17.3 billion on the secondary market since 2010, according to Bloomberg, with almost 95 percent of those going to Wall Street firms.

Warren and Capuano urged that the rules of engagement on these sales be made more friendly to local nonprofits. In fact, HUD has already started setting some loan portfolios aside so that only nonprofits can bid on them.

Do buyers do enough to prevent foreclosure?
A key criticism by the Massachusetts politicians and housing activists is that private equity and hedge funds do a bad job of keeping properties out of foreclosure. An investigation by The New York Times uncovered a "pattern of complaints" about one major player in the secondary market: Lone Star Funds. Homeowners alleged that the $60 billion private equity firm prioritizes foreclosures over working with them to modify the delinquent loans.

"Wall Street is interested in profits," Warren said in a statement picked up by The Times, "not in working out a way for people to stay in their homes."

Thousand of abandoned homes back on the market
But investment firms argue their involvement with the loans and homeowners has benefits not just to their shareholders but also to the economy as a whole. For instance, homes numbering in the thousands are now back on the market after being abandoned by their former occupants. A February report cited by The Times showed that 1 in 10 of the homes HUD sold were vacant.

Further, investors in the nonperforming loan sales market say they serve a needed function as buyers-of-last-resort for hopeless loans. To the charge that private equity is too quick to foreclose, they point out that foreclosure is less profitable for them than making loan adjustments because years go by without homeowners paying a penny.

'Better outcomes for borrowers'
Federal housing officials also defend their loan portfolio sales. They point to recent changes in the HUD program, which mandate that foreclosures are forbidden in the first year the buyer holds a given distressed loan. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has also issued new nonperforming loan sale guidelines.

"The [new guidelines] aim to both reduce risk to taxpayers and achieve better outcomes for borrowers,"  an FHFA spokesperson said, according to HousingWire. "The guidelines require NPL purchasers to evaluate all borrowers for loan modifications and to pursue foreclosure only as a last resort. Fannie Mae and Freddie Mac have been very transparent about their NPL sales programs and have hosted training sessions encouraging non-profits and minority- and women-owned businesses to participate as NPL buyers."

The spokesperson offered as evidence a recent Fannie Mae auction won by New Jersey Community Capital. That sale involved 71 loans with $10 million in unpaid principal.

The secondary market can be complex to navigate for both sellers as well as buyers. Any questions or concerns can be discussed with loan sale advisory firm Garnet Capital Advisors.