Letters to Regulators: Letter to HUD on Note Sale Announcement

View or download a PDF of the letter here.

September 22, 2021 

The Honorable Marcia Fudge
Department of Housing and Urban Development
451 7th St S.W.
Washington, D.C. 20410 

RE: September 16, 2021 Note Sale Announcement  

Dear Secretary Fudge: 

On behalf of the clients and communities we represent, we write in response to the White  House’s September 1, 2021 announcement and HUD’s September 16, 2021 notice of its intent to  sell 1,730 mortgage loan notes in the fall. HUD should not resume any note sales without first  implementing regulations for the program that promote stable homeownership. Establishing rules  through a public process is essential, especially in light of the more than 12% of FHA-insured  borrowers currently delinquent, a figure three times that for conventional loans. 

According to HUD’s Office of Inspector General (OIG), the Administrative Procedure Act  (APA) requires HUD to promulgate regulations for the note sale program before selling loans.1 The HUD OIG concluded that the agency had failed to create necessary regulations when it  previously engaged in note sales. Given the requirement of the APA, HUD cannot simply  announce its intention to restart the note sale program. After the OIG report, HUD issued an  Advanced Notice of Proposed Rulemaking (ANPR) and accepted comments on it, but it has not  taken the next step of issuing proposed rules. Until HUD follows the APA, it should not restart  the sale of notes. 

In addition to its sales of single family forward mortgage notes, HUD also sold certain reverse  mortgage notes through what it termed as the Vacant HECM pools, which auctioned loans  attached to properties that HUD identified as no longer occupied by reverse mortgage borrowers.  The agency has continued to sell HECM loans even after the critical OIG report on its failure to  comply with the APA, and HUD has stated that its upcoming sale is a Vacant HECM pool;  nonetheless, the Vacant HECM pool sales have operated under the same statutory authority and  also lack transparent rules and reporting. While truly empty homes do not affect homeowners,  their sale affects what happens in the neighborhood. Moreover, procedures for ensuring  properties are actually vacant would be part of any established set of rules. The guidelines for  HECM loans sales must be published and available for comment just like those for the general  loan sale program. 

Any regulation HUD approves should promote community stabilization and avoid furthering the  harm that the note sale programs have caused. Specifically, the regulation must:  

Allow HUD to employ note sales only when it can document an imminent threat of a  negative balance to the Mutual Mortgage Insurance (MMI) fund.  

Require servicers to provide notice to homeowners prior to the inclusion of a note in any  auction, informing them that the loan is being proposed for sale as a result of the exhaustion  of loss mitigation options.  

Obligate servicers to document and certify compliance with each step of FHA’s sequential  loss mitigation review, including documentation of the grounds for denial of foreclosure  alternatives, before HUD allows the loan to be sold in a note sale.  

Mandate that loan purchasers offer and make public comprehensive loss mitigation protocols  that provide borrowers with equivalent or greater relief than the options available under FHA  loss mitigation guidelines.  

Prohibit note purchasers from offering loss mitigation options that do not support long term  affordability, including temporary interest-only modifications.  

Set aside the maximum number of notes for purchase by community groups and nonprofit  organizations with a mission of preserving homeownership or affordable rental units.  

Include comprehensive and publicly accessible limits on the disposition of properties  acquired through the program to entities other than owner-occupants, community groups,  affordable rentals, or land banks. 

Prohibit entities that acquire properties through the program from disposition through note sales using land installment contracts or conversion to high-cost rental properties. 

These recommendations are discussed in detail in comments submitted by some of the  undersigned organizations. 

HUD also has an obligation under the Fair Housing Act to affirmatively further fair housing,  which requires HUD to analyze how its programs, including the note sales program, will further  fair housing. Unfortunately, HUD has not provided any public assessment of how its program will further fair housing, which is of particular concern given that FHA-insured loans now  provide a significant means of financing purchases for African American and Latino homebuyers. As a result, policies will disproportionally impact those communities. Going  forward, it is crucial that reporting requirements for the FHA note sale program include a fair  lending analysis that reviews all aspects of the note sale program to ensure that there are no  discriminatory impacts associated with the sale of these loans on any protected classes under the  Fair Housing Act and Equal Credit Opportunity Act.  

We appreciate that HUD is considering setting aside half of the notes for sale to non-profit and  community organizations committed to rehabbing and selling homes to owner-occupants. Even if  HUD adopted this limitation, however, it leaves half of the loans sold without restriction.  Moreover, it does nothing to prevent borrowers from having their loans sold when loss  mitigation was not exhausted. Comprehensive regulations are necessary to make the program  work well for communities and to ensure the program is consistent with the goals of FHA. 

FHA-insured mortgages play a crucial role in providing and maintaining access to affordable and  sustainable homeownership for low to moderate income families and communities of color. If  the note sale program continues in its current unregulated form, FHA-insured borrowers and  their communities remain at risk of further harm from non-compliant servicers and private equity  loan purchasers. It is crucial that HUD implement strong protections both before and after loans  are sold to prevent needless borrower displacement and neighborhood instability and to ensure  fulfillment of the FHA program goals. HUD must develop and enforce robust protections for  FHA-insured borrowers and former borrowers affected by loan sales and mandate  comprehensive data collection, including on fair housing issues, so that the impact of note sales  can be properly evaluated and problems addressed. 

Thank you for your consideration. Please contact Steve Sharpe, Staff Attorney at the National  Consumer Law Center for further discussion at ssharpe@nclc.org