Distressed Asset Stabilization Program: What does it mean for homeowners?

Mortgages
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What is DASP?

The Distressed Asset Stabilization Program (DASP) is the government’s latest attempt to aid struggling homeowners facing foreclosure. The bad news: you can’t apply for it. The good news: if you do get in, your odds of staying in your home are much, much higher.

DASP is being rolled out nationally, and has additional geographically targeted pools in four U.S. markets—Chicago, IL., Newark, NJ., Phoenix, AZ., and Tampa, FL.

Market Projected # of Mortgages To Be Sold This Quarter
Chicago 1,500
Newark 500
Phoenix 300
Tampa 1,200
National, non-targeted 4,500-5,000
Overall 8,000-9,000

Source: Federal Housing Administration/U.S. Department of Housing and Urban Development

Before you say that’s too few mortgages to mean I’ve got a shot, consider this: there have been tons of mortgage aid programs floated in recent years by federal regulators—perhaps you’ve already tried to swim through the alphabet soup of HAMP, HARP and HAFA. All those have had disappointingly low success rates and fallen short of projected targets. Regulators and politicians alike are scrambling for a housing miracle, so even if you’re not included this time around, DASP is already being ramped up rapidly—the Federal Housing Administration originally said only 5,000 mortgages would be sold this quarter, and they’ve already upped that to 9,000. Your turn could come sooner than you think.

How does DASP work?

DASP is a public-private partnership, which is poised to align the incentives of the investor with those of the homeowner and their community.

DASP gives investors new access to buy defaulted mortgages that are in control of the FHA and are almost certainly going to be foreclosed upon. The mortgages will be sold at auction and due to their risky status will go for a price below the outstanding principal balance (meaning the amount you as a homeowner have left to pay).

What does it mean for me?

To be put in a DASP pool, you must be at least six months delinquent on your mortgage, your servicer has to have exhausted all the steps in the FHA-approved loss mitigation procedure, and you cannot have declared bankruptcy.

Once your mortgage note is purchased through the program, foreclosure must be delayed for a minimum of six months. You will also get a new servicer to go along with the new owner of the debt. A servicer refers to the company that you actually pay your mortgage debt to. They are not the underlying owner of your loan, however—they are the middlemen who report back to the owner. It can get confusing, because sometimes the servicer is actually a part of the same company as your lender. For instance, if you have a Wells Fargo mortgage, your servicer is likely to be Wells Fargo. If you have a mortgage from Citizens Bank, which is owned by RBS, your servicer will probably be another company that’s owned by RBS. But the servicer is a separate entity of the company, for legal purposes.

If you were working with a large, faceless servicing company—maybe one that engaged in the robo-signing type of activity that was recently brought to light—then a new company, which might be a smaller one, a regional one, or one with a better track record of working with borrowers, could be a big help in working with you to repay your debt and avoid foreclosure.

The investor doesn’t have to reduce the amount you owe, or modify your repayment terms, but as we will discuss below, those are definite possibilities that fit with many distressed mortgage investor strategies.

Also, the purchasing investor (unlike the FHA) probably doesn’t want to foreclose on you, even after the DASP-mandated six-month stay on foreclosure is over. There are a few reasons why not:

  • The investor probably bought your mortgage to pursue a strategy where they reduce the principal, or lower the amount you owe, to get you to pay them back. So let’s say you still owe $200,000 on your mortgage, but you’ve defaulted and the FHA put you in a DASP pool. A DASP-participating investor buys your mortgage note for $150,000. The investor then modifies your loan, telling you that you only owe $175,000, along with offering you a more lenient repayment schedule and giving you a new servicer to work with. You end up repaying and staying in your home, while the investor has made a profit. That’s a simplistic overview, but it’s essentially the kind of investing DASP is set up to encourage.
  • If you live in one of the geographically targeted pools (Chicago, Tampa, Phoenix, Newark), then they can essentially only foreclose on 50% of the loans they buy out of that pool, with an error margin of 10%.  The FHA has outlined “Neighborhood Stabilization Outcomes”—they include getting you to start paying back your mortgage, helping you do a short sale, and others—and they don’t include foreclosure. Buyers have to meet a ~50% quota of Neighborhood Stabilization Outcomes. If they don’t, they have to pay back the FHA. Since your odds of foreclosure were basically 100% before your loan got bought, a ~50% cap is a step up.
  • Foreclosure is expensive. A Federal Reserve Bank of Chicago study estimated that foreclosures cost a bank on average $50,000. While of course there are no guarantees, it’s unlikely investors would buy up these properties with an aim to foreclose on a large number of them.

So far, investors have welcomed DASP—it’s an expansion of a pilot program the FHA has already been finding a high level of interest in. Last week’s JPMorgan Securitized Product Weekly, a research and strategy commentary aimed at investors, noted the market’s embrace of DASP, pointing to the FHA’s decision to aim at selling 9,000 mortgages this quarter, up from its original goal of 5,000.  While it may not pull at your heartstrings, the flailing U.S. housing market hasn’t been great for investors either, and lots of funds are looking for distressed mortgage investment strategies, rather than fighting against the trend of fewer borrowers being able to repay. Mortgage bond pioneer Lewis Ranieri, described in Michael Lewis’s “Liars Poker” as a ruthless Wall Street profiteer, is now running the Selene Residential Mortgage Opportunity Fund, which uses warm-and-fuzzy strategies like sending foreclosed-upon homeowners free gift cards to get them to work out a repayment plan with a servicer.

But maybe a modification, a new servicer and a stay on foreclosure still don’t get you to where you need to be. If all else fails, DASP specifies that the purchaser should attempt to use a short sale, meaning selling the home for less than the amount due on the mortgage. Short sales are often a better outcome for borrowers than foreclosure—they don’t always destroy your credit score, for one.

While only 9,000 homeowners are getting the benefits of DASP right now, it’s often been noted that President Obama is under a lot of pressure to fix up the U.S. housing market to improve his stature in the 2012 election. Maybe a super-sized DASP is the solution he’s looking for.

 

Homeowner image via Shutterstock