HUD’s Distressed Asset Stabilization Program: Salvation or Sound Bite?

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Earlier this summer, the U.S. Department of Housing and Urban Development (HUD) announced the kickoff of the Distressed Asset Stabilization Program (the Program or DASP) and last week HUD issued additional information regarding the upcoming September sale under the DASP. The Program expands an earlier Federal Housing Administration (FHA) single family loan sales pilot program (the Pilot) intended to safeguard the FHA insurance fund while helping seriously delinquent FHA borrowers avoid foreclosure after they have exhausted the loss mitigation options available under existing FHA regulations.

Under the Program, servicers may submit loans meeting certain criteria for claim submission and assignment to HUD before the loans are foreclosed, after which HUD will pool the loans and sell the pools to bidding investors. To participate in the Program, however, servicing mortgagees will have to certify the loans’ compliance with applicable FHA rules, including loan origination, servicing and loss mitigation requirements – certifications not required in HUD’s existing insurance claim process. In addition, investors that purchase recently announced Neighborhood Stabilization loan pools must be amenable to becoming long-term landlords in many instances.

HUD is moving forward with a September launch of the expanded Program, but questions remain as to how successful the Program will be, given the additional certifications required of the servicing mortgagees assigning loans to HUD and the additional restrictions on investors that purchase the Neighborhood Stabilization loan pools. The additional certifications made by assigning mortgagees could materially increase a servicer’s risk of liability under the False Claims Act, which authorizes the government to pursue treble damages, where the lender is liable for three times the damages sustained by HUD, and civil penalties of up to $11,000 per transaction, if such certifications are not accurate.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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