“This is kind of huge,” said Elizabeth Lynch, a lawyer with Mobilization for Justice Inc. in New York. Her group filed a lawsuit that contends that the loan sales disproportionately affected minority homeowners.
“This is an $18 billion program that has ramifications for stakeholders, and they didn’t notice and comment.”
Ms. Lynch said her organization, in light of the report, was considering amending the lawsuit to add a claim that HUD violated standard administrative procedures in going forward with the mortgage sales. But she added that no final decision had been made.
Frequent criticisms of the loan sales have been that some private buyers have been too quick to move toward foreclosure or that they offered borrowers one-size-fits-all modifications to reduce monthly payments.
HUD, however, has countered that with borrowers many years delinquent on the loans, any remedy that tries to avoid a foreclosure is a positive result.
The agency has also argued that the loan sales were needed to stabilize a federal government mortgage insurance fund that had guaranteed the mortgages against default. Many of the loans insured by the Federal Housing Administration were written by banks during the run-up to the financial crisis a decade ago, and borrowers began missing payments when they lost their jobs during the crisis.
The biggest buyers of soured mortgages sold by HUD have included Bayview Asset Management, Lone Star Funds, Angelo Gordon and Selene Residential Partners.
The pace of loan sales has slowed since last summer, when HUD, responding to the critics, put in place some restrictions on what private buyers could do with the mortgages they purchased.
In the lawsuit, Ms. Lynch’s organization specifically singles out Lone Star and its wholly owned mortgage firm, Caliber Home Loans.
Caliber, one of the nation’s fastest growing mortgage firms, has drawn criticism for foreclosing too fast on some delinquent borrowers and offering five-year loan modifications, during which a borrower makes reduced monthly payments. But those modifications tend to revert to their original payment terms in the sixth year, sometimes with any deferred unpaid principal or unpaid interest added to the back end of the loan.
HUD, in a response to the Inspector General report, said it had established rules and procedures for the mortgage sales but conceded that they were not “formalized in one single centralized document.” The housing agency said it was currently working toward putting all those rules and procedures into a single handbook to address the concerns raised by the report.
But Geoff Walsh, a lawyer with National Consumer Law Center, said the housing agency was inviting a potential legal challenge to any future sales if it did not now follow proper rule-making for administrative programs by giving homeowners and advocates a chance to comment.
“It is disturbing to me that HUD seems committed to not doing rule making with notice and comment,” Mr. Walsh said. “This is consistent with past practice of keeping homeowners out of the picture as much as possible.”
A HUD spokesman said the agency had nothing to add beyond its official response.
Linda Tirelli, a lawyer in White Plains who is an advocate for homeowner rights, said the rebuke from the Inspector General reflected some of the federal government’s misplaced priorities when it came to mortgages, known sometimes as notes.
“For a federal agency to sell notes without rule-making procedures implemented is appalling,” Ms. Tirelli said. “Work out a policy to sell notes but have no realistic policy for foreclosure prevention. Crazy.”
Mr. Walsh and other housing lawyers said the report’s finding would probably be of no avail to any borrower whose mortgage was sold under the program and successfully foreclosed on. The lawyers said it would be hard to find a judge willing to reopen a completed foreclosure.
But lawyers did suggest that borrowers not yet foreclosed on might be able to argue the sale of a mortgage was improper based on the Inspector General report. But they added that would likely require a borrower to file a separate claim against HUD.
Doing so is no easy task and Mr. Walsh said HUD would likely argue that the Inspector General’s findings “are not binding.”
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