WASHINGTON — Key Democratic lawmakers are urging the Department of Housing and Urban Development to tighten its program for selling nonperforming guaranteed loans to ensure servicers have exhausted all loss mitigation options before the loans are sold to private investors.

Rep. Elijah Cummings, D-Md., and Sen. Sherrod Brown, D-Ohio, are concerned that the Federal Housing Administration has sold distressed loans to investors while homeowners are still in agency-approved loan modification programs.

"Multiple news sources cite legal advocates who claim that many homeowners — including borrowers residing in our states — were still actively pursuing loss-mitigation options when their loans were sold," the lawmakers wrote in a Feb. 1 joint letter to Department of Housing and Urban Development HUD Secretary Julian Castro.

Lawmakers are concerned that once the loans are sold private investors have an incentive to force the borrowers into foreclosure.

"Without the borrower protections guaranteed by HUD, borrowers whose mortgages are sold can be offered modifications that do not yield affordable payments or are unsustainable over time," the lawmakers wrote.

A HUD spokesman declined to comment on the Cummings-Brown letter, but he said the agency would respond to the lawmakers directly.

HUD has sold over 100,000 nonperforming FHA-insured loans since the agency launched its Distressed Asset Stabilization Program in 2010. Under DASP, nonperforming FHA loans are generally sold at a discount to investors.

This discount gives investors more flexibility to approve a principal reduction or short sale, according to Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute.

"There is no question that there have been servicing abuses in the past and servicing is not perfect. But the data show that the loan sales are producing better outcomes to borrowers than foreclosures in the absence of DASP," Goodman says in Jan. 6 Urban Institute blog.

Goodman suggested that the FHA could improve the program by reporting on what investors are doing to enhance the outcomes for delinquent borrowers. HUD should ensure that investors don't walk away and leave vacant homes that burden neighborhoods and municipalities.

Cummings is the ranking Democrat on the House Oversight and Government Reform Committee and Brown is the top Democrat on the Senate Banking Committee.

The two lawmakers are demanding that HUD provide information about how the FHA ensures loss mitigation procedures are followed prior to a sale of loan. They also want to know what protections are given to homeowners after their mortgages have been sold and what percentage of nonperforming loans are sold to nonprofit housing groups.

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