Two years ago, Michelle Patterson's delinquent mortgage became one of thousands in Maryland sold by the federal government to a hedge fund or other private investor at a major discount.
The federal government has sold thousands of delinquent Maryland mortgages to private investors through a controversial program that critics argue hurts homeowners and contributes to Baltimore's vacancy problem.
Now they're mounting a campaign to try to change the program established by the U.S. Department of Housing and Urban Development in 2010 partly to get bad federally insured loans off the government's books.
Critics say the buyers, who purchased the mortgages at steep discounts off the unpaid balances, aren't using those discounts to be more flexible with homeowners, as the program also intended.
Instead, advocates say, the buyers are foreclosing on homeowners or offering new mortgages that add decades to mortgage terms and require borrowers to make balloon payments at the end of those terms to cover missed payments and penalties.
"We're supposed to be addressing the issue of these loans rather than adding to the problem," said incoming City Councilman John Bullock at a news conference about the program at City Hall on Wednesday. "We have enough vacant houses in Baltimore."
Since 2010, HUD has sold about 105,000 loans nationwide through what is known as the Distressed Asset Sales Program, or DASP. In Maryland, about 3,800 loans worth more than $845 million have been sold, according to a report issued in January.
The program is considered a last resort for dealing with thousands of defaulted, federally insured mortgages for which banks have exhausted other options for homeowners and turned to HUD for relief. After paying off the lender, HUD resells the loans at a discount to investors.
Many of the loans sold are very delinquent, an average of 28 months behind on payments, according to an October HUD report.
But consumer advocates worry that some loans were sold without banks and mortgage servicers going through all the steps required by the Federal Housing Administration to help homeowners address their FHA-insured mortgage debt.
And they argue that the new mortgage owners are not receptive to homeowners' requests for modifications, even though they acquired the loans at discounts of 40 percent or more, according to HUD.
"They're not getting any answers from their servicers, and then the loan is sold into DASP, and it's only downhill from there," said Phillip Robinson, an attorney with the Consumer Law Center in Montgomery County, one of those who has raised concerns about the program.
Michelle Patterson, 49, is one of the homeowners whose loan was sold through DASP about two years ago. She purchased her home in Northeast Baltimore in 2010 for $89,000, but fell behind on the mortgage after a car accident in 2011 forced her to stop working temporarily.
Patterson, now back on her feet and working, said her family can afford to make monthly payments, but efforts to modify the loan were rebuffed in a seemingly endless exchange of paperwork. This month she received a notice saying she must leave her house Nov. 28 after a foreclosure.
"We can afford the mortgage. That's not the problem," Patterson said. "If you're working, you're making the money, you're supposed to be able to stay in your home."
While 79 percent of the loans sold through DASP were for homes occupied at the time of the auction, fewer than 8,000 borrowers remain in their homes, according to HUD's October report. About 37 percent of the loans went to foreclosure, while another 33 percent remain in delinquent servicing.
HUD spokesman Brian Sullivan said those homeowners would not be in their homes without the sales program.
An Urban Institute analysis of the program called it a "win-win," saying it improved chances for borrowers, while reducing costs for the federal government. Foreclosure is costly to the new mortgage holders, and a short sale or loan modification is typically the more cost-effective route, even for investors, the analysis found.
"Without question, there have been servicing abuses in the past, and current servicing is imperfect. But the data show that borrower outcomes are far better under the nonperforming loan sales than they would be without these programs," the researchers, Laurie Goodman of the Urban Institute and Dan Magder of Center Creek Capital Group, wrote in the report, published in January.
Goodman and Magder called many of the critiques of DASP too simplistic.
"We must recognize that many of these borrowers simply can no longer afford their homes because of job loss, income reduction, or having taken on an overly ambitious loan," they wrote.
HUD has tried to address the concerns. In June, it announced a series of program changes designed to encourage reductions in principal, prohibit purchasers from walking away from homes and allow more loans to be purchased by nonprofits.
"We've heard the criticisms loud and clear," HUD's Sullivan said. "But lest there be any confusion — had it not been for this note sales program, thousands of families wouldn't be in their homes today."
Consumer advocates are moving to pressure investors directly.
Representatives from the Unite Here union, which represents workers in the hotel and other industries, have traveled with homeowners to four states to testify at meetings of public pension funds to raise awareness of the practices of companies involved in the program.
They intend to speak at a meeting of Maryland's State Retirement and Pension System on Thursday.
In advance of the meeting, the union issued a report focused on Oaktree Capital Management, a Los Angeles-based investment company that has purchased nearly 4,800 loans through the program, including hundreds in the Baltimore area. (Oaktree also owns nearly 15 percent of The Baltimore Sun's parent company.)
About 40 percent of Baltimore-area loans tied to Oaktree resulted in foreclosures, according to the union report, citing HUD data for a 2013 sale. Oaktree modified about 14 percent of the loans, but did not change the principal on any of them — unlike other firms, according to the report.
Visits by union representatives to 320 homes in the Baltimore area linked to the mortgages purchased by Oaktree found that 45 percent were vacant.
Officials at Oaktree declined to be interviewed. But in a written statement, the firm disputed the union's facts, saying it has forgiven up to $4.5 million in principal on 44 loans in the Baltimore area. The firm is also in the process of selling more than 150 foreclosed homes "at a loss" to a community housing organization that will put the houses back in use, it said.
"The truth is that Oaktree is in full compliance with HUD's [neighborhood stabilization outcome] program and expects to remain so. The Oaktree-managed funds that purchased the HUD loans in the Baltimore area are pursuing home retention first in all cases," the firm said. "HUD was seeking partners capable of injecting new capital and expertise into these difficult situations and helping borrowers retain their homes, and we're proud to have been able to do so."
Eileen O'Grady, a Baltimore-based analyst for Unite Here, said she's aware of Oaktree's claims but been unable to verify the numbers independently through HUD.
Members of the incoming City Council, including Bullock, Mary Pat Clarke and Zeke Cohen, called on Wednesday for Oaktree officials to attend a hearing in Baltimore on the firm's management of the program.
U.S. Rep. Elijah Cummings, who has pressed HUD for changes to DASP, also sent a letter to Oaktree in response to the report. He said in a statement that he found the Unite Here research "devastating and shocking to the conscience."
"It is unconscionable that a program meant to help families stay in their homes apparently is being used to evict them, and I will do everything in my power to get to the bottom of this and ensure they are made whole," he said.
Unite Here and the housing advocacy coalition Baltimore Housing Roundtable want to convince the city to participate in the DASP sales or back nonprofits willing to bid on the loans, possibly through a land bank or another tool.
"We think this is something the city could be proactive on," said Peter Sabonis, an attorney and member of the housing roundtable coalition.
Patterson is now working with Legal Aid to try to postpone her eviction by Oaktree, but she has given up hope that she can stay in her house, which she and her husband spent thousands to fix up.
On a recent weekday, bags packed with toys and other belongings filled the living room. Patterson said she's looking at filing bankruptcy to try to clear the debt and she's not sure where the family will go.
"I accept the fact that I have to move," Patterson said. "I just hope nobody else has to go through anything like this."