U.S. Rep. Louise Slaughter, D-Rochester, recently called on the Department of Housing and Urban Development and the Federal Housing Finance Agency to make fundamental changes to programs involving the bulk sale of distressed properties.

Under these programs, hundreds or thousands of distressed properties are frequently bundled together for sale to the highest bidder, often to private equity and hedge fund firms. This approach puts community organizations at a disadvantage and fails to properly examine the potential impacts on homeowners and local communities.

“The process of bundling together thousands of foreclosed properties and selling them to the highest bidder doesn’t do enough to take into account the potential impacts on neighborhoods and homeowners in places like Rochester,” Slaughter said. “Secretary Castro and Director Watt should make fundamental changes to these programs to make them work for local communities and not just those with the deepest pockets.”

In the letter, Slaughter joined others in outlining four fundamental changes that the HUD and FHFA should make to these programs to better prioritize neighborhood stabilization, help alleviate the affordable housing crisis and work with organizations with a track record of preserving homeownership.

Foreclosures can have a major impact on families, neighborhoods and the regional economy, with properties in foreclosure five times more likely to be vacant than other residential properties. A recent analysis found that 52.7 percent of pending foreclosures in Rochester — 1,320 of 2,506 properties — are currently investor owned.

Slaughter sent the following letter to HUD Secretary Julian Castro and FHFA Director Melvin Watt:

“We are writing with regard to the bulk sales of distressed properties conducted by the Federal Housing Administration and the government-sponsored enterprises Fannie Mae and Freddie Mac.

Many of us have on a number of occasions expressed concerns about the way these programs have been structured and the impact they are having in the communities in which these properties are located. Both agencies have held some smaller, geographically concentrated auctions. FHA has begun to do nonprofit-only auctions, which is a step in the right direction. However, sale after sale seems to indicate quite clearly that the fundamental approach of these programs, to bundle up hundreds or thousands of properties at a time for sale to the highest bidder, and without sufficient attention to potential outcomes for homeowners, communities and the affordable housing missions of your agencies, has not changed.

We are concerned that this approach represents a huge missed opportunity to prioritize neighborhood stabilization, help alleviate the affordable housing crisis in communities across the country and to work with organizations that have a track record of preserving homeownership.

We believe there are certain fundamental improvements that FHA and the GSEs should make to these programs to better align them with the goals outlined above.

First, we urge your agencies to disqualify the participation of bad actors. For example, one entity that has been a winning bidder on several occasions is the Lone Star Funds. However, in October the New York Attorney General opened an investigation into the Lone Star Funds and its subsidiary Caliber Home Loans following a rash of complaints about the company’s mortgage servicing practices, including loan modifications that temporarily reduce a borrower’s payments but then revert back to the original payments often with all the deferred payments added to the back end of the loan.

Entities that pay lip service to legitimate loan modification requirements while engaging in unfair or abusive practices towards borrowers should not be able to use government programs to profit from the continuing legacy of the financial and foreclosure crisis.

Second, we ask that these programs be made as transparent as possible. We understand that the auction pools are subject to change because the circumstances of each loan are subject to change and that there are confidential provisions to mortgage loans that cannot be made public. However, at present, it is impossible to determine how the different loan pools are constructed, how properties get assigned to the different auction pools or how vacant properties are treated versus occupied properties.

We request that your agencies clearly spell out the criteria you use to determine which properties go into which pools and why. We also urge increased transparency — including much greater levels of detail — in your reporting on the outcomes of the sales. Greater transparency to individual homeowners, including notice that their home is to be included in a sale, would also help flag loans that are being added to pools inappropriately.

Third, we urge your agencies to recognize the added value provided by purchasers that commit upfront to foreclosure prevention efforts that include quality loan modifications and purchasers that commit to property disposition strategies that prioritize affordable housing. The participation of such purchasers brings benefits to these properties, the homeowners and the communities in which these properties are located that should be factored into their bids and should be accepted in lieu of higher priced bids. The work these entities do to rehabilitate these properties and achieve favorable outcomes for neighborhoods should not be discounted as immaterial to the price that your agencies will accept.

This can be done in any number of ways: By giving credit or points in the bidding process to purchasers that commit to these higher community outcome standards, by doing direct sales to nonprofit agencies and accepting prices for such sales that recognize the homeownership and neighborhood stabilization goals they will achieve, by increasing the percentage of properties offered to nonprofits and by designing robust “first look” programs that provide mission-driven entities with the initial opportunity to purchase.

Fourth, and closely connected to the above, we are concerned that state and local governments, including state and local housing finance agencies, have, to date, not been consulted in any meaningful way as to how these programs should be structured, what impact bulk sales could have in their jurisdictions, what role states and localities can play in these programs or, at minimum, if there has even been a process established for notifying states and localities of upcoming sales of properties in their jurisdictions.

State housing finance agencies, for example, have built up decades worth of experience and local partnerships that could be deployed to improve the impacts of these programs on the ground and help address some of the issues we have raised here. We urge you to bring them into the process.

As you take steps to improve these programs, we urge you not to allow an excessively narrow approach to obscure the fundamental goals of promoting sustainable, affordable homeownership and creating affordable rental housing. Maximizing sales to purchasers with a track record of preserving homeownership, stabilizing neighborhoods and creating sustainable, affordable and mixed-income housing opportunities is key to achieving these goals.

It may be a more time-consuming approach than selling off thousands of properties at a time to the highest bidder. It is, however, a more stable approach for communities in the long term and one that is more consistent with your overarching missions.”