Julian Castro’s Housing and Urban Development Department announced significant changes Thursday to a federal program that sold delinquent mortgages to private investors — a move that mollified progressive critics who threatened to undermine his vice presidential prospects.

With three weeks remaining until the Democratic convention and Hillary Clinton’s campaign narrowing down its list of potential ticket mates, the U.S. housing agency said it is changing a controversial program to give delinquent homeowners a new chance to reduce the principal they owe on their mortgage. The changes also prohibit financial firms from giving up on trying to sell or recuperate decrepit properties the businesses would rather walk away from.


As HUD secretary since 2014, Castro had been under attack from by at least 11 Latino and populist groups for his oversight of the department’s “distressed asset stabilization program,” which sold struggling homeowners’ mortgages to hedge funds. Castro, they alleged, failed to deliver on a HUD promise to sell more mortgages to non-profit community groups instead of financial firms.

Started in 2012, the program’s two stated objectives are to help struggling residents while also clearing billions of dollars of bad debt off the agency’s books. But liberals have argued the program undermines homeowner protections, especially for people in low-income neighborhoods, as HUD sold mortgages to the same financial firms that exploited borrowers in the lead-up to the 2008-2009 recession.

The changes came not long after Castro surfaced on Clinton's short list of vice presidential candidates — along with Sens. Tim Kaine and Elizabeth Warren — leading to immediate speculation about the HUD secretary’s political motivations.

Warren was among those calling for major reforms to the program.

“Given that Secretary Castro has only spent a brief time on the national stage, the black mark caused by the distressed asset issue stands out prominently on his record,” said Isaac Boltansky, director of policy research for Compass Point Research & Trading in Washington. He covers housing policy.

“There is no question that the left’s attack of this program generally — and Secretary Castro specifically — lowered the odds of him being tapped,” he said.

As severely-delinquent mortgages accumulated after the recession, the Federal Housing Administration, a division of HUD, needed to reduce debt liabilities to the government.

Under the program, delinquent loans held by banks but insured by the FHA are sold to new buyers, including hedge funds, private-equity firms and non-profit community groups. Through May 2016, HUD sold more than 105,000 FHA-insured loans valued at $17 billion, according to a report by the National Consumer Law Center.

Castro has not said much publicly about the program, which in recent weeks erupted into a politically-charged issue for the Obama administration, said sources with familiar with the situation.

The program was supposed to give struggling homeowners another chance to avoid foreclosure. But researchers following the program said that financial companies have used it to circumvent homeowner safeguards.

“If you have an option of selling your loan through [the] DASP, then you don’t have to go through state foreclosure procedures that have the consumer protections in them and actually help enforce FHA rules,” said Geoff Walsh, author of NCLC’s report. He previously worked as an attorney with Vermont Legal Aid, Inc. and specialized in housing, consumer and bankruptcy areas. “A lot of damage has been done,” he said.

The liberal groups held Castro responsible for the program’s flaws, even though it started before his tenure at HUD. But the groups immediately applauded HUD’s new changes to the program that they had advocated for.

Housing and Urban Development Secretary Julian Castro introduces Hillary Clinton at a "Latinos for Hillary" grassroots event October 15, 2015 in San Antonio, Texas. | Getty

Their website attacking Castro was still live on Friday, though it will be updated to reflect HUD’s changes, said Matt Nelson, managing director of Presente.org, which claims to be the largest U.S. online Latino organizing group.

Housing experts acknowledged that pressure from advocacy groups — which used the issue to question Castro’s progressive credentials — played a role in the revisions.



“But for his potential to be vice president, these changes probably don’t get made,” said Edward Gorman, head of community development for the National Community Reinvestment Coalition, whose members include nonprofits that buy DASP loans.

“It was the specific targeting of the secretary on this issue and the gathering of liberal senators in support that caused the [Obama] administration and the secretary particularly to take another look at this issue,” he said. “This will be fodder for Republicans. This will become a political issue.”

For Castro, it had already metastasized into an issue that clouded his vice presidential prospects. Widely regarded as one of the Democratic Party’s rising Latino stars, the former San Antonio mayor was targeted by a coalition of activist groups that recognized the leverage afforded to them by a presidential primary fight colored by questions about Clinton’s ties to Wall Street and Bernie Sanders’ populist, anti-Wall Street rhetoric.

“HUD has continually enhanced the DASP program by making improvements before every sale since 2014,” an agency spokeswoman said in a statement. “As a result, tens of thousands of families have been able to remain in their home or avoid foreclosure through the program.”

Maurice Weeks, a housing staffer at the Center for Popular Democracy, one of the groups supporting the attack on Castro’s handling of the DASP, said he is grateful to see the changes HUD announced. But his group will want to make sure the changes actually result in better conditions for communities.

“It became a political problem for Castro since he’s the head of that department,” Weeks said. “We didn’t set out to determine if Castro was a good VP candidate or not. Our focus was on homeowners across the country.”

