The U.S. Department of Housing and Urban Development is now accepting applications from investors interested in buying pools of severely distressed mortgages formerly insured by the Federal Housing Administration, HUD announced today.
Under its Distressed Asset Stabilization Program, on Sept. 12, HUD will be selling about 9,000 defaulted loans, about 40 percent of which will be located in four metropolitan areas particularly hard-hit by the foreclosure crisis and with large inventories of real estate owned (REO) properties: Chicago; Newark, N.J.; Phoenix; and Tampa, Fla.
September’s single-family loan sale will represent a sharp ramp-up for the program, which has thus far sold more than 2,100 such loans since its inception in 2010.
The housing market "has momentum not seen since before the crisis," said HUD Secretary Shaun Donovan in a statement. But some metro areas "are still under pressure and some FHA borrowers remain seriously behind on their loans and stand to lose their homes in a matter of months."
To help avoid unnecessary foreclosures and further stabilize communities, HUD is increasing its original goal of selling 5,000 loans per quarter to approximately 9,000 this quarter.
"Providing the opportunity for borrowers to potentially stay in their home under a new sustainable mortgage or other meaningful help not only benefits that homeowner but reduces the costs to FHA and ultimately benefits the entire community," Donovan said.
If a borrower is at least six months delinquent on their mortgage, the program allows an FHA-approved loan servicer to file a claim for FHA insurance benefits and assign the loan to FHA if the servicer has exhausted all steps in the FHA loss mitigation program and initiated foreclosure proceedings, HUD said. FHA then pools such loans for resale and sells them at auction generally at a price below the outstanding principal balance. FHA removes FHA insurance before transferring the loan to the purchasing investor.
Once the note is purchased, foreclosure is delayed for a minimum of six additional months, giving the new servicer time to work through alternatives with the borrower, possibly finding an affordable solution to allow the borrower to remain in their home, HUD said.
Because the loans are generally sold for less than what the borrower currently owes, the purchaser has the ability to reduce or modify the loan terms while still making a return on the initial investment. If no viable alternatives exist, the purchaser may be able to help the borrower sell the property through a short sale and avoid the costs of foreclosure.
Under the program, no more than half of the loans within a purchased "neighborhood stabilization pool" may be sold as REOs. Other investor criteria include experience in asset management and property management and "a proven track record" of helping severely delinquent borrowers either re-perform or achieve foreclosure alternatives.
"This program creates the opportunity for everyone — the homeowner, the new mortgage holder, FHA, and the community — to walk away a winner," said Acting FHA Commissioner Carol Galante in a statement. "FHA not only avoids the costs associated with a long foreclosure process, but also the high costs of maintaining and selling vacant properties in already distressed markets."