FHA Announces Plans to Sell Discounted, Delinquent Loans to Investors

Secretary of ""Housing and Urban Development"":http://portal.hud.gov/hudportal/HUD (HUD) Shaun Donovan and ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory (FHA) Commissioner Carol Galante announced in a press conference Friday FHA's program to sell mortgage loan pools to investors.

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The Distressed Asset Stabilization Program, designed to give homeowners with seriously delinquent loans a chance to avoid foreclosure, is an expansion of an earlier FHA pilot program that allows investors to purchase loan pools headed for foreclosure. Investors are then charged with the task of working to bring the loan out of default. The program starts in September 2012 with a sale of the loan pools.

A servicer can place a note into a loan pool if it falls under certain criteria. First, the borrower must be at least six months delinquent and must not be in bankruptcy. The servicer must have exhausted all steps in FHA's loss mitigation process and must have initiated foreclosure proceedings.

Under the program, FHA-insured notes are sold at a price generally below the outstanding principal balance. After purchase, foreclosure is delayed for six months while the servicer works with the borrower to find another solution. The investor purchases the loan at a discount and then takes steps to help the borrower avoid default with loan modifications or short sale. The program gives borrowers more options than FHA can typically offer.

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To protect against neighborhood blight, HUD will have a requirement that no more than half of the loans within a purchased pool become REO properties. Furthermore, if the servicer and borrower cannot bring the loan out of default, the servicer must hold it for at least three years.

""Currently, FHA's inventory of REO properties available for sale is at its lowest level since fiscal year 2009,"" said Galante. ""At the same time, the inventory of seriously delinquent loans is near an all-time high. With many neighborhoods still fighting to recover from the housing crisis, going upstream will allow us to help more borrowers before they go through foreclosure and their homes ever come into the REO portfolio.""

Beginning with the September 2012 sale, FHA will increase the number of loans available for purchase from 1,800 a year to a quarterly rate of up to 5,000. There will also be a specific neighborhood stabilization pool to encourage investment in communities most affected by the foreclosure crisis. Those communities have yet to be named, but Galante said that eight have been chosen and identified Chicago as a potential candidate. Chicago is one of the hardest-hit cities with a substantial number of delinquent borrowers.

For struggling homeowners, FHA's program represents another chance, Donovan said.

""There are going to be a set of options that might arrive on that doorstep as the best news that homeowner has ever heard after, frankly, they've probably gone through six months or more where they've tried a number of things and given up hope,"" he said. ""So this will be another chance, another lifeline for these families that they certainly weren't expecting.""