FHA Moves To Forestall Foreclosures

As many as 5,000 distressed loans to be sold each quarter

The Federal Housing Administration (FHA) announced last week that they are implementing a bulk sale program to liquidate some of the distressed loans they hold. Currently the agency holds more than 700,000 mortgages that are in severe delinquency, representing nearly 10 percent of the loans that it insures.

Beginning this September, the FHA will sell loan pools of 5,000 distressed loans to investors “for market-determined prices, which are usually less than the outstanding balance on the loan. The servicer will agree not to foreclose on the family for six months as they work to stay in the home,” stated HUD Secretary Shaun Donovan. (via Housing Wire)

Expanding last year’s test of the Distressed Asset Stabilization Program

In a pilot program last year, the FHA sold about 2,200 distressed loans. The agency has yet to gather enough information on the status of those loans to determine how many of those loans were modified to allow borrowers to resume payments or how many of those borrowers were still living in the homes in question. (via The Wall Street Journal)

For loans to be eligible for the loan pool they must be a minimum of six months delinquent, the borrower cannot be in bankruptcy, the servicer must have exhausted all FHA-allowed loss mitigation steps and foreclosure proceedings must have begun. (via The New York Times)

Goal is to help reduce actual foreclosures…

The FHA is bound by certain regulations that limit the scope of loan modification and mitigation that servicers can offer on FHA backed loans. Once the loan has been sold and is no longer subject to FHA guidelines, more options can be made available to the borrower — such as principal reduction, short sale or a rent-to-own plan for the borrower, with the option to buy the home again in three years.

The loan pools are not intended for “vulture” investors. In fact, the program poses certain restrictions on the purchaser — 

a) the investor is not allowed to foreclose on any loan in the pool for six months after buying the FHA-backed loans;

b) the investor is required to modify at least half of the loans in the pool and hold them for at least three years without reselling them. (via Reuters)

…and to support neighborhood stabilization

The FHA plans to create pools that will encourage investment in areas that have been most impacted by the foreclosure crisis. Eight communities have already been selected by the FHA, although not specified in last week’s announcement — except for identifying Chicago as a possibility. The FHA will also work with local non-profits and governments to allow them to use Neighborhood Stabilization Fund money to buy non-performing loans. (via DS News)