Acting Federal Housing Finance Agency (FHA) Commissioner Carol Galante and Housing and Urban Development (HUD) Secretary Shawn Donovan announced late Friday afternoon a new bulk sale program to liquidate some of the reported 700,000 delinquent loans backed by FHA insurance.  The Distressed Asset Stabilization Program is an outgrown of a pilot program that allows private investors to purchase pools of mortgages headed for foreclosure.  The pilot has resulted in sales of more than 2,100 single family loans to date.

Beginning with the September 2012 scheduled sale, FHA will increase the number of loans available for purchase from approximately 1,800 each year to a quarterly rate of up to 5,000, and add a new neighborhood stabilization pool to encourage investment in communities hardest hit by the foreclosure crisis.

According to an article in the Wall Street Journal published before the sale was officially announced, FHA is undertaking bulk sales in an effort to reduce its growing portfolio of distressed loans and to avoid the costly process of foreclosure, but also because its own rules limit ways in which the mortgages can be modified, leaving little room for aggressive loan modifications like those done by Freddie Mac, Fannie Mae, and proprietary lenders.  Once sold these strictures disappear, the new servicer can take more drastic steps to bring the loans back on line.

Under the new program, the current servicer can place a loan into the bulk sale loan pool if the borrower is at least six months delinquent on his mortgage and has exhausted all steps in the FHA loss mitigation process.  The servicer must also have initiated foreclosure proceedings and the borrower cannot be in bankruptcy.

Once accepted from the servicers, the notes are sold competitively at a market-determined price generally below the outstanding principal balance. To minimize the chance "vulture investors" will take advantage of the program, potential investors must agree to hold off foreclosure for a minimum of six months and work with the borrowers to help find an affordable solution to keep them in their homes. FHA also seeks to provide some protection to the market by requiring purchasers to hold back from sale at least 50 percent of the homes backing the loans for at least three years.

"The Distressed Asset Stabilization Program offers a better shot for the struggling homeowner and lower losses to the FHA," Galante said. "By addressing the growing back log of distressed mortgages, FHA is helping to mitigate the negative effects of the foreclosure process as part of the Administration's broader commitment to community stabilization."

"While our housing market has momentum we haven't seen since before the crisis, there are still thousands of FHA borrowers who are severely delinquent today - who have exhausted their options and could lose their homes in a matter of months," said HUD Secretary Shaun Donovan. "With this program, we will increase by as much as ten times the number of loans available for purchase while making it easier for borrowers to avoid foreclosure. Finding ways to bring these loans out of default not only helps the borrower, but helps the entire neighborhood avoid the disinvestment and decline in value that accompanies a distressed property."

 "Currently, FHA's inventory of REO properties available for sale is at its lowest level since FY 2009," added 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."