The Federal Housing Finance Agency (FHA) is expected to announce before the close of business today a new bulk sale program to liquidate some of the reported 700,000 delinquent loans they insure.  According to The Wall Street Journal, the agency may be planning on selling as many as 5,000 distressed loans each quarter over an unspecified period of time.

Bulk sales were used on a large scale by the Resolution Trust Corporation and the Federal Deposit Insurance Corporation during the savings and loan and banking crises of the 80s and 90s and FDIC continues to use this mechanism to clear the assets of failed banks.  Lenders and guarantors such as Freddie Mac and Fannie Mae generally shy away from these sales because of the deep discounts needed to move the loans.  Even the "good" loans such as are sold by the FDIC because they are too costly and time consuming for the institution to manage are discounted substantially; seriously delinquent loans go for pennies on the dollar.   

The Journal states that FHA is considering 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 and the investor can take more drastic steps to bring the loans back on line.

Bulk sales can be hugely profitable for investors, but in this case the sales may also allow some homeowners to stave off foreclosure by cutting better deals than would have been possible with FHA.  The Journal quotes FHA's acting commissioner Carol Galante as saying "There will be an incentive for a modification that isn't able to be done under the current system. It will be cost-effective for the FHA....It will be better for the communities."

Investors also face some restrictions that work for the benefit of homeowners and the marketplace.  They can't foreclose for six months after buying the loans and must agree to hold back from sale at least 50 percent of the homes backing the loans for at least three years.

Galante told the Journal that FHA was trying to minimize the impact of any vulture investors who buy hoping for a quick foreclosure, eviction, and resale.  "We are trying to change, frankly, the behavior of who's interested in buying these notes," she said.