The application process will begin today for bidders to purchase approximately 9,000 loans that are in process to become FHA owned real estate (REO). The agency's new Distressed Asset Stabilization Program is designed to clear FHA's foreclosure pipeline, minimize its REO inventory, mitigate the impact of additional foreclosures on already stressed local areas, and give borrowers a last-ditch chance to remain in their homes.
At a press conference held this morning Acting Commissioner Carol Galante announced that FHA will be selling the loans in several national and four geographically specific pools. About 3,500 to 4,000 of the loans will be located in one of four metropolitan statistical areas, Chicago, Phoenix, Newark, and Tampa in numbers ranging from 300 to 400 in Phoenix to around 1,500 in Chicago. The remainder of the loans will be on properties located throughout the country and will be sold in three or four national pools. Once sold the FHA will process the insurance claim on behalf of the previous owner, remove the guarantee and transfer the loan to the new investor.
Under program guidelines the investor must agree to delay foreclosure for a minimum of six additional months during which it agrees to work toward a solution other than a foreclosure resulting in REO. Solutions might include loan modifications, deeds-in-lieu coupled with lease backs to the owner, short sales to owner occupants, or sale to approved Neighborhood Stabilization Program (NSP) grantees.
As an additional safeguard against blight, FHA will require that no more than 50 percent of the loans within any pool become real-estate owned (REO) properties and - if the servicer and borrower are unable to bring the loan out of default - that the servicer hold the loan as a rental for at least three years.
In order to qualify for inclusion in a loan pool, a servicer must certify that:
- The borrower is at least six months delinquent on their mortgage;
- The servicer has exhausted all steps in the FHA loss mitigation process;
- The servicer has initiated foreclosure proceedings; and
- The borrower is not in bankruptcy.
Galante said she expected that the loans would sell at market value but well below the existing loan balance giving the new owner/servicer the flexibility to offer more generous modification terms. There would be no standards set for the modification such as the maximum 31 percent debt-to-income ratio previously used in the HAMP program.
The September sale is an expansion of a pilot program previously run by FHA in which about 2,100 loans were sold. When the expansion was announced last month it was expected that the sales would be held quarterly and each sale would involve about 5,000 loans. Galante said that investor interest and the size of the shadow inventory have led to increasing the size of at least the September sale. Servicers who will have to provide the loans for the sale, have also responded more enthusiastically once they learned the sales would be ongoing. When offered the pilot program they were hesitant to invest in the infrastructure that would be necessary to identify and transfer the loans for a short term program.
FHA is working with local leaders, Galante said, to create additional smaller pools within the four MSAs to fit their targeting neighborhood strategies, using tools like NSP and the Hardest Hit Fund to offer workable solutions for homeowners and communities.
Department of Housing and Urban Development (HUD) Secretary Shawn Donovan said "The housing market has momentum not seen since before the crisis, 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. As one step towards avoiding unnecessary foreclosures and further stabilizing communities, we are increasing the number of loans beyond our original goals of 5,000 per quarter to approach 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."
