Approximately 20,000 severely delinquent FHA-guaranteed mortgage loans will be offered to investors through two Department of Housing and Urban Development (HUD) sponsored auctions this summer. The sales are part of HUDs expanded Distressed Asset Stabilization Program designed to reduce FHA's shadow inventory, target relief to geographic areas that have been especially hard hit by foreclosure activity, and shore of FHA's mortgage insurance fund.
On June 26th investors will have the opportunity to purchase approximately 15,000 notes through "national pools". The second sale, on July 10 will offer loans from Neighborhood Stabilization Outcome (NSO) pools that are concentrated in Chicago, southern Ohio, metropolitan Los Angeles, and the state of North Carolina. Loans will be sold through a competitive bidding process and sold to the highest bidder.
As a condition of purchasing the loans the buyer must agree to delay any foreclosure for a minimum of six months during which it can work with the borrower in an attempt to preserve homeownership. As the loans are generally purchased below the outstanding principal balance HUD says this gives the investor an incentive to work with the borrower such as by initiating modifications that include a reduction of the loan's principal balance.
The NSO pools have an additional safeguard for distressed communities. The rules require that no more than 50 percent of the loans within a purchased pool can be marketed as real-estate owned (REO) properties and where the servicer and borrower are unable to avoid foreclosure that "the servicer achieve some other neighborhood stabilizing outcome, which may include holding the property for rental for at least three years."
Carol Galante said there has been tremendous response to the note sales. "These auctions allow us to continue stabilizing hard-hit housing markets and to improve FHA's overall financial position at the same time," she said.
The previous set of two auctions, conducted in March, sold 16,000 plus loans similarly allocated among national pools and NSO pools. The 10 national pools had an unpaid principal balance of $2.2 billion. The five NSO pools, concentrated in Atlanta, Cleveland, southern California and several areas in Florida, had an unpaid balance of $635 million.
Servicers can place loans in the sale if the borrower is at least six months delinquent and the servicer has exhausted all steps in the FHA loss mitigation progress and has initiated foreclosure.
HUD said it expects to sell more than 40,000 distressed loans this year through quarterly sales. The sales scheduled and completed will bring HUD close to that total