The U.S. Department of Housing and Urban Development (HUD) recently announced that investors can now apply to purchase pools of severely distressed mortgages that were previously insured by the FHA. According to a recent article for Inman News, 9,000 defaulted FHA loans will be put up for sale by HUD under its Distressed Asset Stabilization Program. Of those, about 40 percent will be located in Chicago, Newark, Phoenix, and Tampa, the four most notoriously recession-hit metropolitan areas. The original goal was 5,000 loans per quarter, but HUD decided to increase it in an effort to stabilize communities and prevent avoidable foreclosures.
According to HUD Secretary Shaun Donovan, “The housing market “has momentum not seen since before the crisis,” but that some metros “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.”
According to the article, the program works like this: “If a borrower is at least six months delinquent on their mortgage, the program allows an FHA-approved loan servicer to file a claim for FHA insurance benefits and assign the loan to FHA if the servicer has exhausted all steps in the FHA loss mitigation program and initiated foreclosure proceedings,” according to the article. “FHA then pools such loans for resale and sells them at auction generally at a price below the outstanding principal balance. FHA removes FHA insurance before transferring the loan to the purchasing investor.”
After everything is said and done, the foreclosure is delayed by at least six months so that the servicer and borrower can explore affordable ways to help the borrower remain in his or her property. The purchaser is then able to possibly reduce or modify loan terms while the original investment continues to get returns.
“This program creates the opportunity for everyone — the homeowner, the new mortgage holder, FHA, and the community — to walk away a winner,” said Acting FHA Commissioner Carol Galante. “FHA not only avoids the costs associated with a long foreclosure process, but also the high costs of maintaining and selling vacant properties in already distressed markets.”