As part of a broad based effort to address the housing market’s “shadow inventory” and to target relief to communities experiencing high foreclosure activity, the U.S. Department of Housing & Urban Development (HUD) has announced preliminary results from the first loan sale under its expanded Distressed Asset Stabilization Program (DASP). HUD’s next scheduled sale, which will take place late in the first quarter of 2013, will include approximately 10,000-15,000 loans, and will have targeted Neighborhood Stabilization Outcome (NSO) pools located in select metropolitan areas in Georgia, California, Florida, and Ohio.
HUD is accelerating the use of loan sales through DASP, selling severely delinquent mortgage loans insured by the Federal Housing Administration (FHA) through a competitive bidding process in which loan pools are sold to the highest bidder, including non-profit and community-based organizations.
“This program accomplishes two very important objectives– it supports communities hardest hit by the housing crisis and it saves considerable money for FHA’s insurance fund,” said FHA’s Acting Commissioner Carol Galante. “The results from the September sales were strong which tells us investors of all stripes and communities are eager for this solution.”
HUD will sell at least 40,000 distressed loans over the next year, generally in quarterly sales, in an effort to reduce total claims cost and increase recovery on losses to FHA’s Mutual Mortgage Insurance (MMI) Fund. The results from the September sale were strong with a record participation among interested bidders. While FHA is in the process of settling the transactions, making the results announced today still preliminary, it is very pleased with the bid prices received in the September sale. The results of which, when considered by FHA’s independent actuary, yielded an estimate of an additional $1 billion in economic value to FHA’s Mutual Mortgage Insurance Fund in fiscal year 2013 alone by significantly reducing the expected severity of losses on loans sold through the program. See results from September’s note sales.
HUD’s September sale took place in two parts. The first part, conducted on Sept. 12, consisted of approximately 5,300 non-performing loans in six different “national” pools with a combined unpaid principal balance of $950 million. The second part occurred on Sept. 27 and consisted of approximately 4,100 loans in seven different “Neighborhood Stabilization Outcome (NSO)” pools with a total of approximately $770 million in unpaid principal balance. The NSO pools are a new and important addition to DASP. They consist of loans pooled in geographically concentrated areas and are accompanied by sale terms that promote neighborhood stability in hard-hit communities. NSO pools in the September sale were in four geographic areas: Chicago, Illinois; Tampa, Florida; Phoenix, Arizona; and Newark, New Jersey.
FHA worked closely with the state and local government on their neighborhood stabilization objectives to carve out targeted sub-pools in three of the geographic areas that were eligible for and won by non-profit, community-based organizations.
A record number of bids were received on all 13 pools and each pool was awarded to the highest bidder. In total, the 13 pools went to 10 different entities. The three targeted NSO sub-pools were all awarded to nonprofit and community-based organizations. One of these organizations partnered with the State of Illinois using the U.S. Treasury’s Hardest Hit Fund to facilitate the transaction.
Like September’s sale, the first sale in 2013, which be held late in the first quarter, will be held in two parts. In the first part HUD will accept competitive bids for non-performing loans bundled into national pools. In the second part, to be held roughly two weeks after, loans will be offered in NSO pools in geographically concentrated areas including the following metropolitan areas: Atlanta; Southern California (Los Angeles, Riverside, San Bernardino and Long Beach); Ohio (Cleveland, Akron and Canton); and Florida (Fort Lauderdale, Miami and Greater Orlando).
FHA’s note sales program was resumed in 2010 as a direct sale pilot program that allows pools of mortgages headed for foreclosure to be sold to qualified bidders and charges them with helping to bring the loan out of default. In many cases, this is a less expensive alternative to foreclosure and sale as REO. An FHA servicer can place a loan into the loan pool if the following criteria are met:
►The borrower is at least six months delinquent on their mortgage;
►The servicer has exhausted all steps in the FHA loss mitigation process; and
►The servicer has initiated foreclosure proceedings.
Under the program, FHA-insured loans are sold competitively at a market-determined price generally below the outstanding principal balance. Once the loan is purchased, foreclosure is delayed for a minimum of six additional months, during which time the new servicer can work with the borrower to find an affordable solution to avoid foreclosure. These loans are purchased at market rate, which is generally well below the outstanding principal balance, giving the investor the incentive to take additional steps to help the borrower avoid foreclosure, including modifications that may include reduced principal balances.
Last June, as part of an effort to address its seriously delinquent loan portfolio, FHA announced that, over the next several years, it would significantly increase the number of loans it makes available for purchase as well as add a new neighborhood stabilization pool to encourage investment in communities hardest hit by the foreclosure crisis. The “Neighborhood Stabilization Outcome” (NSO) pools, as an additional safeguard in distressed communities, require that no more than 50 percent of the loans within a purchased pool be marketed as real-estate owned (REO) properties and – if the servicer and borrower are unable to avoid taking the loan through foreclosure – that the servicer achieve some other neighborhood stabilizing outcome, which may include holding the property for rental for at least three years.