Thousands of borrowers severely delinquent on loans insured by the Federal Housing Administration (FHA) will have help from a new program that explores affordable mortgage solutions or achieve a favorable resolution under an enhanced government note sale program. In a press conference held at the 2012 Clinton Global Initiative America Meeting, U.S. Department of Housing & Urban Development (HUD) Secretary Shaun Donovan and Acting FHA Commissioner Carol Galante launched the Distressed Asset Stabilization Program, an expansion of an FHA pilot program that allows private investors to purchase pools of mortgages headed for foreclosure and charges them with helping to bring the loan out of default.
“While our housing market has momentum we haven’t seen since before the crisis, there are still thousands of FHA borrowers who are severely delinquent today—who have exhausted their options and could lose their homes in a matter of months,” said HUD Secretary Shaun Donovan. “With this program, we will increase by as much as 10 times the number of loans available for purchase while making it easier for borrowers to avoid foreclosure. Finding ways to bring these loans out of default not only helps the borrower, but helps the entire neighborhood avoid the disinvestment and decline in value that accompanies a distressed property.”
The FHA note sales program began as a pilot in 2010 and has resulted in the purchase of more than 2,100 single family loans to date. A 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;
►The servicer has initiated foreclosure proceedings; and
►The borrower is not in bankruptcy.
Under the program, FHA-insured notes are sold competitively at a market-determined price generally below the outstanding principal balance. Once the note is purchased, foreclosure is delayed for a minimum of six additional months as the borrower gets direct help from their servicer to help to find an affordable solution to avoid foreclosure. The investor purchases the loan at a discount and then takes additional steps to help the borrower avoid default, whether through modifying their loan terms or helping them through a short sale, in order to maximize the return on the sale.
“The Distressed Asset Stabilization Program offers a better shot for the struggling homeowner and lower losses to the FHA,” said Galante. “By addressing the growing back log of distressed mortgages, FHA is helping to mitigate the negative effects of the foreclosure process as part of the Administration’s broader commitment to community stabilization.”
Beginning with the September 2012 scheduled sale, FHA will increase the number of loans available for purchase from approximately 1,800 each year to a quarterly rate of up to 5,000, and add a new neighborhood stabilization pool to encourage investment in communities hardest hit by the foreclosure crisis.
In an additional safeguard against blight, HUD will require that no more than 50 percent of the loans within a purchased 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 for at least three years.
“Currently, FHA’s inventory of REO properties available for sale is at its lowest level since FY 2009,” said Galante. “At the same time, the inventory of seriously delinquent loans is near an all time high. With many neighborhoods still fighting to recover from the housing crisis, going upstream will allow us to help more borrowers before they go through foreclosure and their homes ever come into the REO portfolio."