FHA Accelerates Sales of Distressed Loans In Effort to Shore Up Insurance Fund

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By Mike Ferullo

The Federal Housing Administration (FHA) plans to sell at least 40,000 distressed mortgage loans over the next year to help reduce record losses to the Mutual Mortgage Insurance (MMI) Fund.

In response to the recent $16 billion shortfall projected for the insurance fund, the agency has started ramping up sales of delinquent mortgages under its Distressed Asset Stabilization Program.

The agency said Dec. 3 that it sold 9,400 non-performing mortgages in September during two bulk-sale auctions and plans to sell an additional 10,000 to 15,000 delinquent loans in the first quarter of 2013.

“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,” acting Commissioner Carol Galante said in a statement. “The results from the September sales were strong which tells us investors of all stripes and communities are eager for this solution.”

The pools of loans sold in the September sale were in four geographic areas: Chicago; Phoenix; Tampa, Fla.; and Newark, N.J. The FHA said it has targeted metropolitan areas in Georgia, California, Florida, and Ohio for the next round of sales.

The FHA said it is still settling the transactions from this fall, but estimates that the auctions will yield an additional $1 billion in savings to the MMI fund by significantly reducing the expected severity of insurance losses.

Selected Loans Will Be Close to Foreclosure
The mortgages selected for the Distressed Asset Stabilization Program must meet certain criteria. The borrower must be at least six months delinquent on the mortgage, and the loan servicer must have exhausted all steps for a potential loan workout and already initiated foreclosure proceedings, the FHA said.

Once the loan is purchased by an investor, 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, such as converting the property to a rental, according to the agency.

The FHA-insured loans are sold competitively “at a market-determined price generally below the outstanding principal balance,” according to the agency. But the agency said it typically loses much more, about 60 cents on the dollar, if a guaranteed loan on its books goes into foreclosure.

The FHA's total insurance book currently covers $1.13 trillion in unamortized insurance in force, thanks to the expanded role the agency took on as private credit evaporated during the recent financial crisis.

There have been increased calls to scale back the agency's market footprint in light of the Nov. 16 actuarial report that projected a $16 billion shortfall for the MMI fund and raised the prospects for a potential bailout from the Treasury Department.

By Mike Ferullo

For more information on the distressed mortgage sales, please visit http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2012/HUDNo.12-187.

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