Up to 20,000 home owners who are six months or more behind on their FHA mortgages will have their loans sold to investors over the next year. The investors will then either offer the borrowers a work out or help them do a short sale, HUD Secretary Shaun Donovon announced last week.
The Department’s new Distressed Asset Stabilization Program expands an FHA pilot program that allowed private investors to purchase pools of mortgages headed for foreclosure and charged them with helping to bring the loan out of default or complete short sales, in which the house is sold for less than what’s owed on the mortgage.
“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 Donovan. “With this program, we will increase by as much as ten 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 mortgage servicer can place your loan into the loan pool if:
- You’re six months or more late on your mortgage and you’re not in bankruptcy.
- The servicer has tried all the steps in the FHA loss mitigation process.
- The servicer has started foreclosure.
Under the program, FHA-insured notes are sold for less than what the borrower owes. 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.
Beginning in September 2012, FHA will well up to 5,000 loans a quarter 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% of the loans within a purchased pool end up being foreclosed and sold. If the servicer and borrower are unable to bring the loan out of default, the servicer will have hold the loan for at least three years to avoid excessive foreclosures.
“Currently, FHA’s inventory of REO properties available for sale is at its lowest level since FY 2009,” added 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.”