HUD Turns to Private Investors to Rescue Troubled Borrowers
June 13, 2012
The Department of Housing and Urban Development has expanded an Federal Housing Administration pilot program that allows private investors to purchase pools of nonperforming mortgages on the brink of foreclosure before they end up in HUD’s real estate-owned portfolio.
Announced last week, the new initiative provides an alternative method for thinning the FHA’s bulging inventory of foreclosed properties, keeping borrowers in their homes and reducing FHA losses.
The Distressed Asset Stabilization Program expands the FHA note sales program, which began as a pilot in 2010 and has resulted in the purchase of more than 2,100 single-family loans to date.
Known as the “Mortgage Acquisition and Disposition Initiative” back then, the note sales pilot program gives HUD the option of “acquiring mortgages upstream” as opposed to waiting until borrowers have lost their homes to foreclosure and the properties become REOs.
Under the pilot, a servicer can place the loan in a loan pool if the borrower is at least six months delinquent on the mortgage and not in bankruptcy. In addition, the servicer must have exhausted all FHA loss mitigation options and has initiated foreclosure proceedings.
The servicer then submits a claim and assigns the defaulted mortgage to the FHA with the borrower still in the home. Once the loan is assigned, FHA sells the mortgage at a discounted price to a new investor, whom will take additional steps to help the borrower avoid default, whether through modification or a short sale.
Once the note is purchase, the investor is required to delay foreclosure for up to six months to allow the servicer to get the loan to re-perform.
The first sale under the expanded program will be in September, when up to 5,000 loans will be available for sale to investors. There will also be neighborhood stabilization pools to encourage investment in areas that have been hit hard by foreclosures and delinquencies. Note sales in the hardest-hit areas will require that no more than 50 percent of loans within the purchase pool will revert to REO and that the servicer hold on to the properties for at least three years if the defaulted loan is not cured.
“This is an incentive to get the current borrower to re-perform, provide the borrower a graceful exit through short sale, or help the borrower rent the property to someone else as long as the property is held for at least three years,” explained Acting FHA Commissioner Carol Galante.
The FHA inventory of REO properties totaled 29,692 in February, the lowest it had been since July 2010, but has grown to 41,466 from March through May.
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