Enhancements to a distressed note sale program launched two years ago by the Department of Housing and Urban Development is expected to reduce the nation’s shadow inventory and benefit thousands of delinquent borrowers.
A pilot program launched in 2010 led to the sale of more than 2,100 distressed loans insured by the Federal Housing Administration.
It enables the sale of distressed FHA loan pools to investors who must help bring the loans out of default. Loans are sold at market prices — generally at a discount.
The pilot program is being expanded as the Distressed Asset Stabilization Program in a move that “will increase by as much as ten times the number of loans available for purchase,” HUD Secretary Shaun Donovan said in an announcement Friday. Donovan claims that entire neighborhoods will benefit as a result of bringing the loans out of default.
The new servicers will explore affordable mortgage solutions, such as loan modifications or short sales, or achieve a favorable resolution. This means that foreclosure is delayed at least six months as the new servicer helps find an affordable alternative to foreclosure.
“Thousands” of severely delinquent borrowers are expected to benefit from the program.
Servicers can place a mortgage into a loan pool if the loan is at least six months past due, all FHA loss mitigation options have been exhausted and foreclosure proceedings have been initiated. Loans are not eligible, however, if the borrower is in bankruptcy.
Starting with the September 2012 scheduled sale, the number of loans available for purchase will increase from the roughly 1,800 each year to as many as 5,000 per quarter. In addition, a new neighborhood stabilization pool will be added to encourage investment in the hardest-hit communities.
No more than half of any pool can become real-estate-owned properties, a requirement that HUD said will provide an additional safeguard against blight.
HUD is also requiring that the servicer hold the loan for at least three years if the servicer and borrower are unable to bring the loan out of default.
Acting FHA Commissioner Carol Galante noted in the statement that while the FHA inventory of REO properties available for sale is at the lowest level since fiscal-year 2009, 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,” Galante said.
