Fair Housing Administration to Sell Distressed Mortgages

The Fair Housing Administration (FHA) has announced that it will begin selling bundles of distressed mortgages as early as September 2012. The FHA has over 700,000 loans on its books that are currently in default. In order to qualify for the new program, a loan must be at least 6 months behind on payments. The loan must also be in foreclosure and the borrower cannot be in bankruptcy.

Investors that purchase the loan pools from the FHA must agree to hold the loan for three years. They will also be prevented from foreclosing on those loans for six months after purchasing them. The investor will be required to modify at least half of the loans in the pool. FHA plans to sell the pools for less than the face value of the loans.

Shaun Donovan, the secretary of the U.S. Department of Housing and Urban Development, has stated that this program will provide a lifeline of sorts for borrowers whose loans are part of the pools. This makes some sense given the 6 month freeze on foreclosures and the requirement that at least half of the pool receive a loan modification.

At the same time, I am always a bit skeptical about a program where I can only find "broad stroke" details about its implementation. Certainly, anyone willing to buy loans that are 6 months or more past due with restrictions on when they can foreclose must think it is possible to rehabilitate the loans and keep borrowers paying. FHA conducted a pilot program in 2010 that sold about 2,100 of the loans it held at the time. I am unable to find data about that pilot, but it would appear it was successful enough to warrant a more robust implementation.

As with most of these initiatives, we will have to wait and see.

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