FHA to Sell Off Delinquent Loans

In order to raise a bit of cash and to help some borrowers avoid foreclosure, the Federal Housing Administration announced a plan today to sell thousands of its most soured mortgage loans.

The FHA has backed a large share of U.S. home loans since private lenders all but disappeared from the market after the housing bubble popped. Currently, it insures about $1.1 trillion in mortgages, and of those 9 percent or 700,000 are in default.

As the agency has fielded losses from these toxic loans, its cash reserves dwindled last year to a record low $2.6 billion – a figure that had many worried that the FHA would need its own government bailout. This program of selling off defaulting loans could help raise much-needed capital.

The plan is to put up 5,000 loans, bundled in pools, for sale each quarter starting in September.

“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,” Housing and Urban Development Secretary Shaun Donovan said at a news conference in Chicago as quoted in a Reuters article. “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.”

In order to qualify for the investor sales, mortgage loans must be at least six months delinquent and the borrowers must have been through the agency’s foreclosure prevention programs. These loan pools will be sold at deep discounts to investors, but they come with restrictions. Investors must agree not to foreclose on the loans for six months after purchase, and will have to hold onto at least half of the properties for three years.

This program will help many borrowers stay in their homes, as investors will have greater ability than the FHA to modify their loans with things like principal reduction or rent-to-own options.

Homeowners whose loans are sold

“might get a call to say, ‘Hey, we’re willing to cut your payment dramatically, or cut the balance on your loan dramatically,’ ” Donovan said as quoted in a New York Times article. “There are going to be a set of options that might arrive on that doorstep as the best news that homeowner has ever heard.”

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