The U.S. Department of Housing and Urban Development (HUD) has announced the launch of the Distressed Asset Stabilization Program, an expansion of a Federal Housing Administration (FHA) pilot program that allows private investors to purchase pools of mortgages headed for foreclosure and charges them with helping to bring the loan out of default.
According to HUD, 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. A servicer can place a loan into the loan pool if the following criteria are met:
- The borrower is at least six months delinquent on his or her mortgage;
- The servicer has exhausted all steps in the FHA loss mitigation process;
- The servicer has initiated foreclosure proceedings; and
- The borrower is not in bankruptcy.
Under the program, FHA-insured notes are sold competitively at a market-determined price generally below the outstanding principal balance. Once the note is purchased, foreclosure is delayed for a minimum of six additional months as the borrower gets direct help from his or her servicer to help to find an affordable solution to avoid foreclosure. The investor purchases the loan at a discount and then takes additional steps to help the borrower avoid default, whether through modifying the loan terms or helping the borrower through a short sale, in order to maximize the return on the sale.
Beginning with September's scheduled sale, the FHA will increase the number of loans available for purchase from approximately 1,800 each year to a quarterly rate of up to 5,000, and add a new neighborhood stabilization pool to encourage investment in communities hardest hit by the foreclosure crisis. HUD will require that no more than 50% of the loans within a purchased pool become real-estate owned properties and – if the servicer and borrower are unable to bring the loan out of default – that the servicer hold the loan for at least three years.
‘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,’ says HUD Secretary Shaun Donovan. ‘With this program, we will increase by as much as 10 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.’