The Department of Housing and Urban Development announced Friday it is expanding a pilot program aimed at stabilizing distressed assets by allowing private investors to purchase pools of delinquent loans on the condition of trying to keep homeowners in their houses and help bring the loans out of default.
Through the Distressed Asset Stabilization Program, the Federal Housing Administration will competitively sell severely delinquent notes for market-determined rates, generally below the outstanding balance, in an effort to stem the tide of foreclosure-induced real estate owned (REO) properties. Beginning in September, the agency will sell 5,000 mortgages in the foreclosure process each quarter.
A housing scorecard for May showed fewer foreclosure starts, but also revealed a rise in delinquent and severely delinquent loans. HUD acknowledged the implications of foreclosure on not just the homeowners in question, but also on other people, as property values in areas with high foreclosure rates are often negatively affected.
“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,” said HUD Secretary Shaun Donovan. “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.”
Once notes are purchased, foreclosure on a property will be delayed for at least six additional months while the servicer directly works with the borrower to find ways to avoid foreclosure.
Private investors can purchase the loan at a discount and must take further steps to help the borrower avoid default, whether it’s by modifying their loan terms or by helping them through a short sale, in order to maximize the return on the sale.
“The Distressed Asset Stabilization Program offers a better shot for the struggling homeowner and lower losses to the FHA,” said Acting FHA Commissioner Carol Galante in a statement. “By addressing the growing back log of distressed mortgages, FHA is helping to mitigate the negative effects of the foreclosure process as part of the Administration’s broader commitment to community stabilization.”
Written by Alyssa Gerace
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