The Department of Housing and Urban Development is launching a new effort to dispose of severely distressed federally-insured mortgages and avoid costly foreclosures.
An expansion of an FHA disposition program that sells pools of defaulted mortgages facing foreclosure, the Distressed Asset Stabilization Program, announced Wednesday, will offer buyers the opportunity to purchase loan pools comprising 3,500 mortgages in four metropolitan areas that have been hardest hit by the foreclosure crisis: Chicago, Newark, N.J, Phoenix and Tampa, Fla.
“The housing market has momentum not seen since before the crisis,” said HUD Secretary Shaun Donovan. “But some metro areas are still under pressure and some FHA borrowers remain seriously behind on their loans and stand to lose their homes in a matter of months. As one step towards avoiding unnecessary foreclosures and further stabilizing communities, we are increasing the number of loans beyond our original goals of 5,000 per quarter to approximately 9,000 this quarter.”
The increase will help reduce costs to FHA in addition to helping homeowners in distress, he said.
Loans in the program will be sold at market-determined price generally below the outstanding principal balance. FHA will then process an insurance claim, remove the FHA insurance and transfer the loan to the investor, FHA stated. Once the note is purchased, foreclosure will be delayed an additional six months, to allow extra time for the borrower to explore alternatives to foreclosure. Because the buyer generally pays less than what is owed on the loan, the purchaser can reduce or modify loan terms while still making a return on the initial investment, FHA explains.
“This program creates the opportunity for everyone – the homeowner, the new mortgage holder, FHA, and the community – to walk away a winner,” said Acting FHA Commissioner Carol Galante. “FHA not only avoids the costs associated with a long foreclosure process, but also the high costs of maintaining and selling vacant properties in already distressed markets.”
Written by Elizabeth Ecker