FHA Expected to Announce New Bulk Sales Agenda

The Federal Housing Finance Agency (FHA)rnis expected to announce before the close of business today a new bulk salernprogram to liquidate some of the reported 700,000 delinquent loans theyrninsure.  According to The Wall Street Journal, the agency mayrnbe planning on selling as many as 5,000 distressed loans each quarter over anrnunspecified period of time.</p

Bulk sales were used on a large scale byrnthe Resolution Trust Corporation and the Federal Deposit Insurance Corporationrnduring the savings and loan and banking crises of the 80s and 90s and FDICrncontinues to use this mechanism to clear the assets of failed banks.  Lenders and guarantors such as Freddie Macrnand Fannie Mae generally shy away from these sales because of the deeprndiscounts needed to move the loans.  Evenrnthe “good” loans such as are sold by the FDIC because they are too costly and timernconsuming for the institution to manage are discounted substantially; seriouslyrndelinquent loans go for pennies on the dollar. rn </p

The Journalrnstates that FHA is considering bulk sales in an effort to reduce its growingrnportfolio of distressed loans and to avoid the costly process of foreclosure,rnbut also because its own rules limit ways in which the mortgages can bernmodified, leaving little room for aggressive loan modifications like those donernby Freddie Mac, Fannie Mae, and proprietary lenders.  Once sold these strictures disappear and therninvestor can take more drastic steps to bring the loans back on line.</p

Bulk sales can be hugely profitable forrninvestors, but in this case the sales may also allow some homeowners to stavernoff foreclosure by cutting better deals than would have been possible with FHA.  The Journalrnquotes FHA’s acting commissioner Carol Galante as saying “There will be an incentive for a modification that isn’t ablernto be done under the current system. It will be cost-effective for thernFHA….It will be better for the communities.”</p

Investorsrnalso face some restrictions that work for the benefit of homeowners and thernmarketplace.  They can’t foreclose forrnsix months after buying the loans and must agree to hold back from sale atrnleast 50 percent of the homes backing the loans for at least three years. </p

Galanterntold the Journal that FHA was trying to minimize the impact of any vulturerninvestors who buy hoping for a quick foreclosure, eviction, and resale.  “We are trying to change, frankly, thernbehavior of who’s interested in buying these notes,” she said.

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