FHA Opens Application Process for REO Sale

by devteam July 19th, 2012 | Share

The application process will begin todayrnfor bidders to purchase approximately 9,000 loans that are in process to becomernFHA owned real estate (REO).  The agency’srnnew Distressed Asset Stabilization Program is designed to clear FHA’srnforeclosure pipeline, minimize its REO inventory, mitigate the impact ofrnadditional foreclosures on already stressed local areas, and give borrowers a last-ditchrnchance to remain in their homes.</p

At a press conference held this morningrnActing Commissioner Carol Galante announced that FHA will be selling the loans</bin several national and four geographically specific pools.  About 3,500 to 4,000 of the loans will bernlocated in one of four metropolitan statistical areas, Chicago, Phoenix,rnNewark, and Tampa in numbers ranging from 300 to 400 in Phoenix to around 1,500rnin Chicago.  The remainder of the loansrnwill be on properties located throughout the country and will be sold in threernor four national pools.  Once sold thernFHA will process the insurance claim on behalf of the previous owner, remove thernguarantee and transfer the loan to the new investor.  </p

Under program guidelines the investorrnmust agree to delay foreclosure for a minimum of six additional months duringrnwhich it agrees to work toward a solution other than a foreclosure resulting inrnREO.  Solutions might include loanrnmodifications, deeds-in-lieu coupled with lease backs to the owner, short salesrnto owner occupants, or sale to approved Neighborhood Stabilization Programrn(NSP) grantees.</p

As an additional safeguard againstrnblight, FHA will require that no more than 50 percent of the loans within any poolrnbecome real-estate owned (REO) properties and – if the servicer and borrowerrnare unable to bring the loan out of default – that the servicer hold the loanrnas a rental for at least three years. </p

In order to qualify for inclusion in arnloan pool, a servicer must certify that: </p<ul class="unIndentedList"<liThe borrower is at least six monthsrndelinquent on their mortgage;</li<liThe servicer has exhausted all stepsrnin the FHA loss mitigation process;</li<liThe servicer has initiatedrnforeclosure proceedings; and</li<liThe borrower is not in bankruptcy.</li</ul

Galante said she expected that thernloans would sell at market value but well below the existing loan balancerngiving the new owner/servicer the flexibility to offer more generousrnmodification terms.  There would be nornstandards set for the modification such as the maximum 31 percentrndebt-to-income ratio previously used in the HAMP program.</p

The September sale is an expansionrnof a pilot program previously run by FHA in which about 2,100 loans werernsold.  When the expansion was announcedrnlast month it was expected that the sales would be held quarterly and each salernwould involve about 5,000 loans.  Galanternsaid that investor interest and the size of the shadow inventory have led tornincreasing the size of at least the September sale.  Servicers who will have to provide the loansrnfor the sale, have also responded more enthusiastically once they learned thernsales would be ongoing.  When offered thernpilot program they were hesitant to invest in the infrastructure that would bernnecessary to identify and transfer the loans for a short term program.</p

FHA is working with local leaders, Galanternsaid, to create additional smaller pools within the four MSAs to fit theirrntargeting neighborhood strategies, using tools like NSP and the Hardest HitrnFund to offer workable solutions for homeowners and communities.  </p

Department of Housing and UrbanrnDevelopment (HUD) Secretary Shawn Donovan said “The housing market has momentumrnnot seen since before the crisis, but some metro areas are still under pressurernand some FHA borrowers remain seriously behind on their loans and stand to loserntheir homes in a matter of months.  Asrnone step towards avoiding unnecessary foreclosures and further stabilizingrncommunities, we are increasing the number of loans beyond our original goals ofrn5,000 per quarter to approach 9,000 this quarter.  Providing the opportunity for borrowers tornpotentially stay in their home under a new sustainable mortgage or otherrnmeaningful help not only benefits that homeowner but reduces the costs to FHArnand ultimately benefits the entire community.”

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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