The September sale will feature four pools with loan concentrations in the Chicago, Newark, Phoenix and Tampa metropolitan areas. The rest of the formerly FHA-insured loans will be divided into two or three national pools, according to FHA commissioner Carol Galante.
The note sale program allows investors and nonprofits to purchase FHA loans already in the foreclosure process at significant discounts.
About 5,000 loans will be sold in the national pools but the winning bidders will not be able to foreclose on the borrowers for at least six months. This limitation is designed to give servicers enough time to modify or refinance the loans so the borrowers have one last chance to remain in the home.
FHA has conducted five note sales since 2010 ranging in size from $16 million to $163 million. The winning bidders generally pay 30% to 40% of the unpaid principal balance.
Bayview Asset Management, Coral Gables, Fla.; Kondaur Capital Corp. of Orange, Calif.; MCM Capital Partners in Cleveland; and Lone Star Funds in Dallas have participated in these FHA note sales.
The other 4,000 loans will be divided among the four metropolitan pools and the terms of those sales are more demanding. “These Neighborhood Stabilization pools are designed to stem the flow of distressed properties in these hard-hit markets,” Galante said.
Winning bidders of the Neighborhood Stabilization pools must keep 50% of the properties from becoming vacant REO. The bidders must find some way to modify the loans so they are reperforming, lease the property back to the homeowner or complete a short sale to an owner-occupant. “So a short sale to an investor will not receive a neighborhood stabilization outcome credit,” the FHA commissioner said. Renting the property three years will be considered an acceptable outcome.
“This program creates the opportunity for everyone—the homeowner, the new mortgage holder, FHA and the community—to walk away a winner,” Galante said.
The note sales help FHA avoid the high cost of maintaining properties during the foreclosure process and selling the REO in already distressed markets.
FHA had 41,100 foreclosed properties as of May 31.