Usually, the servicer that forecloses on the mortgage hands the REO property over to FHA-approved contractors to manage and sell the vacant homes. Under the pilot program, the lender or servicer who completes the foreclosure can take over responsibility for selling the FHA REO.
“At a reserve price slightly below the outstanding unpaid principal balance of the loan, the properties are sold to third-party purchasers without ever being conveyed to FHA,” according to testimony HUD secretary Shaun Donovan presented to the Senate Banking Committee last week.
The federal mortgage insurance agency expects this approach will reduce its losses and eliminate carrying costs of managing and marketing REO properties.
In October, FHA had 37,000 REO properties under its control, down 2.4% from a year ago. The agency also has 734,000 seriously delinquent loans as of Oct. 31.
FHA plans to pursue more “creative strategies” to dispose of REO properties in areas where traditional methods have yielded “negative recoveries,” according to the secretary’s testimony.