VA 'No Bids' an Issue For Katrina Servicers

Residential servicers are beginning to review their Veteran Administration-insured loans in the Gulf Coast states, calculating how many will end up as "no-bids" due to hurricane damage.

After factoring insurance payouts and Community Development Block Grant assistance, servicers realize it will not be enough to fill the hole. The Department of Veterans Affairs loan guarantee covers only 25% to 50% of the loan amount. When a loan goes into foreclosure, VA determines whether it will save money by paying the guarantee, or taking over the property and then selling it.

When the agency decides to pay off the guarantee, leaving the property with the servicer, it is called a "no-bid." Depending on the structural shape of the home, no-bids frequently wind up costing the servicer money. VA is required by law to apply a no-bid formula to every foreclosure and it does have "much flexibility," according to Keith Pedigo, director of the VA loan guarantee program.

"I think everyone understands that it is likely that there will be a number of no-bids in the Gulf Coast area," he said. "But it is really way too early to tell what the magnitude of the no-bids will be."

Mr. Pedigo noted that homeowners are still waiting for insurance payments and many claims are being decided in the courts. "Neither VA nor the servicers in many cases know how it will play out," he said.

In the meantime, VA has extended forbearance, asking servicers not to initiate foreclosures in the affected areas. VA has nearly 400,000 guaranteed loans in the four Gulf Coast states hit by Hurricanes Katrina and Rita.

Prior to Aug. 29 - before Hurricane Katrina hit New Orleans - FHA had 6,000 defaulted loans (90 days or more past due) in Louisiana, Mississippi, Texas and Alabama. It currently has 12,060 defaulted loans in those states.

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