[authors: Russell Koonin, Robert Siegel] 

The U.S. Department of Housing and Urban Development recently announced that it is accepting applications for investors interested in buying distressed residential mortgage loans formerly insured by the FHA, focusing on mortgages in Chicago, IL, Newark, NJ, Phoenix, AZ, and Tampa, FL. The Distressed Asset Stabilization Program is an expansion of an FHA disposition program that sells pools of defaulted mortgages headed for foreclosure and provides the opportunity for the purchasers and borrower to avoid a costly foreclosure.

How It Works

There are approximately 9,000 loans that will be offered for sale. The incentive for the investor is that the loans are sold competitively at a market-determined price below the outstanding principal balances, and thus the purchaser has the ability to reduce or modify the loan terms while still making a return on the initial investment. FHA then processes an insurance claim, removes the FHA insurance and transfers the loan to the investor. Once the note is purchased, foreclosure is delayed for a minimum of six months, giving the new servicer time to work through alternatives with the borrower.

In a press release issued by HUD, Acting FHA Commission Carol Galante stated, “These markets were chosen because of the high concentration of FHA loans in the pipeline for foreclosure and because each allows us to test this strategy under a variety of market conditions.”

Investors are required to have a proven track record of helping severely delinquent borrowers to either be able to perform their obligations under their mortgages or work out foreclosure alternatives. We can only hope that these investors are genuine in their attempt to offer relief to the thousands of homeowners who were originally enticed by the big banks to obtain mortgages under unrealistic loan programs that were doomed to fail from the start. Kudos to HUD for an affirmative attempt to get these homeowners out of a mess that was, for the most part, not of their own doing.