Qualified entities interested in purchasing pools of severely distressed loans formerly insured by the Federal Housing Administration (FHA) can now submit applications for the Distressed Asset Stabilization Program, an expansion of an FHA disposition program that sells pools of defaulted mortgages headed for foreclosure and provides the opportunity for the purchaser and borrower to avoid a costly foreclosure.

According to loan pool information released, approximately 3,500 loans will be sold in four metropolitan areas that are among those hardest hit by the foreclosure crisis aligning with other neighborhood stabilization efforts to help those communities recover as quickly as possible. The program is part of the Obama Administration's broader strategy to encourage public/private partnerships to stabilize neighborhoods and home values in critical markets.

“The housing market has momentum not seen since before the crisis,” U.S. Department of Housing and Urban Development Secretary (HUD) Shaun Donovan said. “But some metro areas are still under pressure and some FHA borrowers remain seriously behind on their loans and stand to lose their homes in a matter of months. As one step towards avoiding unnecessary foreclosures and further stabilizing communities, we are increasing the number of loans beyond our original goals of 5,000 per quarter to approximately 9,000 this quarter. Providing the opportunity for borrowers to potentially stay in their home under a new sustainable mortgage or other meaningful help not only benefits that homeowner but reduces the costs to FHA and ultimately benefits the entire community.”

Under the program, loans are sold competitively at a market-determined price generally below the outstanding principal balance. 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 additional months, giving the new servicer time to work through alternatives with the borrower, possibly finding an affordable solution to allow the borrower to remain in their home. Because the loans are generally sold for less than what the borrower currently owes, the purchaser has the ability to reduce or modify the loan terms while still making a return on the initial investment. If no viable alternatives exist, the purchaser may be able to help the borrower sell the property through a short sale and avoid the costs of foreclosure.

“This program creates the opportunity for everyone – the homeowner, the new mortgage holder, FHA and the community – to walk away a winner,” Acting FHA Commissioner Carol Galante said. “FHA not only avoids the costs associated with a long foreclosure process, but also the high costs of maintaining and selling vacant properties in already distressed markets.”

FHA began selling distressed single family loans through what is now the Distressed Asset Stabilization Program in 2010 and has successfully sold more than 2,100 single family loans to date. An FHA-approved mortgagee can file a claim for FHA insurance benefits and assign the loan to FHA if the borrower is at least six months delinquent on their mortgage, the servicer has exhausted all steps in the FHA loss mitigation process, the servicer has initiated foreclosure proceedings and the borrower is not in bankruptcy.  These assigned loans are then pooled by FHA for resale through the Distressed Asset Stabilization Program.

In addition to the standard note sales, the enhanced program features new neighborhood stabilization requirements to encourage investment in communities hit hardest by the foreclosure crisis. Approximately 40 percent of the 9,000 loans in the sale scheduled for September 2012 will be located in Chicago, Ill.; Newark, N.J.; Phoenix, Ariz. and Tampa, Fla. – four metropolitan areas where high numbers of seriously delinquent loans could expand an already large inventory of REO properties over the coming months. Designed to help stem the flow of distressed properties hitting these markets, these neighborhood stabilization requirements provide that no more than 50 percent of the loans within a purchased neighborhood stabilization pool may be sold as real-estate owned (REO) properties.

“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,” Galante said. “Further, in some of these communities, state and local leaders are already acquiring these loans and using tools like the Neighborhood Stabilization Program and the Hardest Hit Fund to offer workable solutions for homeowners and communities. And in each city, nonprofit and for-profit investors have shown great interest in using this program to help borrowers in their community find affordable solutions as quickly as possible. FHA is working with local leaders to create additional smaller pools to fit their targeted neighborhood strategies.”

All parties seeking to bid on the sale pools must first be qualified by HUD.  Parties seeking to bid in the neighborhood stabilization pools are required to meet several additional criteria to ensure they will comply with the program’s goal that fewer homes end up as vacant REO properties in metro areas already struggling with high numbers of foreclosures. Eligible investors must have experience in asset management and property management, as well as a proven track record in helping borrowers seriously delinquent on their loans to re-perform or to achieve an affordable alternative to foreclosure. An emphasis will be placed on experience within the metro area in which the bidder is interested.

Bidder qualification materials and guidelines for the Distressed Asset Stabilization Program bidding process can be found at www.hud.gov/fhaloansales.