The U.S. Department of Housing and Urban Development (HUD) will now be accepting applications for qualified entities to purchase severely troubled loans that were formerly insured by the Federal Housing Administration (FHA) through the Distressed Asset Stabilization Program.

The program serves as an expansion of an FHA disposition program, which sells pools of defaulted mortgages that are bound to foreclose and offers the opportunity for the purchaser and borrower to avoid an expensive foreclosure.  

Before it was officially named the Distressed Asset Stabilization Program, the FHA began selling distressed single-family loans in 2010 and has effectively sold over 2,100 single family loans thus far.

According to loan pool information issued today, about 3,500 loans will be sold in four metropolitan areas that have been the most impacted by the foreclosure crisis including Chicago, IL, Newark, NJ, Phoenix, AZ and Tampa, FL.

The loans in the program are sold competitively at a market-determined price, which is generally below the outstanding principal balance. The FHA then processes an insurance claim, takes out the FHA insurance, and transfers the loan to the investor. After the note is bought, foreclosure is postponed for at least six additional months, which provides the new servicer added time to work through alternatives with the borrower. This gives borrowers time to find an affordable solution to remain in their home.

Since the loans are usually sold for less than the price that the borrower presently owes, the purchaser has the ability to lower or modify the loan terms, while still making a return on the initial investment. If there are ultimately not any plausible alternatives for the borrower, the purchaser may be able to help the borrower sell the property through a short sale and thus elude the high 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. 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,” said Acting FHA Commissioner Carol Galante.

This initiative is a component of the Obama administration’s larger strategy to encourage public and private partnerships to help stabilize neighborhoods and home values in key markets. It is similar to other neighborhood stabilization efforts to aid communities in their recovery process.

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