The Federal Housing Finance Agency (FHA)
is expected to announce before the close of business today a new bulk sale
program to liquidate some of the reported 700,000 delinquent loans they
insure. According to The Wall Street Journal, the agency may
be planning on selling as many as 5,000 distressed loans each quarter over an
unspecified period of time.
Bulk sales were used on a large scale by
the Resolution Trust Corporation and the Federal Deposit Insurance Corporation
during the savings and loan and banking crises of the 80s and 90s and FDIC
continues to use this mechanism to clear the assets of failed banks. Lenders and guarantors such as Freddie Mac
and Fannie Mae generally shy away from these sales because of the deep
discounts needed to move the loans. Even
the “good” loans such as are sold by the FDIC because they are too costly and time
consuming for the institution to manage are discounted substantially; seriously
delinquent loans go for pennies on the dollar.
states that FHA is considering bulk sales in an effort to reduce its growing
portfolio of distressed loans and to avoid the costly process of foreclosure,
but also because its own rules limit ways in which the mortgages can be
modified, leaving little room for aggressive loan modifications like those done
by Freddie Mac, Fannie Mae, and proprietary lenders. Once sold these strictures disappear and the
investor can take more drastic steps to bring the loans back on line.
Bulk sales can be hugely profitable for
investors, but in this case the sales may also allow some homeowners to stave
off foreclosure by cutting better deals than would have been possible with FHA. The Journal
quotes FHA’s acting commissioner Carol Galante as saying “There will be an incentive for a modification that isn’t able
to be done under the current system. It will be cost-effective for the
FHA….It will be better for the communities.”
also face some restrictions that work for the benefit of homeowners and the
marketplace. They can’t foreclose for
six months after buying the loans and must agree to hold back from sale at
least 50 percent of the homes backing the loans for at least three years.
told the Journal that FHA was trying to minimize the impact of any vulture
investors who buy hoping for a quick foreclosure, eviction, and resale. “We are trying to change, frankly, the
behavior of who’s interested in buying these notes,” she said.