|HUD Region V No. 12-069
Laura J. Feldman
Follow us on Twitter @HUDMidwest
July 18, 2012
HUD ACCEPTING APPLICATIONS FOR ENTITIES TO PURCHASE TROUBLED MORTGAGES IN CHICAGO, OFFER CHANCE TO AVOID COSTLY FORECLOSURES AND STABILIZE LOCAL NEIGHBORHOODS
Up to 1,500 loans in Chicago to be part of special note sale in September as part of broader Obama Administration effort to address shadow inventory, target relief to hardest hit communities
CHICAGO - 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 today, approximately 1,500 loans in Chicago will be part of the program's new neighborhood stabilization requirement to encourage investment in communities hit hardest by the foreclosure crisis. A total of 3,500 loans in Chicago, IL; Newark, NJ; Phoenix, AZ; and Tampa, FL will be part of specialized pools aligned with other local 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. Details on the Distressed Asset Stabilization Program can be found on HUD's website.
"The broader housing market has momentum not seen since before the crisis," said HUD Secretary Shaun Donovan. "But markets like Chicago are still under pressure and some FHA borrowers remain seriously behind on their loans - standing to lose their homes in a matter of months. As one step towards avoiding unnecessary foreclosures and further stabilizing communities, the Distressed Asset Stabilization Program will offer some Chicago borrowers the chance to work with a new servicer and time to find an affordable solution. 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 helps to heal the local housing market while minimizing the costs to FHA."
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 homeowners, the new mortgage holder, FHA, and Chicago - to walk away a winner," said Acting FHA Commissioner Carol Galante. "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 like Chicago."
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.
Neighborhood Stabilization Loan Sales
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, IL; Newark, NJ; Phoenix, AZ; and Tampa, FL - 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.
"The market in Chicago offers a unique opportunity to test this program and address a significant number of FHA loans in the pipeline for foreclosure," said Antonio R. Riley, HUD's Midwest Regional Administrator. "The city has made significant strides to recover from the housing crisis because state and local leaders have used tools like the Neighborhood Stabilization Program and the Hardest Hit Fund to offer workable solutions for homeowners and communities. The DASP will be another valuable tool to encourage investment in this community while allowing borrowers to work with lenders to find affordable solutions as quickly as possible."
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 on HUD's website.
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