In an effort to cut the foreclosure rate, the Federal Housing Administration recently announced it plans to implement a program to sell delinquent home loans more effectively.
Under the new initiative, a greater number of delinquent home loans backed by the agency will be offered to investors at auction. Real estate data indicates the FHA current backs more than 700,000 distressed loans totaling nearly $1 trillion. This accounts for roughly 10 percent of the agency's book of business.
"While our housing market has momentum we haven't seen since before the crisis, there are still thousands of FHA borrowers who are severely delinquent today - who have exhausted their options and could lose their homes in a matter of months," said HUD secretary Shaun Donovan. "With this program, we will increase by as much as ten times the number of loans available for purchase while making it easier for borrowers to avoid foreclosure."
What does it take to qualify?
Not every borrower with a mortgage backed by the FHA will be able to qualify for the new program. Instead, they must be at least six months behind on payments and not in bankruptcy. In addition, their mortgage servicer must have exhausted all the steps of the FHA loss mitigation process and already filed a foreclosure on the property.
When auctioned to investors, the distressed loans will most likely be sold for much less than their outstanding balance. Since it's in their best financial interest to bring the loan out of delinquency, the new servicers will have six additional months to help the borrower avoid foreclosure.
How will it help?
Experts say this help could occur through a short sale, which is far less damaging to a homeowner's finances than a foreclosure. Under certain circumstances, borrowers may qualify for a modification, which would restructure their mortgage into more favorable terms, such as lower monthly payments.
Starting in September, the FHA will raise the number of loans offered to investors from 1,800 per year to 5,000 every quarter. In addition, the agency will also try to pool the distressed loans of properties in close proximity to one another. In theory, this will not help just individual borrowers, but return financial safety and soundness to entire communities.