Faced with a rising number of severely delinquent loans, the Federal Housing Administrationis taking a very small program to sell these loans to investors and ramping it way up.
The government's mortgage insurer came to the rescue of the mortgage market, when credit seized up at the start of the recent housing crash.
It's market share rose from barely 3 percent to upwards of 40 percent of new originations. Now it is saddled with over 700,000 bad loans, or 9 percent of the residential loans it insures.
"I'm not going to make any future predictions "bailouts", but we are working hard every day to ensure that we are protecting the taxpayers and the FHA," said FHA Acting Commissioner Carol Galante.
The initial pilot program was launched in 2010 and sold barely 3000 loans in all of last year. The newly renamed Distressed Asset Stabilization Program, will offer up to 5000 loans per quarter starting this fall. Borrowers must be at least six months behind on their payments for the loan to be eligible.
"If we can sell the mortgage sooner, we have the opportunity to do at least as good in terms of money back to FHA and potentially help the borrower, and the community," said Galante.
Since the FHA does not own, but insures mortgages, this would be a voluntary choice by the banks, but likely a popular one, as the FHA requires banks to go fully through the costly and time-consuming foreclosure process before handing off the properties to the FHA.
FHA also limits the types of modifications the banks can do. Big banks have already starting selling off some of their non-FHA other mortgages to private investors, like Connecticut-based Carrington Mortgage Holdings.
"If an investor has correctly analyzed and priced the NPL(non-performing loans) pools, and has the people, services and infrastructure in place to work with borrowers and manage the properties, these pools can be a very attractive investment," says Rick Sharga, a Carrington executive.
Investors in these pools, however, will face restrictions. They cannot foreclose on the property for six months after purchasing the loan, and they must guarantee that at least half the loans would be modified to a reperforming status and held for at least three years. That is designed to prevent immediate "flipping."
"We have a fairly straightforward approach to how we handle NPL (non-performing loan) pools. We attempt to keep the borrower in the home and keep the property cash flowing. In the long run, that should deliver the best results for our investors," says Sharga.
Investors are buying the loans at a discount and therefore can make more aggressive modifications than the banks might be willing to do. For the FHA, selling the loans, even at this discount, is stemming at least some of the bleeding simply by getting rid of them more quickly.
"We actually save money because we're not paying all the cost of holding that mortgage all the way through to foreclosure and managing and maintaining those properties over a long period of time," said Galante.
The program will offer some national loan pools and some pools in "hardest hit geographies," according to Galante. Those geographically specific pools will have additional restrictions in terms of how many of those properties could come to market as vacant REO (real estate owned, foreclosed homes).
FHA is not offering up all of its troubled loans for sale, because as the housing market improves, they are able to get increasingly better returns when selling the foreclosed homes it has.
"We're seeing our recovery dollars go up in some markets," adds Galante. "We have to have multiple tools.