Is HUD’s latest move the right one?by Peter Miller
HUD announced last week that it would increase their bulk sale of troubled mortgages from 20,000 loans to 36,000 loans a year. That’s good news, but could HUD have gotten better prices with less restrictive sales?
The government’s Distressed Asset Stabilization Program is designed to get troubled loans out of the FHA program in order to reduce or eliminate additional FHA insurance claims. As RealtyTrac reported in June, “a servicer can add a loan to the FHA’s distressed asset program if the borrower is at least six months delinquent, loss mitigation hasn’t worked, foreclosure proceedings have started and the borrower is not in bankruptcy.”
The catch is that lenders cannot just sell off properties purchased under the program. Half the loans must be kept for at least three years before the lender can foreclose.
Given that there are huge numbers of short sales, foreclosures and REOs flooding the market, why would anyone want restricted loans from the FHA’s basement? The answer is in the discount.
It’s all about the discount
Here are the results from years of FHA bulk-sale events which reveal the size and discounts:
2010: A package of 200 New Jersey loans with an unpaid balance of $49,326,724 was valued with broker price opinions (BPOs) at $36,335,800. The winning bid equaled 43 percent of the BPO, or $15,624,394.
June 2011: A package of 840 loans with properties in various states had an unpaid balance of $143,700,634 but was valued with BPOs at $96,159,523. The winning bid was $52,887,738, or 55 percent of the BPO value, 37 percent of the unpaid balances.
April 2012: Three packages with a total of 279 units in several states had unpaid balances of $58,248,023. The properties had an estimated value of $43,313,436, and the final price for the three packages was $19,516,086, or about one-third of the remaining loan balances. One package had just three loans.
The FHA discounts are enormous, far larger than the typical discounts for foreclosures (18 percent) and short sales (15 percent) last month.
The bulk discount should be large because of FHA sale restrictions. If the loans were simply sold off without the three-year holding requirement, sale prices would be higher, small investors would have more interest and HUD losses would be lower.
That sounds like a better result than the current system produces. Given that mortgage rates are at historically-low levels, think how many loans HUD could sell off if it got rid of the three-year sales limitation or changed it to a year or six months.