HOUSING AGENCY TO SELL MORE TROUBLED LOANS / THE WALL STREET JOURNAL ( VERY HIGHLY RECOMMENDED READING )

ECONOMY
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Updated June 8, 2012, 11:31 a.m. ET
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Housing Agency to Sell More Troubled Loans
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By NICK TIMIRAOS

The Federal Housing Administration, struggling to manage a growing glut of delinquent home mortgages, plans to ramp up sales of the loans to investors, a move that could stave off foreclosure for thousands of homeowners.




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The government agency, which is expected to announce the bulk sale program Friday, has more than 700,000 loans in default, amounting to more than 9% of the $1 trillion in loans it insures. Bulk loan sales are one way the FHA could reduce the backlog of potential foreclosed properties it will have to take back and resell.
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Mortgage-finance giants Fannie Mae and Freddie Mac as well as banks have shied away from bulk mortgage sales despite heavy interest from investors because they would have to sell the loans at such deep discounts. Instead, they modify the mortgages, and if that doesn't work they sell the homes individually, often through foreclosure.

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But FHA rules provide less flexibility on how troubled mortgages can be modified, leaving very little room to cut loan balances. Officials figure that if they sell defaulted loans to an investor for at least the same price as it would cost to foreclose, investors can take more aggressive steps to modify the mortgages, such as reducing principal, to keep the borrower in the house—all without raising costs for the government. If the borrower resumes making payments, the investor could later resell the loan for a profit.




."There will be an incentive for a modification that isn't able to be done under the current system," said Carol Galante, the FHA's acting commissioner. "It will be cost-effective for the FHA....It will be better for the communities."



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For now, the FHA says it plans to sell up to 5,000 defaulted mortgages every quarter. In a small pilot sale in April, the agency sold 279 loans to buyers that paid around $19 million, representing around a third of the outstanding loan balances. It sold about 2,200 loans last year through the program.




.Ms. Galante said the FHA didn't yet have firm data on what share of the loans sold to investors involve the resumption of mortgage payments by delinquent borrowers, or what proportion of borrowers are still living in the houses under a new arrangement with the investor.






The FHA has faced big losses on sales of foreclosed properties, which could make loan sales attractive. The agency now loses about 64 cents on every $1 on mortgages that go through foreclosure. If defaulted loans sell at that discount, the sales won't add to the FHA's losses.



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Investors can't foreclose for six months after buying the FHA-backed loans. Under the agency's revamped "distressed asset stabilization program," they must also agree not to resell for three years at least half the homes backing the loans they buy.






The changes are designed to deter "vulture" investors that buy defaulted loans with the aim of quickly evicting the homeowner and reselling the home.



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"We are trying to change, frankly, the behavior of who's interested in buying these notes," Ms. Galante said.




.The FHA doesn't make loans but insures loans made by lenders that meet certain standards.



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