Bloomberg News

FHA to Expand Auctions of Defaulted Mortgages at Discount Prices

June 08, 2012

In an effort to mitigate losses on mounting foreclosures, the Federal Housing Administration will begin quarterly auctions of delinquent mortgages to investors at marked-down prices, Shaun Donovan, secretary of the Department of Housing and Urban Development, said today.

The effort, which began as a pilot program in 2010, is intended to keep the troubled borrowers in their homes by encouraging the investors to use some of their discount of as much as 65 percent off of the unpaid principal balance to write down the loan amount. Beginning in September, the agency will put about 5,000 loans on the market every quarter.

The program “offers a better shot for the struggling homeowner and lower losses to the FHA,” Acting FHA Commissioner Carol Galante said in a statement.

Each of the 35,000 foreclosed properties currently on its books costs the agency an average of $28.78 a day to maintain and market. The FHA received the properties exchange for insurance payouts to loan servicers. It provides insurance to encourage lenders to offer credit to home buyers who might not otherwise qualify for prime loans

In return for the agency’s insurance payout, the auction program allows servicers to transfer delinquent FHA-insured loans to the FHA before foreclosure -- but only after the servicer has worked with the borrower to make the loan current. The FHA is calculating that the amount it will recoup from the loan sales is greater than the amount it would lose if it let the property slip into foreclosure and put it on the market, Donovan said today at a Chicago news conference.

The FHA so far has acquired and sold about 2,100 loans on properties across the U.S. under the program. More than a year into the pilot project, most of the notes were still delinquent, according to data provided last year.

Delaying Foreclosure

Winning bidders agree not to foreclose on borrowers while they work to modify the terms of the loan, including writing down the principal. No more than half of the loans sold off can end up in foreclosure, according to the terms of the auction.

The agency, an arm of the U.S. Department of Housing and Urban Development, has insured more than 34 million mortgages since it was created in 1934.

The FHA is financed by the mortgage insurance premiums it charges to lenders and historically has not required a taxpayer subsidy. That could change if its losses from the housing crash continue to mount.

To contact the reporter on this story: Clea Benson in Washington at or

To contact the editor responsible for this story: Maura Reynolds at

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