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Suzanne Macdowell's Blog

By Suzanne MacDowell | Agent in Mount Arlington, NJ

The FHA's latest plan for a housing market recovery, sell bad loans to investors!

The Federal Housing Administration is rolling out its new plan to sell off its delinquent loans in bulk. (Not, not the properties…the LOANS).  The plan calls for the FHA  to sell 5,000 mortgages each quarter beginning in September.  The FHA currently has more than 700,000 seriously delinquent mortgages, originated from 2007 through 2009.  The thinking behind this scheme is that investors who buy the loans would have greater freedom to reduce principal or offer rent-to-own plans and other means of making the mortgage affordable.

 To be eligible for the program, loans must be more than six months delinquent and must have been through the administration’s available foreclosure-prevention programs.  The loan servicer must have begun the foreclosure process, and the borrower must not be in bankruptcy.

The investors who purchase these loans would have to halt foreclosure proceedings for at least six months, AND agree not to sell half the loans for at least three years.

Currently, when the FHA forecloses, they receive only 36 cents on the dollar on average.  In order to do better, investors will need to pay the FHA more than 36% of the current value of the loan.   Considering the fall in home values, I can’t help but wonder if the FHA will be able to sell these loans at a steep enough discount to motivate investors to buy them at all.

It will be interesting to see how this scheme plays out.  Thus far the FHA has sold more than 2,000 distressed loans when testing this new program, but they have not chosen to share what the public what the outcome of the program has been thus far.

I hate to sound like such a skeptic, but this sounds to me like more of an accounting scheme than a plan to help the housing market recover.  In fact, it sounds like just another Ponzi scheme to make the banks, and the FHA, look better at tax payer expense.

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