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Housing and Urban Development

HUD Announces Results of Note Sales Under Stabilization Program

As part of a broad based effort to address the housing market's "shadow inventory" and to target relief to communities experiencing high foreclosure activity the U.S. Department of Housing and Urban Development (HUD) announced preliminary results from the first loan sale under its expanded Distressed Asset Stabilization Program (DASP). HUD's next scheduled sale which will take place late in the first quarter of 2013 will include approximately 10000-15000 loans and will have targeted Neighborhood Stabilization Outcome (NSO) pools located in select metropolitan areas in Georgia California Florida and Ohio.

HUD is accelerating the use of loan sales through DASP selling severely delinquent mortgage loans insured by the Federal Housing Administration (FHA) through a competitive bidding process in which loan pools are sold to the highest bidder including non-profit and community-based organizations.

"This program accomplishes two very important objectives– it supports communities hardest hit by the housing crisis and it saves considerable money for FHA's insurance fund" says FHA's Acting Commissioner Carol Galante. "The results from the September sales were strong which tells us investors of all stripes and communities are eager for this solution."

HUD will sell at least 40000 distressed loans over the next year generally in quarterly sales in an effort to reduce total claims cost and increase recovery on losses to FHA's Mutual Mortgage Insurance (MMI) Fund. The results from the September sale were strong with a record participation among interested bidders. While FHA is in the process of settling the transactions making the results announced today still preliminary it is very pleased with the bid prices received in the September sale. The results of which when considered by FHA's independent actuary yielded an estimate of an additional $1 billion in economic value to FHA's Mutual Mortgage Insurance Fund in fiscal year 2013 alone by significantly reducing the expected severity of losses on loans sold through the program.

HUD's September sale took place in two parts. The first part conducted on September 12th consisted of approximately 5300 non-performing loans in six different "national" pools with a combined unpaid principal balance of $950 million. The second part occurred on September 27th and consisted of approximately 4100 loans in seven different "Neighborhood Stabilization Outcome (NSO)" pools with a total of approximately $770 million in unpaid principal balance. The NSO pools are a new and important addition to DASP. They consist of loans pooled in geographically concentrated areas and are accompanied by sale terms that promote neighborhood stability in hard-hit communities. NSO pools in the September sale were in four geographic areas: Chicago Illinois; Tampa Florida; Phoenix Arizona; and Newark New Jersey.

FHA worked closely with the state and local government on their neighborhood stabilization objectives to carve out targeted sub-pools in three of the geographic areas that were eligible for and won by non-profit community-based organizations.

A record number of bids were received on all 13 pools and each pool was awarded to the highest bidder. In total the 13 pools went to 10 different entities. The three targeted NSO sub-pools were all awarded to nonprofit and community-based organizations. One of these organizations partnered with the State of Illinois using the U.S. Treasury's Hardest Hit Fund to facilitate the transaction. For more information about successful bidders visit HUD's Asset Sales Office website.

HUD's Upcoming Note Sale in Late First Quarter of 2013
Like September's sale the first sale in 2013 which be held late in the first quarter will be held in two parts. In the first part HUD will accept competitive bids for non-performing loans bundled into national pools. In the second part to be held roughly two weeks after loans will be offered in NSO pools in geographically concentrated areas including the following metropolitan areas: Atlanta; Southern California (Los Angeles Riverside San Bernardino and Long Beach); Ohio (Cleveland Akron and Canton); and Florida (Fort Lauderdale Miami and Greater Orlando). More information regarding the upcoming sale will be available in the coming weeks and can be found on HUD's Asset Sales Office website.

Distressed Asset Stabilization Program
FHA's note sales program was resumed in 2010 as a direct sale pilot program that allows pools of mortgages headed for foreclosure to be sold to qualified bidders and charges them with helping to bring the loan out of default. In many cases this is a less expensive alternative to foreclosure and sale as REO. An FHA servicer can place a loan into the loan pool if the following criteria are met:

The borrower is at least six months delinquent on their mortgage;
The servicer has exhausted all steps in the FHA loss mitigation process; and
The servicer has initiated foreclosure proceedings;

Under the program FHA-insured loans are sold competitively at a market-determined price generally below the outstanding principal balance. Once the loan is purchased foreclosure is delayed for a minimum of six additional months during which time the new servicer can work with the borrower to find an affordable solution to avoid foreclosure. These loans are purchased at market rate which is generally well below the outstanding principal balance giving the investor the incentive to take additional steps to help the borrower avoid foreclosure including modifications that may include reduced principal balances.

Last June as part of an effort to address its seriously delinquent loan portfolio FHA announced that over the next several years it would significantly increase the number of loans it makes available for purchase as well as add a new neighborhood stabilization pool to encourage investment in communities hardest hit by the foreclosure crisis. The "Neighborhood Stabilization Outcome" (NSO) pools as an additional safeguard in distressed communities require that no more than 50 percent of the loans within a purchased pool be marketed as real-estate owned (REO) properties and – if the servicer and borrower are unable to avoid taking the loan through foreclosure – that the servicer achieve some other neighborhood stabilizing outcome which may include holding the property for rental for at least three years.

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