The recent announcement of the impending sale of $700 million of single-family loans from the FHA assignment portfolio presents real opportunities for those with mortgage expertise to develop a new line of business. This is the second of six sales through which the Department of Housing and Urban Development will offer about $4 billion of single-family loans over the next two years.
The first of these sales, on Oct. 25, 1995, was overlooked by traditional mortgage players, who viewed it as a one-time transaction rather than as a new line of business that can provide an ongoing stream of profits.
While the initial sale was financially successful, HUD is revising the procedures to encourage broader participation by banks and mortgage banks. The new procedures open up opportunities for a new set of participants in buying and resolving nonperforming loans.
The following key changes are likely to find their way into the new offering: a reduction in the minimum bidding unit from $5 million to $1 million; simplification of bidding procedures to focus primarily on loan performance and secondarily on geography; dramatic reductions in the cost of due diligence through the use of technology; prior approval of loans for CRA eligibility; clarification of HUD servicing handbook requirements; investor financing support from major lenders; and an aggressive marketing approach by adviser Hamilton Securities Group designed to broaden the universe of bidders.
With the minimum bid reduced to $1 million, new players have an enhanced ability to participate. Depending on the actual sales price, availability of financing, and the terms of such financing, a buyer might be able to participate in this program for as little as $250,000 in cash.
The bidding procedures have been simplified to focus just on performance and geography. The 15,000 loans will be broken down into bidding blocks of about $1 million based on performance since entering the assignment program. Within the performance categories, the loans will be grouped by geography.
One of the most serious impediments to participation in the previous sale was due diligence. In the upcoming sale, bidders will be able to review extensive information on compact discs.
Finding assets that qualify for CRA purposes has become a significant issue for many lenders. The FHA loans are being reviewed by federal regulators and preapproval for CRA credit is expected.
To facilitate the acquisition and holding during the resolution period of any loans purchased, Hamilton will be briefing lenders about the specifics of the sale and the opportunities for financing. A number of major lenders as well as many local institutions will likely be eager to provide financing.
The key to Hamilton's sales strategy is the development of an ongoing and broader market for the remaining sales. Hamilton will encourage bidders to develop their purchases as an ongoing business opportunity, not a one-time transaction.
Banks of all sizes can benefit directly and immediately by acquiring CRA-eligible assets. The ability to target loans in a specific area of operation and the certainty that these loans qualify for CRA are a compelling reason to take a very close look at the program.
Efficient mortgage servicers can use the loans to use excess capacity in their default management departments. Using a resource that already exists can be a cost-effective way to generate additional revenue.
In addition, the loans can provide an excellent source of refinancing opportunities. Many have high rates and borrowers who have resolved many of the problems that caused them to default.
Investors without expertise in default management can team up with mortgage servicers to obtain these critical skills. Such a joint venture provides a potentially high-yielding investment without the risk of starting an entirely new business.
The key dates for the upcoming sale are Feb. 5, when the bid packages will be available; Feb. 12, when the due-diligence room will be open, and March 21, when the bids are due. Mr. Horner heads R.D. Horner & Associates, a consulting firm in Chicago.
