The U.S. Department of Housing and Urban Development for the first time failed to sell some of the soured mortgages it's auctioning off in the wake of the housing crisis, according to four people with knowledge of the results.
HUD deemed bids on about $450 million of home loans too low to accept at an Oct. 30 sale, said the people, who asked not to be named because the details are private. Since 2010, the agency has sold about 50,000 non-performing single-family loans insured by the Federal Housing Administration to investors willing to either help keep the borrowers in their homes or rehab the properties for sale.
The sales are an attempt by HUD to simultaneously stem losses at the financially troubled FHA and pursue its public mission of averting foreclosures on the underlying properties. The refusal to accept bids on some of the pools may reflect that the FHA reached its limit on the losses it was willing to realize to keep some borrowers in their homes or stabilize markets.
"If you can get someone who's willing to take these notes and fix the properties and rent them out or transfer them to a nonprofit, the idea is that you're not hurting places that have been hit hard by foreclosures," said Andrew Jakabovics, senior director of policy development at Enterprise Community Partners and a former HUD policy adviser who helped design the note sale program. "It's about striking that balance but also making sure that they're not giving properties away far below what the value is."
High Debt
The mortgages that HUD failed to sell last month were in the two pools that had the highest debt relative to the value of underlying properties, the people said. The department sought to offload a total of $1.7 billion in loans.
HUD offers the loans at a significant discount to the unpaid principal balance with the expectation that buyers will try to modify the loan terms or take other actions to prevent neighborhoods from being swamped with vacant homes. Buyers of the notes agree not to foreclose for at least six months as a condition of the sale.
Homeowners have a better chance of keeping their properties if the loans are sold because FHA's rules prevent borrower-aid tactics available to private investors, such as reductions to principal balances.
The sales also potentially recoup more value for the FHA than alternatives such as taking the properties to foreclosure and then selling them or allowing delinquent borrowers to sell their homes for less than they owe.
Higher Return
FHA recovered an average of 46 percent of the principal balances on foreclosed homes it sold in July. Meanwhile, buyers of the loans in HUD's last round of sales in June paid an average of 53 percent of the balances of the $2.4 billion of loans sold, or 67 percent of estimated property values. Buyers included Oak Hill Advisors LP, mortgage-bond pioneer Lewis Ranieri's Selene Investment Partners and Royal Bank of Scotland Group Plc's securities arm, HUD disclosures show.
The FHA, created in the wake of the Great Depression to insure low-downpayment loans, has been swamped with foreclosures as a result of defaults on mortgages it backed as the housing bubble burst. The agency required a $1.7 billion taxpayer subsidy in September, the first in its history.
The Oct. 30 auction differed from previous versions OF HUDS main type of sales by offering pools of loans sorted by quality and geography, one of the people said.
Buyers included investment firm Angelo Gordon & Co. and the securities arm of Credit Suisse Group AG, two of the people said. Ellington Financial LLC, which is run by hedge-fund manager Michael Vranos's firm, also bought some of the loans, Chief Executive Officer Laurence Penn said last week on a conference call.
Buying As-Is
Allan Krinsman, senior counsel for Angelo Gordon, and Drew Benson, a spokesman for Credit Suisse, declined to comment. HUD spokeswoman Addie Whisenant also declined to comment.
The mortgage sales are being conducted through an online loan-auction service run by Debt Exchange Inc., known as DebtX. The offerings differ from others in the market by requiring investors to agree to buy all of the loans in the pools for which they're bidding on an as-is basis instead of allowing loans to be "kicked out," or removed, after relying on upfront due diligence from providers they don't choose.
Some potential bidders may also be prevented from participating because of a variety of other unusual rules, including disclosures about whether any of their employees are related to individuals working at HUD, one of the people said.
Sales Surge
HUD's auctions have helped fuel a surge of sales of non- performing mortgages in the past year, as banks also stepped up their offerings.
About 24,000 loans are being offered over the agency's October and December "national pool" auctions, and an additional 5,000 from Atlanta, Baltimore, Washington, Indianapolis, Las Vegas and California in "Neighborhood Stabilization Outcomes" pools, according to an online posting by DebtX.
The current $5 billion round of auctions of non-performing loans insured by the FHA, the largest yet, resumes Dec. 10.
Before the latest round, the department, which conducted loan sales under the program as early as 2002, had offloaded $8.1 billion since 2010, with the offerings accelerating starting late last year.
