Moving to create a new type of financial asset, the Department of Housing and Urban Development intends to sell the rights to receive insurance premiums on $50 billion of government-backed home loans.
Observers said the package could fetch $1 billion.
A senior HUD official said the plan would shift the task of collecting the premiums to the private sector - in line with a broader effort to place certain HUD functions in private hands.
The rights, if sold, would join a growing array of broadly traded mortgage-related assets. That menu already includes mortgage-backed securities, collateralized mortgage obligations, and the rights to process monthly loan payments by homeowners.
Potential buyers of the insurance rights are said to be Wall Street firms, lenders that service loans backing Government National Mortgage Association securities, and private mortgage insurers. The Wall Street firms have expertise in securitizing assets, while the servicers and insurers have hands-on experience in collecting and processing premiums.
The two million Federal Housing Administration loans behind the deal were originated before 1983, when monthly premiums were standard. The premiums now amount to $230 million a year, said a HUD official. The amount would diminish over time as loans are paid down or paid off.
The one-time sale will likely take place in mid-October. On June 22, HUD will give details of the sale at three hour-long forums at a national mortgage servicing conference in Philadelphia presented by the Mortgage Bankers Association of America.
By selling the insurance-premium rights - which resemble servicing rights - HUD rids itself of the task of collecting the payments, said William S. Richbourg, a director of management control who coordinates asset sales for HUD. The department also gets the benefit of the receiving its payments up front instead of over several years.
"It is just an administrative nightmare for the department, so we would like to sell the rights to this in order to redirect our resources," Mr. Richbourg said.
It could also simplify HUD's budgeting process. Presently, HUD must get funding from Congress each year to cover its estimated payouts on defaulted loans.
A nongovernment source working on the deal said HUD was unsure whether it would sell the rights in bulk or split into lots. He said that by conservative estimates, HUD could get $1 billion for the insurance rights.
"It is fairly small in dollar magnitude, but it's significant in that it is a more creative transaction than we have attempted in the past," Mr. Richbourg said.
Purchasers would be responsible for collecting mortgage insurance rights from 6,000 loan servicers. They also would have to notify HUD when a loan terminated, changed ownership, or was prepaid.
Because this is a new type of sale, "there will be a fairly lengthy education and marketing period," the nongovernment source said.
Williams, Adley & Co., a Washington consulting firm, is advising HUD on the sale. Two other consulting firms - Hamilton Securities Group of Washington and R.D. Horner & Associates of Chicago - are also helping to organize the auction.
Initially, lenders expressed interest in the offering. Some said the deal seemed like a potential cash cow. The risk of prepayments seemed to some lenders to be more predictable considering the age of the portfolio.
An industry source said prepayment speeds would be the crucial factor in determining the product's appeal. He said the 10 largest Ginnie Mae lenders would be the most likely purchasers.
One lender wondered whether the purchaser of the insurance rights would be forced to change its infrastructure to handle the government program.
Thomas Stanton, a Washington lawyer who follows issues of safety and soundness in government enterprises, said the key question about the program was what HUD would do with the proceeds.
"If this money is used to create a capital reserve fund to meet the requirements of credit reform for a new housing corporation, then this would be a very positive step," he said.
"If, however, the money goes merely into general revenues, then it represents a lost opportunity."
Mr. Richbourg said he believed the money would be placed in HUD's Mutual Mortgage Insurance Fund, which is used to pay for defaulted loans. The fund can be used for other purposes - with the approval of Congress.
