WASHINGTON -- So, you want to buy one of the Department of Housing and Urban Development's nonperforming loans when they go on sale next year, but you're frightened by all the red tape and risk?
HUD's financial advisor, The Hamilton Securities Group Inc., has a solution: Cut your teeth on some 40-year performing loans under Section 221 of the housing code that will go on the auction block net April.
"It's a way you can learn about the whole HUD portfolio and about the different types of paper, and this one is so easy because the loans are insured," said C. Austin Fitts, a managing director for Hamilton.
The Section 221 loans "are a great way to get your feet wet without taking a risk," said Fitts, who was assistant secretary of housing-federal housing commissioner from 1989 to 1990.
Fitts and her firm are hawking the Section 221 sale because they see a problem looming for HUD when its portfolio of nonperforming multi-family loans eventually comes on the market: The universe of mortgage buyers is relatively small, and the $8 billion in loans representing 320,000 units will be more than those buyers can possibly absorb.
Thus, the Section 221 sale is "a fairly painless way for nontraditional mortgage buyers to get involved with HUD portfolios," said Russell T. Davis, another managing director for Hamilton.
"When you start getting into the nonperforming loans, some with subsidies and some without, and some with unusual program requirements, people quickly overload on details," Davis said. "This is very simple. The Section 221 loans "are insured, and they're all roughly the same maturity."
For the municipal market, the sales of nonperforming loans will be important because many of those mortgages were financed with tax-exempt bonds. In addition, state and local housing finance agencies are expected to try to buy loans and rehabilitate the properties using tax-exempt financing.
For those agencies, the Section 221 sale would be particularly helpful, Davis said. Many of the decisions HUD is making about how to sell the Section 221 loans are likely to extend to the later sales of nonperforming loans.
State and local housing agencies "should be aware early, and watching the process early on so that by the time it gets to them it's not an overwhelming mass of accumulated lore they don't understand," Davis said.
Although Fitts and Davis said they were concerned about a potential shortage of buyers, housing lobbyists said HUD could easily find enough buyers if it were willing to insure the loans or sell them at a deep enough discount.
"They can get as many buyers as they want at a discount," said one lobbyist.
The nonperforming loans were insured by HUD and were assigned to the agency by lenders when borrowers defaulted. HUD expects to sell the troubled loans in pools to Wall Street investors. However, state and local housing officials are hoping to persuade the agency to sell to them, so they can refurbish the deteriorated apartments built with the loans.
When HUD will start selling the nonperforming loans and whether they will be insured remains uncertain. Before the sales can begin, Congress must ease a 1987 law requiring HUD to offer subsidies to buyers of the loans under Section 8 of the housing code in order to ensure that the properties are preserved for low-income tenants.
The Senate Banking Committee passed legislation earlier this week that would permit HUD to use other methods to make sure the projects remain low-income. But the House has not begun to draft a similar bill, and housing lobbyists say the Senate bill may not become law this year.
The performing loans under Section 221 were originated between 1960 and 1983. During those years HUD added a provision to the code allowing lenders to turn back or "put" the loans to HUD after 20 years, because the department was having difficulty encouraging lenders to offer loans with 40-year maturities.
But Congress began to reevaluate the wisdom of having HUD take over the loans. In 1990, as the 20th anniversary for many of the loans approached, Congress passed legislation permitting HUD to auction the loans to private investors.
HUD began selling the loans in April 1992, and just completed the third auction on Wednesday. In Wednesday's sale, 75 loans were auctioned in three pools, with a face value of $50.6 million. The winning bidder was Smith Barney Shearson, which bid an interest rate of 6.04% on two of the pools and 6.12% on the other.
That brings the total of loans sold to date under the program to 242 with a face value of $357.6 million.
Fitts and Davis are talking up next April's loan sale not only because it would be a good training ground for the nonperforming loans yet to come. They also need plenty of buyers for the April auction, where up to 330 loans could be sold -- a significantly greater number than the first three auctions combined.