* FHA to offer up to 5,000 loans per quarter
* FHA saddled with over 700,000 bad loans
* Bulk loan sales aim to dampen FHA’s losses
June 8 (Reuters) - The U.S. Federal Housing Administration on Friday announced plans to sell off thousands of severely delinquent loans in an effort to protect its dwindling capital and improve the chances more troubled borrowers avoid foreclosure.
The FHA, which protects lenders against borrower defaults, said it would offer up to 5,000 loans each quarter in bulk sales to private investors starting as early as September. The sales build on a smaller-scale pilot program launched in 2010.
More than 700,000 FHA-backed mortgages are currently in default, or about 9 percent of the home loans the agency guarantees. In all, it insures about an estimated $1.1 trillion in loans.
Borrowers must be at least six months behind on their payments for the loans to be eligible for the investor pools. The program aims to help borrowers avoid foreclosure.
Investors will be prevented from foreclosing on the FHA-backed loans for six months after buying them.
The program will also require the loan servicers purchasing the pool of mortgages to modify at least half of the loans to make it easier for borrowers to stay current on payments. The servicers will have to ho l d the loans for at least three years.
“With this program, we will increase by as much as ten times the number of loans available for purchase while making it easier for borrowers to avoid foreclosure,” Housing and Urban Development Secretary Shaun Donovan said at a news conference in Chicago. “Wh i le our housing market has momentum we haven’t seen since before the crisis, there are still thousands of FHA borrowers who are severely delinquent today.”
The FHA has played a critical role in the U.S. housing finance system since private lenders retreated at the height of the financial crisis in 2008.
Saddled with losses from risky loans, the agency’s cash reserves reached a record low of $2.6 billion last year, raising concerns among some lawmakers about the agency’s solvency and the potential need for a taxpayer-funded bailout.
More than 2,100 FHA loans have already been sold at discounts to private servicers through the pilot program launched in 2010. The new loan pools will be offered nationally and in some pockets of the country hardest hit from the foreclosure crisis.
Under the program, FHA-backed loans would be marketed competitively “at a market-determined price generally below the outstanding principal balance” of the troubled loan, the agency said. (Reporting by Margaret Chadbourn, Editing by Gary Crosse)