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FHA’s Galante Says Delinquent-Loan Buyers Could Become Landlords

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June 11 (Bloomberg) -- Investors who bid on Federal Housing Administration pools of delinquent loans could end up converting some of the properties into rental housing, FHA Acting Commissioner Carol Galante said in an interview.

The FHA said last week it will begin quarterly sales of about 5,000 defaulted loans received from lenders in exchange for insurance payouts, expanding a pilot program started last year. The government mortgage insurer, which already has 35,000 repossessed homes on its books, is looking to sell loans at a discount to keep more properties from going into foreclosure.

About a third of foreclosed properties on the market are owned by the FHA or government-controlled finance companies Fannie Mae and Freddie Mac. Regulators put out a call last year for input on how to structure bulk sales of real-estate-owned properties, or REOs, to encourage their conversion into rentals.

Fannie Mae is auctioning properties that have been repossessed to investors who are required to rent them. The FHA auctions may encourage similar conversion of seized properties, Galante said yesterday.

“We really see this as our contribution to the REO-to-rental type of solution,” she said.

Under the FHA program, investors must first try to work with borrowers to make loans current. If they do foreclose, the investors can’t sell more than 50 percent of the properties in their pools and will be encouraged to rent out repossessed homes that they aren’t allowed to sell.

“This isn’t a quick flip,” Galante said. “For the majority of the pool, somehow or other they will be in a stabilized situation. That’s the goal.”

Neighborhood Stabilization

The FHA will pool loans with characteristics that would make them eligible for other federal aid, such as funds for neighborhood stabilization, in the hope that investors will use them as part of larger community development plans, she said.

Galante said the FHA is also looking into allowing REO investors to qualify for a program that allows homebuyers to finance an additional amount beyond the purchase price to pay for repairs. The so-called 203(k) loans are now available only to borrowers who plan to live in the houses they buy.

The amount the FHA will recoup from the loan sales is greater than what it would lose in foreclosures, according to agency officials. Each foreclosed property on the agency’s books costs an average of $28.78 a day to maintain and market.

The agency, an arm of the U.S. Department of Housing and Urban Development, has insured more than 34 million mortgages since it was created in 1934. It is financed by the mortgage insurance premiums it charges to borrowers.

To contact the reporter on this story: Clea Benson in Washington at cbenson20@bloomberg.net or

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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