Investors were a bit confused Wednesday as talks around the watering hole revealed that the Department of Housing and Urban Development failed to sell some of its soured mortgages during an auction for the first time ever.

HUD deemed bids on roughly $450 million of single-family loans too low to accept at an Oct. 30 sale. Consequently, the notes within the pool were categorized as 'failures,' according to Bloomberg.

The sales are an attempt by HUD to stem losses from its Mutual Mortgage Insurance fund, while providing an alternative for distressed borrowers that are on the brink of foreclosure.

What’s interesting is when you look at previous auctions and the performance of the pools, the unpaid principal balance continues to increase with each successive sale — by trending standards, the likelihood of this auction posting the same results as previous sales seems to be probable. The market is still awaiting the outcome.

What factors caused this auction to stop short given that there seems to be an investor appetite for distressed properties?

HUD took a different approach on the two different pools of notes within this action, including the characterization of higher loan-to-value ratios — meaning the notes were upside-down — and the geographic distribution by region was also a first-time factor, according to sources.

In a nutshell, investors did not offer to pay the reserve price on the notes within the pool because the assets seemed too risky.

However, it’s important to note that while most would chalk this up as a ‘failure,’ there is a silver lining to the attempted auction.

HUD is now aware that these types of notes do not provide attractive yield to investors. It’s a slap on the wrist compared to what the agency continues to make on its unpaid principal balance from auctions.

There are two more auctions coming up in December that will be offered as an attempt to heal the MMI fund and assist homeowners.

Will HUD take the same approach of pooling these specific notes the next time around? That's the lingering question.

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