Housing and Urban Development Secretary Shaun Donovan testified before the Senate Banking, Housing and Urban Affairs Committee following the Federal Housing Administration’s actuarial report on Thursday to address the necessary steps that need to be taken in 2013 to avoid a first-time Treasury draw.

While Donovan stated that the potential $16.3 billion is a serious concern, it is not the determining factor for whether FHA will draw on permanent budget authority from the Treasury.

A main area of focus is to maximize recovery in the areas of loss mitigation and asset management, which could significantly help reduce the projected loss, Donovan said. 

According to the report, a projected $60 billion in claims costs for FHA from seriously delinquent loans will go to claims by the end of 2014. The goal is to reduce the severity of losses derived from loans insured between 2007 and 2009 to exert a positive impact to fund performance over the next few years.

For example, Donovan said the FHA plans to build on its bulk sales of distressed properties. HUD recently announced FHA will sell 40,000 distressed loans to strengthen funds.

The FHA will also re-design modification treatments to better assist delinquent homeowners. Loss mitigation policies will be geared toward greater payment relief for borrowers by reducing payments of at least 20% for FHA-Home Affordable Modification Program revisions. 

“This approach will yield lower claim costs for FHA while also reducing prepayment speeds for insured loans, both of which will positively impact the MMI Fund,” Donovan stated.

FHA will also introduce a streamlined pre-foreclosure sale policy, removing certain barriers for borrowers to obtain a short sale on their FHA-insured mortgage, which will increase the number of defaulted loans that end in short sales versus foreclosures.

The FHA is currently conducting a pilot where properties secured by non-performing FHA-insured loans are offered for sale by the lender that completed the foreclosure process. The properties are then sold to third party purchasers without ever being conveyed to FHA, which is at a reserve price slightly below the outstanding unpaid principal balance of the loan.

“This method of disposing of these properties may yield lower losses for the MMI Fund than selling them through FHA’s normal REO disposition process, as carrying costs associated with preserving, managing, and marketing an REO property were eliminated,” Donovan stated.


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