The Federal Housing Administration will sell 5,000 mortgages in the foreclosure process every quarter beginning in September to give borrowers more options to stay in their homes than government programs currently allow.

The inventory of repossessed homes held by the Department of Housing and Urban Development reached a three-year low because of servicing and foreclosure delays. But the more than 707,000 severely delinquent FHA-backed mortgages hovered around a record high since the start of the year.

To cut down on this backlog, HUD expanded its Distressed Asset Stabilization program. What began as a pilot initiative selling roughly 2,000 nonperforming loans to investors in total could grow by 10 times that amount, according to HUD Secretary Shaun Donovan.

"The loans will be sold for market-determined prices, which are usually less than the outstanding balance on the loan. The servicer will agree not to foreclose on the family for six months as they work to stay in the home," Donovan said in a press conference.

Eligible borrowers must be at least six months delinquent, and the servicer must have exhausted all loss-mitigation tools available through existing FHA programs. The loan must already be in foreclosure, but the borrower cannot have filed for bankruptcy.

With the loan owned by someone else, the servicer can provide other options, Donovan said, such as principal reduction or renting the home back to the borrower, who will have the option to buy it back in three years.

FHA Commissioner Carole Galante outlined some parameters for the sale as well.

Some pools of loans will be concentrated in areas hardest hit by the housing downturn, but those places will be determined this fall. The FHA will also pull out nonperforming loans for local nonprofits and governments to buy using Neighborhood Stabilization Fund money.

"It will be open to all bidders, but there will be capacity and management requirements," Galante said.

According to the parameters, the investor can only report half of the loans bought were eventually moved to REO after the sale.

"For a typical borrower, they've probably already given up the home. But they might get a call because of this program from the servicer to say we can cut the balance. We can do principal reduction or a whole package of things that we couldn't do under FHA rules before," Donovan said.