In an effort to address the country’s shadow inventory and relieve high-foreclosure areas, the U.S. Department of Housing and Urban Development will sell thousands of severely delinquent mortgage loans insured by the Federal Housing Administration. 

Throughout the summer ahead, HUD will sell approximately 20,000 distressed loans via the Distressed Asset Stabilization Program in an attempt to increase recoveries to FHA’s Mutual Mortgage Insurance Fund from non-performing FHA-insured loans, while contributing to stabilization and recovery in communities that took the hardest hit during the housing recovery. 

The offerings by HUD will be conducted via two auctions. The auction on June 26th will focus on selling approximately 15,000 notes through 'national pools,' while the one on June 10th will offer approximately 5,000 notes through Neighborhood Stabilization Outcome pools. 

HUD is growing the use of single-family loan sales via a competitive bidding process in which loan pools are sold to the highest bidder. This includes nonprofit and community-based organizations. 

"We’ve seen a tremendous response to our note sales which allow us to support particular areas of our country hard-hit by foreclosures while improving outcomes for FHA," said FHA Commissioner Carol Galante.   

Galante added, "These auctions allow us to continue stabilizing hard-hit housing markets and to improve FHA’s overall financial position at the same time."

Severely delinquent FHA-insured loans in the program are sold competitively at a price determined by the market, which is generally below the outstanding principal balance. 

After the purchasing of the loan, foreclosure is postponed for a minimum of six extra months. During this time, the new servicer can work with the borrower in a effort to find an affordable solution so foreclosure can be avoided. 

By purchasing these loans at market rate — which is generally below the outstanding principal balance — investors are given the incentive to help the borrower steer clear of foreclosure. 

HUD anticipates it will sell more than 40,000 distressed loans in 2013 through quarterly sales that reduce FHA’s total claims costs and raise recovery on losses to FHA’s Mutual Mortgage Insurance Fund.

In March 2012, HUD sold more than 16,000 seriously delinquent mortgages.