FHA Won’t Reduce Your Mortgage, But it Will Sell it to Investors at a Steep Discount

A report by The Atlantic reveals that the Housing and Urban Development Department (HUD), has been selling large numbers of delinquent, FHA-insured mortgages. When a borrower can’t afford to pay her mortgage, the bank that owns the mortgage will make a claim on its FHA insurance. FHA pays the bank and in exchange, it becomes the owner to the mortgage. During the financial crisis, that happened a lot. The FHA was pressed for funds and so it began selling these “distressed” mortgages to private investors – at something like a one-third discount.  The investor then forecloses and seeks the full amount owed; a nice return in excess of 30%.  These sales have concealed the true rate of foreclosures on FHA insured loans (because the FHA is not the designated owner when foreclosure ultimately happens).  These sales have benefited wealthy investors at the expense of borrowers in distress. While the investors receive a huge discount, the borrowers never have the same chance: the FHA will not to reduce the amount of their loan.  In other words, the FHA will sell the loan at a steep discount to a third party investor, but it will not offer a principal reduction to the homeowner.