Salient to Investors:

Hedge funds and private-equity firms are buying delinquent home loans sold by the FHA, paying an average of 36 cents on the dollar and a low of 26 cents.

The FHA doesn’t have the legal authority to use workout tactics like principal forgiveness, and is not allowed to rent homes back to their former owners after a foreclosure.

The FHA had a default rate of 9.6 percent at the end of November versus the 7 percent serious-delinquency rate for the 50 million U.S. home loans tracked by the MBA.

For eligible mortgages, investors can be reimbursed as much as 63 cents per dollar of principal forgiveness under a US Treasury program. For modifications that fail, investors can resell or rent the homes.

The FHA is selling loans in areas where the costs of foreclosing are highest. LPS said Florida borrowers were an average of 1,114 days delinquent by the time of foreclosure, versus the US average of 728 days.

Ed Pinto at the American Enterprise Institute said the FHA’s typical loss on a foreclosure is 63 cents on the dollar, close to the loss from the average winning auction bid, so doesn’t see much financial benefit in the auctions. Pinto said the auctions are a back door way of implementing principal reductions on FHA loans and doling out other pots of money authorized for community development.

Wayne Meyer at New Jersey Community Capital said that by buying the loans at a discount, investors can offer more generous payment modifications to delinquent borrowers.

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