What Is a HUD Foreclosure?

Mike Licht

Realtor.com quoted me in What Is a HUD Foreclosure? A Home That’s Below Market Value. It reads,

“Foreclosure” is a scary word with a simple definition: It’s the process of a lender attempting to recoup the balance owed on a loan after the homeowner fails to pay the mortgage. Mortgage lenders can be banks, private institutions, or the Federal Housing Administration. The FHA is the world’s largest insurer of mortgages; FHA loans are managed by the Department of Housing and Urban Development. So any foreclosed house that was purchased with an FHA loan is called a HUD foreclosure. But what exactly is a HUD foreclosure?

What is HUD?

HUD is a federal agency with the mission to help low-income and first-time home buyers. Through mortgage assistance and subsidized housing, it helps make the dream of owning a home a reality for many Americans.

A major division of HUD is the FHA, which is the world’s largest insurer of mortgages.

“A HUD foreclosure is the foreclosure of a loan that was insured by the FHA,” says David Reiss, professor of law and research director at the Center for Urban Business Entrepreneurship
 at Brooklyn Law School
.

When a homeowner defaults on this government-backed loan, HUD pays off the mortgage and becomes the property’s de facto owner. To recoup financial losses, HUD then puts the house on the market.

The benefit of buying a HUD foreclosure

The upside for bargain home hunters is that HUD-owned properties are usually sold well below market value.

While anyone can buy a HUD home, “the agency has a special program for teachers, police officers, firefighters, and EMS personnel called the Good Neighbor Next Door program,” says Reiss.

This program allows people in those professions to purchase a HUD property at a whooping 50% discount if it’s in a “revitalization area” and the owner occupies it for three years. Revitalization areas are neighborhoods with very low income, low homeownership, or a high concentration of foreclosed homes.

How to buy a HUD foreclosure

HUD foreclosures are not sold in the typical manner, according to Reiss. Instead of open houses and offer letters, he explains, HUD foreclosures are sold through a bidding process that favors owner-occupants (people who actually want to live in the house) over investors by giving them priority in bidding.

Prospective owners working with a real estate agent authorized to sell HUD property submit bids but have no idea what the other bids are. If the property fails to sell to an owner-occupant, the HUD foreclosure is then open to investors.

How to find a HUD foreclosure

According to Reiss, HUD maintains the HUD Home Store, an online database that lists all its foreclosures. And unlike some foreclosed properties that may have liens (a notice attached to your property that means you owe a creditor money), HUD homes are for sale lien-free.

What’s Behind Rising Mortgage Bond Issuance?

GlobeSt.com quoted me in What Else Is Behind Rising Mortgage Bond Issuance, Demand?. It opens,

Investor demand for mortgage bonds, both that have agency backing and not, is quite high these days.

Last week Bloomberg reported that issuance of home-loan securities that don’t have government backing reached more than $32 billion this year, compared to $18 billion a year ago, citing data compiled by Bloomberg and Bank of America Corp. These securities include rental-home bonds, a relatively new asset class that developed after the recession.

Agency and GSE securities are also in high demand, as a recent report from the Mortgage Bankers Association indicates. The level of commercial/multifamily mortgage debt outstanding increased by $40.4 billion in the first quarter of 2015 — a 1.5% increase over the fourth quarter of 2014. Said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research with the report’s release: “Multifamily mortgages continued to grow even more quickly than the market as a whole, with banks increasing their portfolios by $8 billion and agency and GSE portfolios and MBS increasing their holdings by $10 billion.”

There are a number of economic-based drivers behind the demand for mortgage bonds of course: the fundamentals in the real estate space and the low interest rates that have driven investors to consider all manner of securities to eek out yield.

However, there is another possibility to consider as well and that is that the changing financial regulations are driving both issuance and investment.

On one hand, mortgages and private-label mortgage backed securities are much more regulated per Dodd-Frank and its Qualified Mortgage and Qualified Residential Mortgage rules, according to David Reiss, professor of Law and research director of the Center for Urban Business Entrepreneurship (CUBE) at Brooklyn Law School. On the other, post-crisis rules put in place for mortgage bonds have made these securities far more attractive for banks to hold as various news reports suggest.

For example, new rules have made ratings on mortgage bonds less crucial, allowing US lenders to use an alternative approach to calculating capital requirements, according to another recent article in Bloomberg. In essence, these rules allow lenders to reduce the amount needed for junk-rated mortgage bonds that are trading at discounts.

In addition, banks are finding that “treasury debt and MBS pass-throughs meet regulators’ standards much more easily than other assets”, according to a report by Deutsche Bank analysts Steven Abrahams and Christopher Helwig, per a third recent article in Bloomberg.

Two Opinions

With these facts in mind we turned to two experts to see how much of an impact new regulations are having. As it turned out, they are driving some of the change – but what is actually moving the needle in terms of demand is yet another trend. Read on.

For starters, there are some caveats. It can be misleading to throw the new rental home bonds in the mix in such a comparison, Reiss tells GlobeSt.com. “They are a post-crisis product when Wall Street firms saw that single-family housing prices were so low that they could make money from buying them up in bulk and then renting them out,” he says.

“They are not regulated in the same way as private-label MBS.”

Meanwhile issuers are still navigating Dodd-Frank’s Qualified Mortgage and Qualified Residential Mortgage rules, he says. They “are still trying to figure out how to operate within these rules — and outside of them, with the origination of non-QM mortgages. The market is still in transition with these products.”

As he sees it, the surge in issuance is a reflection of market players trying to understand how to operate in a new regulatory environment. They “are increasing their issuances as they get a better sense of how to do so.”