FHA reverses some Biden era adjustments to foreclosure sales

Certain sales practices for distressed single-family properties that had served as collateral for loans the Federal Housing Administration insures will undergo policy reversals, according to a new mortgagee letter.

A 30-day, exclusive advanced sale preference for "claims without conveyance of title" properties must end by May 30. Owner-occupants, nonprofits and government entities have had a preference in those sales, in which mortgagees sell homes without conveying title to HUD.

Also, real-estate owned properties listed on the Department of Housing and Urban Development's online Homestore must end a similar 30-day sales preference and revert back to a 15-day period by that deadline. 

"FHA's evaluation of these policies has revealed the efforts were generally not successful in meeting their intended goals," the administration said in an information bulletin announcing the letter. "Instead, they have delayed sales of foreclosure properties, increased the deterioration of these properties, leading to lower sales prices and increased costs."

The data behind the decision

The mortgagee letter cites numbers showing that 3% or 85 of 2,696 CWCOT sales in 2023 with an exclusive listing period went to owner-occupants, government entities or nonprofits. In 2024, the share was similar at 3% of 4,447 sales. 

"During the new CWCOT exclusive listing period, very few properties have sold to owner-occupant buyers, and even fewer were purchased by HUD-approved nonprofits and government entities," FHA said in its letter.

The share of REO properties that went to owner-occupants inched up after the longer exclusive listing period was added, rising from 44% to 52% at one point over a period of 24 months, but then it fell back to 46% a year later. Most of the sales happened in 15 days, with what appeared to be limited migration into the 15-30 day timeframe.

"For REO, it's unclear whether the longer exclusive listing period resulted in higher overall sales resulted in higher overall REO sales to owner-occupants or shifted sales from the original listing period," the administration said in its letters.

The FHA's two moves mirror another one made recently by the Federal Housing Finance Agency, and is in line with the Trump administration's efforts to scale back government spending.

"Removing these requirements aligns with the Trump administration goals of reducing unnecessary burdens and saving taxpayer funds," the FHA said in an information bulletin about its mortgagee letter.

The backdrop for the changes taking place

The FHFA in March reversed Fannie Mae's "repair all" owner-occupant attraction strategy involving REO properties and with a similar comment about misalignment between that program's results and its goals.

The stakes are even higher for FHA-insured loans, which historically have had more expansive underwriting criteria than mortgages sold to government-sponsored enterprises like Fannie that the agency oversees.

FHA loans tend to attract a relatively high volume of lower-income buyers with less of a financial buffer against hardship. As such, the volumes of distressed properties in the FHA sector tends to be higher.

March's serious FHA delinquencies at risk of foreclosure were up 63% compared to a year earlier in ICE Mortgage Technology's latest numbers.