FHA Targets 'Scratch-And-Dent' Investors In Effort To Unload Discounted Federally Insured Home Loans In Default; Some Have Dubious 'Subprime' Past

Bloomberg reports:

• [T]he Federal Housing Administration is auctioning thousands of defaulted mortgages at prices marked down by as much as 65 percent. If the pilot works as planned, the government mortgage insurer will cut its losses by avoiding foreclosures while giving borrowers a better chance of remaining in their homes.



• “This pilot program is a potential win-win-win,” Acting FHA Commissioner Carol Galante said in an e-mail.



• Still, as the program joins other small-scale government housing initiatives, it illustrates the challenges policy makers face as they try to revive the housing market. So far, investors in the loans are scratch-and-dent specialists who buy less-than-perfect debt and try to squeeze a profit out of it.



• In the long run, they might have little interest in continuing to work to keep troubled borrowers from losing their homes. In some cases, the investors are the same people who originated subprime loans in the run-up to the 2008 credit collapse or later ran afoul of regulators.

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• Borrower advocates say they are troubled by the participation of companies whose principals were subprime lenders or who have drawn scrutiny from regulators in the past. The FHA program “is a way to continue to line the pockets of the predators who created this mortgage crisis,” said Bruce Marks, chief executive officer of the Neighborhood Assistance Corporation of America, a Boston-based non-profit that aids and counsels troubled borrowers.
  
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• One of the four firms that have bought notes through the program is Bethesda, Maryland-based MCM Capital LLC. MCM Capital employs Steven Trowern, a former director of Dynamic Capital Mortgage Inc. in Brookline, Massachusetts.



• According to a 2009 consent order and state officials, Dynamic was found to have falsified loan documents and misled borrowers. Without admitting wrongdoing, Trowern signed an agreement that he wouldn’t own or manage a mortgage company in the state for three years.

For more, see Vulture Investors Buy Discounted FHA Loans.