This Design Book is intended to serve as a road map for implementing the sale of primarily nonperforming, FHA-held mortgage loans which secure single family properties throughout the United States. The information is to be used by FHA staff, the financial advisor and the due diligence contractor, collectively known as the contract team (CT). The financial advisor coordinates the CT in carrying out the sale.

FHA Single Family Mortgage Loan Sale #2 is the second in a series of six planned sales of assigned nonperforming single family mortgage loans. The single family mortgage loans had been insured by the Federal Housing Administration (FHA). They became government-owned when home buyers defaulted on their FHA-insured mortgages. The single family sales are a subset of the overall sales program that includes performing and nonperforming, single family and multifamily mortgage loans.

Launched in 1994, the program is part of the Clinton administration's initiative to re-invent the Department of Housing and Urban Development (HUD). To date, the sales have generated taxpayer savings of about $650 million. Additional sales are slated for 1996 and 1997, beginning with a multifamily sale in May.

HUD's sales program has featured a number of innovations, including widespread use of Internet websites to distribute sales information. The sales are also the first federal mortgage auctions to successfully use computer "optimization" to enable bidders to submit an almost unlimited combination of bids. Developed for the Department by AT&T Bell Laboratories, the optimization model automatically determines which combination of bids provides the maximum return to taxpayers.

The 16,231 single family loans sold in the SF Mortgage Loan Sale #2 are primarily nonperforming and carry an outstanding balance of approximately $740 million. The average per mortgage balance owed by the defaulted buyers is $45,000, with the largest concentrations of defaulted loans in California, Texas, Colorado, and Arizona.

This Design Book, which will be used in conjunction with subsequent sales, covers the following:

1. Data Collection Strategy. A fair and successful sale requires accurate and current information. The objectives of data collection are to provide information about the loans to potential investors, to collect information to assist in valuing the assets, to identify documents necessary for selling the loan, and to collect all other information relevant to the sale.

2. Subcontracting. The CT outsources certain services to complete the sale, including photocopying, file imaging, Broker's Price Opinions (BPOs), and credit reports. The subcontracted services are awarded to qualified firms.

3. Due Diligence Database. One of the primary due diligence tasks in an asset sale is the processing of loan and property data in an accurate and timely manner. It is important to construct a system that stores information in a central location and allows it to be presented in an organized and easily accessible format.

4. Credit Reform Act Requirements. The terms of the Credit Reform Act must be applied to the HUD loan sales process.

5. Structure/Bid Procedures. The objective of the structure is to provide the highest possible price while providing access to large and small bidders alike.

6. Marketing. The goals of the marketing strategy are to maximize the number of bidders, reduce uncertainty by insuring easy access to a high level of quality information, lay the groundwork for future sales, assure a fair sale, and foster a positive image of FHA in the marketplace.

7. Bid Administration. The CT performs all tasks associated with bid administration, including all pre-bid day, bid day, and post-bid day tasks. A detailed list of general and specific tasks is included in this chapter.

8. Closings. The CT performs all tasks corresponding to the actual closings of the loan sales. Closing documents are prepared by the CT and reviewed and accepted by HUD's Office of General Counsel. Closing procedures and requirements are described in a standard loan sales agreement (LSA).

9. Information Control. Information that is inaccurate or that is released prematurely and subsequently changed threatens the success of a sale. Consequently, a process has been established to control the dissemination of information to all interested parties.

10. Training. Training is provided to insure that all parties involved in FHA Single Family Mortgage Loan Sale #2 have a consistent and thorough understanding of the goals, tasks, and protocol to be followed. Training is directed at three groups: FHA/HUD headquarters and field office staff, the due diligence contractor, and subcontractors.

11. Internal Controls and Quality Control. The internal control section of this chapter identifies the potential risks associated with each aspect of FHA Single Family Mortgage Loan Sale #2 and sets forth procedures to detect or minimize such risks. The quality control section describes the process by which components of the sale will be monitored and tested to insure accuracy, consistency and completeness.


Below is a summary timeline for the conduct of the FHA Single Family Mortgage Loan Sale #2. The timeline is based on the bid date of March 20, 1996. Each chapter in the Design Book includes a timeline highlighting the relevant tasks and activities.


1995            1996

Oct.  Nov. Dec. Jan. Feb. Mar. April. 
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