The new program would include an expansion of guardrails aimed at addressing past concerns around the disposition and servicing of those mortgages in line with Biden administration goals.

The proposed reforms include measures aimed at giving owner occupants or organizations that advocate for them a first look at the notes when they go up for sale.

"This proposed rule will help struggling homeowners, stabilize neighborhoods, and make more affordable homes available for the people we serve," HUD acting Secretary Adrianne Todman said in a press release.

These types of sales have been in "test" or "demonstration" mode since 2002, according to HUD. Most recent distressed note sales have involved reverse mortgages for which a "first look" program has been active. 

Questions posed for comment in the proposal include whether that first look program should be extended to all mortgages.

HUD defines a first look program as a "requirement for sales of real estate owned properties to provide an exclusive listing period for owner occupant, nonprofit organization, government, and other prospective buyers."

The department also asks whether post-sale servicing requirements should "include that a purchaser offer loss mitigation options that are as or more generous than the FHA loss mitigation options for insured mortgage loans."

Other questions raised include some around whether there should be a requirement for servicers to send certain loan sale notifications to borrowers and whether there is additional information commenters would like to see added to reporting on sales outcomes.

"Today's proposal creates a permanent, standardized set of rules for note sales in the future that incorporates our learnings from previous sales that have taken place," Federal Housing Commissioner Julia Gordon said in the release.

HUD will be accepting comments on the proposal through Sept. 16.

The sales have historically seen some partisan division over how they should be handled.

While certain Democratic lawmakers and President Biden have prioritized owner-occupant sales as a way to stabilize communities with distressed homes, some Republicans have questioned whether this strategy is in line with a duty to maximize recoveries.

Distressed mortgage sales have been attractive to buyers recently given a scarcity of homes with low upfront price points. Foreclosed homes are often in need of repair and sell at lower prices but may require more investment in renovation and repairs over time.

Some secondary market players say they have seen a rise in owner-occupant transactions since HUD tested an expanded first-look program in 2022 that may have encouraged the department to move ahead with a proposal for broader use.