The program launched in 2002 is now on track to become permanent on Jan. 10 of next year with an expansion of guardrails aimed at addressing past concerns around disposition and servicing.

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.

First-look programs for real-estate owned properties provide an exclusive listing period for owner occupants, nonprofit organizations, government agencies, and other prospective buyers.

Most recent distressed-note sales have involved reverse mortgages for which a first look program has been active.

Some secondary market players have said they have seen a rise in owner-occupant transactions since 2022 and that may have encouraged the department to move ahead with a proposal for broader use.

This trend could have "given HUD some comfort that it will be a responsible way of handling these loans," Daren Blomquist, vice president of market economics at Auction.com, said in an earlier interview about the July proposal to expand the program.

"This should help pave the way for a more diverse loss mitigation and disposition strategy for FHA-insured mortgages," he added in response to an inquiry from this publication on Thursday. "In most cases, dealing with distressed loans earlier in the process is better than kicking the can down the road — both from a financial perspective and from a neighborhood stabilization perspective — and a permanent distressed note sale program will certainly facilitate that."

Blomquist would like to see the program broadened in the future.

"I continue to believe that expanding that first look to for-profit buyers who have been certified as responsible 'local community developers' will even further improve disposition outcomes. We see many for-profit buyers on Auction.com who responsibly renovate properties and return them to the market as affordable housing — both for owner-occupants and as quality, affordable rentals. But those buyers are locked out of the first look auction as it stands now," he said.

There has historically been some partisan division over how distressed loan sales should be handled, raising some questions about whether the incoming Republican administration and Congress could reconsider the permanence of the program.

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.

The state of the FHA's Mutual Mortgage Insurance Fund often has a lot to do with how much scrutiny the government agency's finances get.

The capital ratio that's a key measure of the fund's financial health rose to 11.47% from 10.51% during the fiscal year ending Sept. 30, well over its 2% statutory minimum.

However, there's been a concerning rise in the mortgage delinquency rate recently, which could put more strain on the fund.

Servicers should make sure their systems are ready whatever FHA policy shifts surface in this area next year, particularly when it comes to loan transfers that are increasingly automated, said Jane Mason, CEO of distressed mortgage technology provider Clarifire.

"You have to be operationally open minded right now from an override perspective. You have to get you have to have changeability, auditability, and you have to pay attention to gathering the characteristics of the loans. That's very important to your success as a servicer," she said.