Thousands of troubled mortgages in communities hard hit by the foreclosure crisis will be going up for sale in September, announced federal housing officials.

The sale will feature pools of distressed loans in Chicago; Newark, N.J.: Phoenix; and Tampa, Fla., as well as a national pool, according to Carol Galante, acting Federal Housing Administration (FHA) commissioner, who announced the opening of the application period for qualified bidders Wednesday.

“These are all communities where there is a high concentration of FHA loans in the pipeline for foreclosure,” Galante says. “These are also in metropolitan areas where there is significant interest by both nonprofit and for-profit investors in using the program to help the community find affordable solutions for people.”

All of the loans were insured by the FHA. Most of the defaulted mortgages involve single-family homes, but some small buildings with one-to-four units may be included.

Galante estimates that 9,000 loans will be sold nationally, with roughly 4,000 of those in the four markets tapped by the FHA. The numbers will vary from a low of about 400 in Phoenix to a high of about 1,500 in Chicago.

The total number is up from the original estimate of 5,000 loans, according to Galante, who attributed the increase to strong interest. FHA intends to target other locations in the future, with another sale scheduled for next quarter.

The FHA began selling troubled loans through the Distressed Asset Stabilization Program in 2010 and has sold more than 2,100 loans to date under the pilot. Under the program, an FHA-approved lender can file a claim for FHA insurance benefits and assign the loan to the FHA if the borrower is at least six months delinquent on a mortgage, the servicer has exhausted all steps in the FHA loss mitigation process, the servicer has initiated foreclosure proceedings, and the borrower is not in bankruptcy. The assigned loans are then pooled by FHA for resale.

The loans are sold competitively at a market-determined price generally below the principal balance. FHA then processes an insurance claim, removes the FHA insurance, and transfers the loan to the investor. Foreclosure is then delayed for a minimum of six additional months, giving the new servicer time to work with the borrower to try to find an alternative to foreclosure.

Because the loans are generally sold for less than what the borrower owes, the purchaser has the ability to reduce or modify the loan terms while still making a return on the investment. If an alternative does not exist, the purchaser may be able to help the borrower sell the property through a short sale and avoid the cost of foreclosure, according to housing officials.

All bidders must be qualified by the Department of Housing and Urban Development.

Galante points out that no more than half of the loans within a purchased neighborhood stabilization pool may be sold as real-estate owned (REO) properties. “Of the 50 percent that cannot become vacant REO under the terms of the sale, the winning bidder must realize what we’re calling ‘neighborhood stabilization outcomes,’” she says.

Those outcomes can include such items as mortgage modifications that lead to “a re-performance of the loan.”

“This program at its most basic level creates the opportunity for everyone to come out a winner – the homeowner, the mortgage holder, FHA, and the community,” Galante says. “But as we all know even one foreclosure on a neighborhood street brings down surrounding home values. So in some  hardest-hit areas we have decided to enhance the national loan sale program to incorporate neighborhood stabilization pools that are really designed to stem the flow of distressed properties hitting these hard-hit markets.”