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Sunday, January 30, 2011

Fannie and Freddie's Big Foreclosure Backlog

businessweek
  •  Friday January 28, 2011, 8:08 am EST
Fannie Mae (fnma.ob.OB) and Freddie Mac (fmcc.ob.OB) are trying to sell their huge backlog of foreclosed homes in an orderly way to avoid flooding the market and depressing prices. As foreclosures mount, though, analysts say the companies may be forced to reconsider that approach.

The government-controlled mortgage companies' inventory of foreclosed residential property has quadrupled in three years and now stands at a record $24 billion. The number of properties they own has increased fivefold to nearly 242,000, representing roughly a third of all repossessed homes in the U.S. And the total keeps growing as they take possession of homes faster than they can sell them. In the first nine months of 2010 Fannie and Freddie took in 319,243 foreclosed properties and disposed of 210,105. At the same time, U.S. housing prices have been falling. In the most recent reading, the S&P/Case-Shiller index of home values in 20 cities fell 1.6 percent in November from the previous year, the biggest 12-month decrease since December 2009.

Officials at Fannie and Freddie say they are committed to an approach consistent with their mission as backstops for the housing market. They have been trying to stabilize neighborhoods by selling homes at prices close to market levels and giving preference to buyers who plan to live in the homes rather than investors who might rent them out or try immediately to resell them. Fannie and Freddie are also investing in some properties, spending millions on maintenance to make them competitive with other homes on the market in their neighborhoods. "We don't want a reduced value to initiate a quick sale," says David Wendling, senior director of REO (real estate owned) sales at Freddie Mac. "The focus has always been on supporting neighborhood values."

Of the 74,621 properties Freddie Mac sold in the first nine months of 2010, 67 percent went to buyers who intended to occupy them, according to company data. At Fannie Mae, about 80 percent of sales are to owner-occupants, says company spokeswoman Amy Bonitatibus. "We don't hold anything back that is available to be sold," says Jane Severn, director of REO disposition at Fannie Mae. "We're doing the opposite, pushing our homes out to the market as soon as we can."

Some real estate analysts say the companies will have to find a way to dispose of properties more quickly. The number of homes subject to a foreclosure filing may rise by 20 percent this year, up from a record 2.87 million properties in 2010, RealtyTrac, an Irvine (Calif.) data company, predicts. The market currently can absorb about a million foreclosures a year, the Mortgage Bankers Assn. estimates. Fannie and Freddie themselves estimate in regulatory filings that it will take "a number of years" to bring their foreclosure inventory down to pre-2008 levels.

As their holdings of unsold homes increase, Fannie and Freddie eventually will need to drop prices and turn to investors, analysts predict. "I think they're just (postponing) the inevitable," says Michael Slaughter, a partner at New Providence Capital, a Dallas-based private lender. "If they don't start with a systematic distribution of these properties to investors who have cash today and will buy them at the right price, they're going to end up selling the entire portfolio to Goldman Sachs (NYSE:GS - News) or BlackRock (NYSE:BLK - News) at a tenth of what they can get for them today."

The bottom line: Fannie's and Freddie's strategy of not flooding the market with foreclosed homes may come under pressure as their inventory builds.

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