Fannie and Freddie's collection of homes reaches 191,000

Fannie and Freddie's collection of homes reaches 191,000

By Nick Timiros
The Wall Street Journal
9/17/10

Two years after they were taken over by the federal government, Fannie Mae and Freddie Mac face a new challenge: The mortgage-finance giants are becoming two of the nation's largest home sellers at a time when the housing market shows new signs of softening.

Fannie and Freddie have already taken back nearly as many homes in the first half of the year as they did all of last year. They owned more than 191,000 homes at the end of June, double the year-earlier total. That number will grow because they are taking back homes faster than they sell them.

In recent weeks, Fannie Mae has warned that it could get tougher on lenders that are taking too long to reclaim homes once they have determined that the home is vacant or once they have exhausted foreclosure alternatives, such as modifications. Mortgage servicers, which collect fees from Fannie, could face fines if the process is unreasonably prolonged.

Fannie's recent reminder to banks signals a growing impatience with delays that have become "exaggerated and unmanageable," says Edward Delgado, a former Wells Fargo and Co. executive who is now chief executive of the Five Star Institute, a provider of training programs for mortgage professionals.

Fannie is effectively saying "we need to jumpstart the system. We need to be more expedient," Mr. Delgado says.

Once they take homes back, Fannie and Freddie must not only cover the utility bills and property taxes, but they are also relying on thousands of real-estate agents and contractors to rehabilitate homes, mow lawns and clean pools. Fannie took a $13 billion charge during the second quarter just on carrying costs for its properties.

While it is expensive for Fannie and Freddie to hold on to more unsold homes, they nevertheless want to avoid costly delays. Attorneys' fees can pile up and vacant homes risk falling further into disrepair. Fannie issued the notice to remind servicers to "minimize processing delays," said a company spokeswoman.

Delays also add to the uncertainty over the housing market, which faces a backlog of loans that are at least 90 days past due or in some stage of foreclosure. Analysts at Barclays estimate that this "shadow inventory" sits at around four million loans.

Already, as borrowers fail to qualify for permanent modifications, newly initiated foreclosures at Fannie and Freddie have risen for three consecutive months to more than 150,000 in July, up nearly 60% from April, according to LPS Applied Analytics.

That creates an increasingly delicate balancing act. The costs of managing those homes are adding up, but the companies are reluctant to slash prices and dump lots of homes at big discounts.

"Freddie Mac probably owns loans on the same street. We don't want to create a downward spiral for values in a given neighborhood," says Chris Bowden, the Freddie executive in charge of selling foreclosures.

Banks are also entering a less favorable environment for disposing of rising inventories. While mortgage rates continue to fall to record lows, home-buying activity stalled earlier this year when tax credits to spur sales expired.

"One year ago, you couldn't even keep them on the market," says Brett Barry, a real-estate agent who sells foreclosed homes for Fannie Mae in Phoenix. "That's so done."

Fannie has reduced the price three times on a property at the end of East Phelps Road in suburban Phoenix, to $200,000 from $265,000 in early July. But, like many of Mr. Barry's bank-owned listings, the three-bedroom home has still received no offers. "They're definitely pushing the envelope on price," he says. "But they're doing it at the wrong time."

A Fannie Mae executive says the company is "very focused on positioning a property effectively" and that after a record-setting June, sales fell sharply in July before rebounding somewhat in August.

"It's difficult. These are volatile markets," says Freddie's Mr. Bowden. "I can easily leave money on the table if I set value too low."

If demand remains weak, Fannie and Freddie could face pressure to take more aggressive steps to hold homes off the market.

Fannie, for example, is testing an effort in Chicago where it will rent vacant foreclosures rather than list them for sale.

Such a "lease-and-hold" approach could make sense in certain markets where "you believe the supply will take a long time to absorb, but there's going to be an increase in employment going forward," says Douglas Duncan, chief economist at Fannie Mae.

But renting could prove tricky for firms that have little experience as property managers.

The companies face other balancing acts. To promote neighborhood stabilization, they have instituted a program that allows offers only from owner-occupants and community groups during the first 15 days that a property is listed. To move sales along, Fannie offers financing on its own properties with just 3% down payments and no mortgage insurance.

Zero Hedge Comments

As the administration continue to recreate the ponzi bubble using the very same criminal methods that reflated the first housing bubble, more and more homes are being handed back to the original mortgage lenders - Fannie and Freddie (which incidentally are all now owned by everyone in America, ever since the GSEs were nationalized by the US, after Barney Frank's experiment in the early 2000s went so wrong, it nearly cost the default of America.

How that human is still allowed to draft law after corrupt and worthless law, is beyond us). And today we discover that at the end of June, Fannie and Freddie are now the proud owners of 191,000 homes (double what they owned at the end of 2009) and rising with each passing day.

And shockingly, the GSEs have decided to do the prudent thing and start selling this real estate, before the plunges really plunge and leave them straddled with millions of homes. On the other hand, this action alone will likely be sufficient to force the next leg lower in home prices.