What should the Administration do about Frannie’s REO inventory?

  • Sell the REOs in bulk to investors. (44%, 35 Votes)
  • Leave it to Frannie to continue selling the REOs. (35%, 28 Votes)
  • Turn the REOs into rental property. (21%, 17 Votes)

Total Voters: 80

Freddie Mac and Fannie Mae’s (collectively Frannie’s) hands are full of real estate owned properties (REOs) and it doesn’t look like they are going anywhere anytime soon.

Frannie held 180,000 REOs as of October 1, 2011 – a net drop of 16,000 from the 196,000 they owned three months earlier. This is only the second time since 2005 the two government-sponsored enterprises (GSEs) sold more REOs than they acquired in any quarterly period.

If the current trend continues (which it won’t) Fannie expects to clear its REO inventory in four years and Freddie in 15. (Though Freddie has less inventory than Fannie, its REO sales to acquisition ratio is much lower.) However, Core Logic reports 1.6 million home loans are in foreclosure, stalled from becoming REOs, and once this shadow inventory gets processed, Frannie will absorb yet another wave of REOs. So much for ending the foreclosure relief programs by 2017.

first tuesday take: For the average California homeowner, the idea of buying an REO home, most likely sitting in some blighted suburban community, is just not as much of a priority as paying next month’s bills. Personal savings on average are declining for lack of employment, which bodes badly for homebuyers making that 20% down payment. [For the most recent statistics on personal savings, see the first tuesday Market Chart, The 20% solution: personal savings rates and homeownership.]

One idea on the table for mitigating the foreclosure crisis is an REO rental program made possible by large-scale sales to investors. Buy-to-let investors can purchase the REOs at 20% down, with volume limited only by net worth in other assets. This will put an end to the backlog. Income property investors will be better equipped than homeowners to understand the risks taken on in single family residence (SFR) ownership (simply because they’re better at doing their math). These investors are ready and willing to buy up REOs in bulk now – the only problem is there aren’t a sufficient number of them able to obtain 80% financing because the government just hasn’t gotten the prices right. [For more information about ideas for REO inventory relief, see the September 2011 first tuesday article, REOs for rent.]

While we wait for some level of certainty by action from Congress and the Administration to get us past their running list of inept foreclosure relief ideas (whether the action be an REO rental program to fill the vacant property, or bankruptcy-instituted cramdowns to loosen up equity for sale by underwater homeowners), what California needs now from the government are job-creating scenarios, not further sandbox fighting.

Without a job-creation environment, made possible by businessmen deciding the marginal costs for hiring that one more employee, expect any recovery or REO disposition plan to be like watching paint dry on a damp winter day — the very reason why current employment conditions are called the Lesser Depression.

With a job-creation environment, expect increased income, consumer confidence and then spending by homeowners and renters — that, dear Frannie, will usher in your buyers in huge numbers and bring this lingering REO affair to a quick end.

Readers: Job growth in California currently languishes around 200,000 annually going forward. When the numbers jump to 350,000 and 400,000 (which occurred at the turning point of the 1990s recovery), anticipate a rise in home sales volume, a cure for the present famine in closings and brokerage fees.

RE: “Fannie Mae and Freddie Mac own more than 180,000 foreclosures” from Housing Wire