Government Agencies Hold 46% of REO Inventory...and More Is Coming
By: Carrie Bay
As the GSEs and other federal agencies involved in housing finance sell their collective inventory of repossessed homes, they will generate significant pressure on prices, according to a new report from the real
estate analytics firm Radar Logic. And with an even larger share of government-backed loans in the delinquency pipeline, their influence over home prices could last for years, the New York-based company says.
Based on Radar Logic’s analysis, the federal government’s REO inventory — including homes owned by Fannie Mae, Freddie Mac, HUD, and the Department of Veterans Affairs (VA) — has increased steadily for over 24 months and now accounts for approximately 46 percent of the nation’s total REO supply.
Looking at information from the GSEs and HUD, Radar Logic says the government currently owns 209,500 homes as a result of foreclosure, and the company estimates there could be an additional 9,560 homes held by the VA, for a total of 219,060 government-owned foreclosed homes.
In addition to the glut of homes already tagged as REOs, there is a growing number of non-performing loans soon heading for foreclosure that will raise the government’s stake in distressed property ownership significantly.
According to estimates by Zillow and Lender Processing Services, 2.3 million U.S. homeowners are 30 to 90 days delinquent on their mortgages. Based on data from the
U.S. Treasury Department, Radar Logic estimates that 69 percent of these mortgages are owned or guaranteed by the GSEs, the FHA, or the VA.
In its calculations, Radar Logic assumes that 35 percent of these mortgages will be cured or end in short sales rather than becoming REO, which means 1 million of these homes will enter the federal government’s REO inventory.
Another 5 million homeowners are more than 90 days delinquent or already in the process of foreclosure. Data from the Treasury indicates that 56 percent of these loans are owned or guaranteed by federal agencies. Assuming again that 35 percent will result in delinquency cures or short sales, Radar Logic projects 1.8 million of these homes to be added to the government’s REO holdings.
Taken together, there are currently 3.1 million homes in the federal government’s REO inventory or headed toward it, Radar Logic concludes.
“For over a year now we have been saying that the GSEs and other Federal agencies will play a critical role in the success or failure of the housing recovery due to their huge holdings of foreclosed homes,” said Michael Feder, Radar Logic’s president and CEO. “Now their role is more critical than ever before. The potential cost to taxpayers resulting from the government’s current policies is enormous. We can’t help but wonder if there isn’t a better approach.”
Assuming an average mortgage balance of $200,000, the book value of these homes could ultimately reach $614 billion, according to Radar Logic’s report. In most cases, the government will have to sell its REO inventory at a significant discount, on average 40 percent less than book value, which Radar Logic says means taxpayers stand to lose $246 billion.
In addition, assuming a similar discount relative to loan value in short sales, if 25 percent of the government’s foreclosure pipeline is liquidated as a pre-foreclosure sale, taxpayers will lose another $88 billion, based on Radar Logic’s calculations.
Taking both short sales and REO sales into account, that puts total losses from the government’s holdings of distressed properties in the neighborhood of $333 billion.
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