More “Fs” in Foreclosure Inventory Mean A+ Buyers Market

A growing number of delinquencies and foreclosures on government-backed loans –combined with generous incentives for purchasing foreclosed homes owned by Fannie Mae, Freddie Mac and HUD — means buyers and investors will have plenty of opportunities in the coming months to pick up properties at bargain prices with low down payments and preferred financing.

“The cherished account right now is Fannie and Freddie,” said Tom Moon, a Fannie Mae and Freddie Mac approved broker with Pacific Moon Real Estate in Orange County, Calif. “Any broker would like to have Fannie and Freddie because they seem to have the most properties right now.”

Moon also noted the Fannie and Freddie properties are generally lower-priced, entry-level housing that is attracting the bulk of active buyers in the Orange County market.

Second quarter reports from Fannie and Freddie show that the two government sponsored enterprises (GSEs) are acquiring real estate owned (REO) properties through foreclosure at a significantly faster pace than overall growth in REO activity based on RealtyTrac data. Fannie Mae took ownership of 68,838 REO properties in the second quarter, an increase of 114 percent from the second quarter of 2009, and Freddie Mac took ownership of 34,662, a 58 percent increase from the previous year.

Overall REO activity was up 38 percent over the same time period, according to RealtyTrac, and the two GSEs together accounted for 38 percent of the total 269,962 REOs reported by RealtyTrac in the second quarter. Throw in the 23,435 foreclosed properties acquired by the Department of Housing and Urban Development through Federal Housing Administration-backed loans gone bad, and the three “Fs”, as economist Thomas Lawler calls them, accounted for 47 percent of all REO activity in the second quarter.

“In regard to Fannie and Freddie …the prime mortgage market deterioration in credit performance lagged that of the subprime/alt-A,” Lawler wrote in an e-mail. Lawler, who is founder of Lawler Economic & Housing Consulting, LLC and former senior vice president at Fannie Mae, added that serious delinquencies for Fannie and Freddie loans began rising last year, but foreclosure on many of those delinquent loans was delayed by foreclosure moratoria and other foreclosure prevention programs.

Freddie Mac acknowledged these delayed foreclosures in its second quarter report: “Our expectation of increasing distressed sales reflects, in part, the substantial backlog of delinquent loans accumulated by lenders over recent periods, due to various foreclosure suspensions, extended foreclosure timelines in certain states, servicer capacity constraints, and delays associated with the processing for HAMP. We expect many of these loans will transition to REO and be sold in the remainder of 2010 and 2011. This may have a dampening effect on prices as the market absorbs the additional supply of homes for sale.”

Fannie Mae provided similar predictions in its second quarter report: “we expect our REO inventory to continue to increase significantly throughout 2010.”

Regulating REO Flow
The report also included a key insight on how Fannie is regulating the flow of delinquencies to REO, stating that only 38 percent of its seriously delinquent (three months or more past due) single-family loans were in the process of foreclosure. This supports the notion of a “shadow inventory” of distressed properties yet to enter the foreclosure process, let alone be listed for sale on the market.

Pete Nyiri, an REO listing broker and owner of Top Producers Realty & REO in Corona, Calif., witnesses the reality of that shadow inventory every day as he receives fewer and fewer REO listings from his clients.

“Our numbers are still so low,” he said, describing the last couple months as “disastrous.” Nyiri said his company closed more than 1,000 sales in 2008 and 99 percent of those were REO sales. The company closed about half that number in 2009 and is on track to cut the 2009 number in half again in 2010.

“I think that the administration is so in tune right now to do short sales …or systematically release a few here and few there,” he said, noting that he thinks the record-high REO sales of 2008 “will probably never happen again in my lifetime.”

This article is excerpted from the October 2010 issue of RealtyTrac’s award-winning newsletter, the Foreclosure News Report. Sign up for a 7-day free trial with RealtyTrac and we’ll mail you a free issue of the newsletter. Simply opt in to receive your free issue at the end of the registration process.

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