Bloomberg News

U.S. Struggles as Biggest Seller of Homes in Buyers’ Market

August 29, 2011

Aug. 26 (Bloomberg) -- For sale or rent by motivated owner: 248,000 foreclosed homes.

The U.S. government, which has become the nation’s biggest owner of residential properties, is looking for ways to reduce and manage its huge inventory without swamping the real estate market or exposing federal agencies to enormous losses.

Government-run Fannie Mae, Freddie Mac and the Federal Housing Administration now own about a third of the country’s nearly 800,000 foreclosed properties. With that inventory predicted to grow, they are looking for new ways to cope.

In a joint public appeal this month, the agencies invited the public to send in suggestions for managing the inventory, particularly ideas for turning foreclosed homes into rentals.

Karen Petrou, managing partner of Federal Financial Analytics Inc., said the unusual appeal is a sign the agencies recognize the backlog of distressed properties has grown so large that it can’t be sold off without inundating the market and depressing prices.

“They’re stuck,” said Petrou. “All sorts of people are demanding they do something. They don’t know what to do but they have to do something.”

The government’s housing inventory is just one challenge facing President Barack Obama as he prepares to run for re- election next year. The administration also is exploring ways to help hard-hit neighborhoods, unemployed homeowners and underwater borrowers whose houses are worth less than what they owe -- many of them concentrated in battleground states including Florida, Ohio and Nevada.

Refinancing

Current low interest rates offer an opportunity, with 30- year-fixed loans hovering just above 4 percent. The administration is weighing ways to allow distressed or underwater borrowers to refinance into a lower-rate mortgage, freeing up billions of dollars to boost consumer spending.

The complexity of mortgage finance promises to make any housing fix difficult to implement, as the administration discovered when it launched a mosaic of loan-modification programs three years ago.

Since the 2008 financial collapse, Obama and his aides have focused housing efforts on extricating borrowers from high-cost loans, aiding delinquent homeowners, and stabilizing neighborhoods. Now the most pressing problem has shifted to what to do with properties left by borrowers who couldn’t be helped.

Mark Wiseman, a lawyer and former director of Cleveland’s foreclosure-prevention program, said the new call for ideas is a sign the agencies are overwhelmed by the repossessions, commonly known as real-estate-owned properties or REO.

Looking for Ideas

“It’s almost like having the captain of the Titanic go on the public address system and say, ‘Does anybody have an idea?’” Wiseman said. “It’s not a confidence builder.”

Fannie Mae, Freddie Mac and FHA already are working to shrink the property glut by selling homes to individuals, donating vacant properties to cities for demolition and auctioning off hard-hit blocks to investors.

All the same, foreclosed properties on the agencies’ books ballooned to 295,000 in December, nearly four times the number just three years earlier. According to RealtyTrac Inc., a housing data provider, that was about 30 percent of the 980,711 foreclosed properties listed nationwide that month.

Fannie Mae, Freddie Mac and the FHA made progress selling off the backlog in the first half of 2011, dropping to about 248,000 in June, according to data from the Department of Housing and Urban Development. Still, with the pace of foreclosures slowed by flawed documentation, total inventory of repossessed properties has dropped to 817,567 in June and 798,659 in July, and the agencies’ proportion remains just about the same: about 30 percent.

Foreclosure Increase

With settlements in the works on the documentation problem, foreclosures are expected to pick up, said Thomas Lawler, founder of Lawler Economic & Housing Consulting, who tracks trends in government-owned foreclosures.

“You wouldn’t say everything’s great or wonderful,” Lawler said. “There’s still a substantial number of loans in the foreclosure process.”

Foreclosed properties made up 22 percent of the 3.65 million homes that were for sale at the end of July, according to RealtyTrac. With about 50,000 REOs sold each month, the market has a 15-month supply, the firm said.

Buffering the broader housing market from a glut of government-owned inventory by turning them into rentals might be good for homeowners and the economy. That’s not necessarily so for taxpayers, whose dollars are at risk when government- guaranteed loans go bad and who are footing the bill for maintaining the REOs.

Rental Costs

Moreover, it remains to be seen whether converting REO to rental will work. Leasing requires money to bring properties up to code, adds to liability costs and requires an infrastructure to manage the inventory. It also delays the government’s ability to recover anything from their repossessed properties, said FHA Acting Commissioner Carol Galante.

“It isn’t necessarily our preference that FHA is going to itself continue to hold these properties,” Galante said in an interview. “We want to move homes through the system so we can recover.”

At the same time, the agency can’t maximize returns if it sells too many houses at once.

“If you’re putting too much through that system you are helping to drive down prices,” Galante said. “If there’s some siphoning off of some of that stock, it can help stabilize the prices. We could be better off. The proof will be in the pudding.”

Biggest Seller

That’s especially true in parts of the country where the government is the biggest foreclosure seller. In the first seven months of this year, Fannie Mae, Freddie Mac and FHA sold 45 percent of all REO properties in Toledo, Ohio, and 53 percent in Atlanta, according to RealtyTrac.

Fannie Mae and Freddie Mac in particular are under political pressure to recover as much money as they can from repossessed properties. The mortgage companies were seized by the U.S. Treasury in September 2008 as failing subprime mortgages pushed them to insolvency. The Treasury bought nearly 80 percent of the companies and promised unlimited aid.

With more than $170 billion drawn so far, Fannie Mae and Freddie Mac are among the biggest recipients of government bailout money.

Whether turning foreclosures into rentals is a solution remains to be seen. The government wants to explore, among other things, partnerships with investors that would allow Fannie Mae, Freddie Mac and FHA to keep an ownership stake in the rental properties, giving the government potential to gain from sales should the housing market recover.

Joint Ventures

Structured properly, joint ventures could help mitigate the impact of foreclosures on struggling neighborhoods, some housing experts say.

“This proposal is encouraging because it looks like a serious attempt to address two problems that have not received enough attention, which is property maintenance and the impact on communities,” said Kevin Stein, associate director of the San Francisco-based California Reinvestment Coalition, which works on behalf of low-income areas.

In the request for information, the agencies said deals would ideally involve packages of properties ranging in value from $50 million to $1 billion. Michael Slaughter, a partner at New Providence Capital, a Dallas-based private lender, said it would be better to sell to smaller, local investors in lots of about 20 properties at a time.

Doing larger deals, “is putting the properties back in the hands of the guys who created the problem in the first place,” Slaughter said.

‘Too Far Gone’

Also, it may turn out that some neighborhoods may be too far gone for rentals, Wiseman said. In Cleveland, Detroit and elsewhere, houses in some parts of town are stripped and vandalized the minute they’re vacant.

“Some of the neighborhoods you can’t move into,” he said. “There are so many empty houses, it’s just not safe.”

It also remains to be seen if there is adequate demand from renters. Fannie Mae and Freddie Mac already have been renting foreclosed properties on a small scale, with mixed success. Freddie Mac allows occupants of foreclosed homes to remain on a month-to-month lease until the house is sold, spokesman Brad German said. Few do.

“They have the option, and people prefer to take cash for keys and move on,” German said. “Our primary goal is to sell the property.”

U.S. home foreclosures: HOMFCLOS <INDEX> GP <GO> Government relief programs: GGRP <GO> News on agency mortgage bonds: TNI AGE US BN <GO> News on mortgage defaults: STNI MORDEL <GO> Top finance news: FTOP <GO> Mortgage-bond stories: NI MBS <GO> Worldwide credit crunch: WWCC <GO> News about the FHFA: NI 3218437Z US CN BN <GO>

--Editors: Maura Reynolds, Lawrence Roberts

{FMCC US <Equity> CN} {FMNA US <Equity> CN}

-0- Aug/29/2011 17:02 GMT

To contact the reporters on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net; Clea Benson in Washington at cbenson@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net


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