What Will Be The Fate of Freddie’s and Fannie’s REO Inventory?

By Alex Rolim on Foreclosure News

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The country's housing market seems to be on the right path towards recovery. Recent reports once again highlight the rise of home prices on a national level and most recently Freddie Mac and Fannie Mae are both optimistic about their REO inventory status.

Freddie’s REO inventory dropped 30% compared to peak levels, with Chris Bowden VP of the HomeSteps unit stating it now stands at 53,000 units, down from 75,000.

As regards Fannie Mae, its second quarter filing shows more than 109,000 repossessed homes, so this is a slightly different picture, but the government-sponsored enterprise has about 23% of its REO inventory listed for sale, and another 2,500 are part of the recently launched foreclosure-to-rental program.

The slight recovery of the national housing market benefits both GSE's REO inventories. While at the beginning of the year, experts were quite pessimistic about what would happen, the falling REO level shows that everything is set for the market to return to normal conditions in the foreseeable future.

As we previously reported, the inventory of foreclosed homes is shrinking in most areas, which makes room for more REO absorption. These properties are attractive for investors and first-time home buyers, as the supply of vacant homes available on the market drops: the number of excess vacant properties for sale in the country dropped from 1 million in 2011 to about 300,000 currently.

But the main issue right now is that a huge percentage of REO homes don't even reach the market. What will happen with these housing units?

For example, Fannie Mae's REO inventory is the biggest among the trio of Freddie, HUD and Fannie. While its inventory is down 28% from a year ago, 47% of the current inventory (which now stands at roughly 109,000) properties have not yet reached the market. Some analysts say they’re holding off to get more for these units when home prices stabilize, but the fact is (in the case of Fannie Mae) 14% of its inventory is in redemption status and the timelines vary by state.

Another 13% of Fannie's REO inventory is still occupied by the distressed homeowner, so they will likely face eviction soon. Another 8% won't hit the market, as they generate income by being rented out as part of Tenant in Place or Deed for Lease (both pilot) programs and another 2,500 properties will be sold through the foreclosure-to-rental program. And we have no data about the remaining 9-10% of the unmarketed Fannie REO inventory, so there is a big question mark there.

Considering that Fannie Mae has listed only 23% of its REO inventory, it is highly likely to see GSEs holding up their inventory and expect to market them when the time comes, meaning home prices have reached the level they want to see. Meanwhile, improving home prices (boosted this year) are pushing profits for GSEs.