Federal Government Is Largest Owner of Foreclosed Properties; Over 200,000 and Growing

Dennis Norman

According to a report issued by Radar Logic Incorporated government-sponsored enterprises (GSEs) and Federal agencies involved in housing finance currently have an inventory of over 200,000 repossessed homes. Being the largest owner of foreclosed homes in the U.S. gives the government a lot of power and influence over the housing market for years to come as they will generate significant pressure on home prices as they sell off foreclosed homes in the coming years.

Foreclosed homes currently sell at significant discounts to the unpaid balances of the mortgages they back, generating a loss for the seller (i.e., the lender, mortgage investor or government agency) at every sale. As Fannie Mae, Freddie Mac, the Department of Housing and Urban Development (HUD) and the Department of Veterans Affairs (VA) sell their REO (“real estate owned”) inventories for less than the book value on their loans, they generate billions in losses for taxpayers. When the huge numbers of government-insured mortgages in the intermediate stages of default or foreclosure are taken into account, losses from future government REO sales could reach hundreds of billions of dollars.

“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, President and CEO of Radar Logic. “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.”

Highlights from the report:

  • The Federal Government’s REO inventory, including homes owned by Fannie Mae, Freddie Mac, HUD and the VA, has increased steadily for over 24 months and now accounts for approximately 46% of the total REO inventory. This is the government’s largest share of total REO since the beginning of the housing bust.
  • The Federal Government’s share of total motivated sales (i.e., sales of foreclosed homes by financial institutions) has also increased steadily for over 20 months, and this trend shows little sign of slowing. As the largest owner and seller of foreclosed properties, the Federal Government has unprecedented control over the nation’s housing supply and, therefore, home prices.

Recent reports have shown that mortgage delinquencies may be leveling off, albeit at almost record levels, but this is the first step to the foreclosure rate declining which will help the housing market stabilize. Unfortunately with the number of current foreclosures as well as the gloomy projections for future foreclosures, it will be a while before this happens.

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