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Fannie and Freddie's Big Foreclosure Backlog

By Clea Benson Clea Benson Fri Jan 28, 8:08 am ET

Fannie Mae (fnma.ob.OB) and Freddie Mac (fmcc.ob.OB) are trying to sell their

huge backlog of foreclosed homes in an orderly way to avoid flooding the market

and depressing prices. As foreclosures mount, though, analysts say the

companies may be forced to reconsider that approach.

The government-controlled mortgage companies' inventory of foreclosed

residential property has quadrupled in three years and now stands at a record

$24 billion. The number of properties they own has increased fivefold to nearly

242,000, representing roughly a third of all repossessed homes in the U.S. And

the total keeps growing as they take possession of homes faster than they can

sell them. In the first nine months of 2010 Fannie and Freddie took in 319,243

foreclosed properties and disposed of 210,105. At the same time, U.S. housing

prices have been falling. In the most recent reading, the S&P/Case-Shiller

index of home values in 20 cities fell 1.6 percent in November from the

previous year, the biggest 12-month decrease since December 2009.

Officials at Fannie and Freddie say they are committed to an approach

consistent with their mission as backstops for the housing market. They have

been trying to stabilize neighborhoods by selling homes at prices close to

market levels and giving preference to buyers who plan to live in the homes

rather than investors who might rent them out or try immediately to resell

them. Fannie and Freddie are also investing in some properties, spending

millions on maintenance to make them competitive with other homes on the market

in their neighborhoods. "We don't want a reduced value to initiate a quick

sale," says David Wendling, senior director of REO (real estate owned) sales at

Freddie Mac. "The focus has always been on supporting neighborhood values."

Of the 74,621 properties Freddie Mac sold in the first nine months of 2010, 67

percent went to buyers who intended to occupy them, according to company data.

At Fannie Mae, about 80 percent of sales are to owner-occupants, says company

spokeswoman Amy Bonitatibus. "We don't hold anything back that is available to

be sold," says Jane Severn, director of REO disposition at Fannie Mae. "We're

doing the opposite, pushing our homes out to the market as soon as we can."

Some real estate analysts say the companies will have to find a way to dispose

of properties more quickly. The number of homes subject to a foreclosure filing

may rise by 20 percent this year, up from a record 2.87 million properties in

2010, RealtyTrac, an Irvine (Calif.) data company, predicts. The market

currently can absorb about a million foreclosures a year, the Mortgage Bankers

Assn. estimates. Fannie and Freddie themselves estimate in regulatory filings

that it will take "a number of years" to bring their foreclosure inventory down

to pre-2008 levels.

As their holdings of unsold homes increase, Fannie and Freddie eventually will

need to drop prices and turn to investors, analysts predict. "I think they're

just (postponing) the inevitable," says Michael Slaughter, a partner at New

Providence Capital, a Dallas-based private lender. "If they don't start with a

systematic distribution of these properties to investors who have cash today

and will buy them at the right price, they're going to end up selling the

entire portfolio to Goldman Sachs (NYSE:GS - News) or BlackRock (NYSE:BLK -

News) at a tenth of what they can get for them today."

The bottom line: Fannie's and Freddie's strategy of not flooding the market

with foreclosed homes may come under pressure as their inventory builds.