The backlog of real estate owned homes held by banks and the government is “staggering,” Fitch Inc. said.
The disposal of those distressed properties in the next two years will depend largely on the strategies taken by Fannie Mae and Freddie Mac, the ratings agency said in a research note last week.
Reducing the backlog of foreclosures and speeding up the foreclosure process is crucial to reviving the economy. But the process of unloading REO homes is “hard to predict” and “variable by location,” according to Fitch.
Distressed sales currently make up 25% to 35% of total home sales and “more are undoubtedly coming,” Fitch said.
Fannie and Freddie own half of all distressed loans, so disposing of the 2.2 million properties that are currently in foreclosure will depend largely on steps taken by their regulator, the Federal Housing Finance Agency. Another 1.8 million borrowers are 90 days or more delinquent on their mortgages but not yet in foreclosure, according to Lender Processing Services Inc.
“It is possible but unlikely that a rapid disposition of FHFA homes at discounted prices could have a significant impact on the national market,” Fitch said in the note. “We believe it more likely that FHFA will choose a program that leads to measured sales,” including a plan to sell homes in bulk to investors that would rent out the properties until the housing market turns around.
The impact of such a strategy would be modest in most regions. But in some overbuilt areas of Florida, Michigan and Ohio, where 10% of all loans are in foreclosure or REO, the impact will be “more notable,” Fitch said.
Mortgage servicers suspended foreclosures last year in the wake of the so-called robo-signing scandal, when banks were found to be cutting corners in their processing of foreclosure documents.
Homeowners currently spend an average of 21 months in their homes without paying their mortgages before going into foreclosure, according to LPS. It takes another eight months for an REO property to be sold, Fitch said.