Fannie Mae has responded to a decline in foreclosure sales by increasing incentives for homebuyers -- building on the original plan introduced in 2010. Homebuyers who qualify for the program may receive up to 3.5 percent of the contract price back for closing costs. The person must plan to live in the home, not rent the property or attempt to “flip” the property to make a profit.
Numerous homebuyers use Federal Housing Administration's (FHA) home mortgage financing, which requires 3.5 percent down payment, to finance their purchase. Fannie Mae also has a low down payment program that requires three percent down; some buyers may qualify for the “renovation mortgage,” which helps make improvements to properties in need of repairs. Buyers of Freddie Mac properties will not have access to an FHA mortgage to finance their purchase, but can avail themselves of other enticements, such as 30 percent discounts on home appliance and two-year home warranty programs.
According to an audit completed for the end of the first quarter, Fannie Mae had about 153,549 foreclosed home in its inventory. Freddie Mac owns another 65,174. With these government-sponsored enterprises (GSE) having 220,000 homes on their books, the new program should make a dent in its existing backlog.
The action protects taxpayers from realizing even more losses from a real estate market still in somewhat of a downward spiral since the housing crash. Some analysts believe the total number of foreclosures owned by Fannie and Freddie to be closer to 300,000 units.
The foreclosure decline started in the fourth quarter of 2010, due to the fallout from the faulty bank documents used to foreclose on many homes illegally. Before that fiasco, for every ten houses in foreclosure, the REO inventory increased by one foreclosed home for any given quarter. RealtyTrac reports a 16 percent dropped in foreclosures, in the first quarter of 2011 to 158,434, compared to the quarter ending December 31 2010.
The decline equates to a 30 percent drop in contrast to same quarter in 2010. In the first quarter of 2009, the GSEs sold 350,000 foreclosures. RealtyTrac said at the current sales pace, it would take at least two years to dissipate the existing stock of foreclosed homes held by the GSEs.
The total inventory of real estate owned by banks (REO), which includes GSEs stock, adds up to about 872,000 homes. With Government-sponsored enterprises owning most of the seriously delinquent mortgages, estimated from 1.8 to 2 million borrowers, expect their inventories to continue to rise at a rate faster than the total REO foreclosed housing inventory over the past year.
For buyers able to get a mortgage, incentives and low interest rates may be enough to help dissipate part of the inventory; however, many industry insiders believe the GSEs should allow investors to participate in the program to help reduce the inventory list.
Status of Foreclosure Resolutions
The Office of the Comptroller (OCC) reached an agreement with 14 mortgage lenders in April that will lead to the reimbursement of borrowers unfairly victimized by flawed paperwork, proceeding with foreclosure during the mortgage modification process, and other lender malpractice related to mortgage services. Bank regulators gave the lenders 30 additional days in which to bring forth a plan to address the discrepancies regarding mortgage paperwork. The lenders originally received 60 days to produce their proposal.
The United States Department of Justice, along with Attorney Generals continue talks with Wells Fargo & Co., Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. to arrive at a figure to reimburse homeowners. Bankers have “decided” they would pay ill-treated mortgage customers $5 billion, which fall shorts of the $20 billion that was floated about several months ago; the final figure is still up for debate.
The Shadow Inventory
Once bank regulators and State's Attorney Generals work out a solution with mortgage lenders, -- it is possible that Fannie and Freddie receive titles to as many as 180,000 foreclosed properties each quarter. It possible that FHA and the GSEs could sell about 300,000 homes over the coming year. A 30 percent increased from current levels based on the data from the previous four quarters.
This “shadow inventory,” some analysts fear, will drive home prices down further, once the homes hit the market. If housing prices show some ill effect from GSEs releasing this inventory on the market, they may decide to sit on its stock of foreclosed homes.