Federal shadow housing inventory is getting bigger | FT Alphaville

Federal shadow housing inventory is getting bigger

A housing milestone, of sorts.

Federally-backed loans already make up a majority of the mortgages classified as ‘seriously delinquent’ in the US financial system. In other words, there are more soured loans held or backed by the US’s giant GSEs — Fannie Mae and Freddie Mac — plus the Federal Housing Administration (FHA), than those held by banks and in private-label securitisations.

But when it comes to Real Estate Owned (REO) property, some reckon the federal share of so-called shadow housing inventory (foreclosed properties) looks set to surpass the private sector’s too.

Here’s Goldman Sachs, including economists Alec Phillips and Jan Hatzius:

The federal share of REO property is also rising. For 1Q, RealtyTrac estimates that total REO property held by lenders totaled 872,000. Of this, we know from monthly or quarterly financial statements that Fannie Mae, Freddie Mac, and the FHA hold roughly 300,000 of these properties on their books, and that this inventory has been rising by more than total REO inventories over the last year. Over the next few quarters, the federally backed entities are likely to see their inventories of REO property become a larger share of the total. The chart below shows the accumulation of REO property by the GSEs and FHA, which was on a trend to overtake private sector activity until it declined in 4Q, most likely due to legal irregularities in foreclosure processing (the chart relies on filings from the federal entities and assuming that the difference between this number and total REO filings reported by RealtyTrac are related to private label securities or bank portfolios).

Now, Goldman reckons the government could use its newly-acquired shadow inventory in a couple ways — one of which, notably, is to help prop up house prices by not doing anything with it, really.

Here’s Goldman again:

As the GSEs and FHA begin to take on a larger and larger share of seriously delinquent loans and, ultimately, foreclosed properties, how policymakers approach the operations of these entities could become an important factor for home prices, since these entities could in theory be used to hold supply off of the market in an effort to support prices. As shown in the chart below, distressed property sales appear to be weighing on home prices, with solid gains over the last couple of months in the CoreLogic HPI that excludes distressed sales, compared with weakness in the index that includes them.

However, the federally backed entities have not shown much sign of trying to hold properties back from the market. The FHA may be particularly constrained by costs, since it has been trying to raise its capital level after concerns last year that it would fall below required minimums. But the Treasury is providing temporarily open-ended financial support to the GSEs, so they do not have the same constraint. (though the administration would probably prefer to avoid further losses at the GSEs if possible). Despite federal support, the GSEs have not made any significant new attempts to hold supply off the market.

Indeed, Goldman says the first quarter of this year was the first since 2009 that the GSEs and FHA acted as a combined net supplier of foreclosed properties to the market. They expect the agencies to assume ownership of as many as 180,000 properties per quarter, or 700,000 over the next year.

Which would mean — if the federal entities decide to keep selling as they’ve been doing so far — there would be a whopping 30 per cent increase in the number of properties feeding into the market.

We’ll say it again — the supply! The supply!

Related links:
Doubting the data, US home sales edition – FT Alphaville
Jim the realtor: REO tour – Calculated Risk
Extend and pretend in US housing is reeeaaally extended – FT Alphaville