$8.6 billion in foreclosed homes weigh down bank balance sheets

Posted Jul 23rd 2008 10:48AM by Peter Cohan
Filed under: Federal Natl Mtge (FNM), Economic Data, Recession

Bloomberg News reports that the 8,500 banks and S&Ls in the U.S. hold $8.56 billion worth of foreclosed homes on their balance sheets. And most of those $6.9 billion, are held by two companies -- Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). They hold 81% of the foreclosed properties but 50% of the mortgages -- more evidence that Fannie and Freddie financed far more bad loans than their standards should have permitted.

This inventory of foreclosed homes weighs down the entire housing market. Generally, such homes sell for a 20% discount -- and that's not good for the prices in the neighborhood. Bloomberg reports that the prices received for foreclosed properties have declined -- from 93% in 2005 to 74% of the unpaid mortgage principal. Moreover, unless the bank pays to cut the grass and otherwise maintain the foreclosed home, its poor curb appeal taints the neighborhood a bit for potential buyers.

I've suggested that given the huge costs of the collapse in the real estate market, we should put an end to securitization. This is the practice of buying up thousands of loans -- backed by real estate, credit cards, auto loans, and others -- bundling and wrapping them in insurance and ratings and then selling them to investors. Bloomberg reports that mortgage securitization has nearly wiped itself out. Banks bundled $1.15 trillion of home loans into so-called private-label securities in 2006 -- that number has fallen 96% to $46 billion in the first half of 2008.

And the huge volume of foreclosed properties is likely to keep that figure falling further.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Tags: fannie mae, FannieMae, fnm, foreclosed, foreclosure, foreclosurebustour, foreclosures, foreclosuresforsale, fre, freddie mac, FreddieMac, inthenews

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Reader Comments (Page 1 of 1)

7-23-2008 @ 1:18PM

william lindblad said...

Peter, why do you think that there is a problem?
While I agree and so do many others posting in this area, the bank analysts do not. Doug, of 24/7 wall st. has a neat article on this. This is a case of the chickens minding the coop. The people doing the talking have a vested interest in the subject material.
I don't expect anyone is going to do a Sen. Schumer.
Paulson is being the most honest and his statements of late are not what I would call optimistic. He expects more bank failures and so does the FDIC.
Since Paulson has an interest in the banking system - why is he so negative? I think he knows what is coming and I don't trust him either
Default in housing will continue unabated for at least another year. The luxury condo market has yet to surface and it will be a disaster. These are multi-million dollar projects - and they are still being built.

7-23-2008 @ 5:17PM

peye said...

peter give it up.you been writing this b.s. forever nobody cares.i think you must be one of a million that's been shorting freddy and fanny stocks.you need to grow some gonads and start buying these stocks before they come after you for spreading false rumors.