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.