The housing industry is relying heavily on government-backed mortgage organizations like Fannie Mae, Freddie Mac and FHA for supplying financing to home buyers, filling a gaping void left by the private home loan sector still applying remedial salve to its festering wounds. Without them the real estate arena would be uniquely anemic. And the government is slowly gaining even more control over housing in a different but quite influential capacity, whether it likes it or not.
As mortgage foreclosures keep steadily spilling onto the ravaged real estate market, GSEs - Fannie Mae's and Freddie Mac's official designation - and its federal cousins like FHA and VA pick up repossessed homes by the thousands. Radar Logic - a real estate research boutique - reports that the government now holds about 46% of all U.S. REO inventory, a large share that has been continually growing over the past several years.
What's alarming is that it's going to increase from there for the foreseeable future. 2.3 million homeowners are currently 30-90 days behind on their mortgages, as Zillow and Lender Processing Services have figured out. Radar Logic calculates that 69% of these home loans are guaranteed or owned by the various government agencies. The situation is worse than that, though. About 5 million mortgage borrowers are either 90 days past due or are already in the foreclosure pipeline. The Treasury reports that 56% of these are in some shape or form under the government's umbrella. Radar Logic estimates that roughly 35% of mortgages in these two categories will avoid foreclosure via modification efforts or short sales.
Nevertheless, when everything is tallied up nearly 3 million homes will soon be in the government's REO inventory, Radar Logic says, pushing up its percentage share quite a bit.
If Washington puts the entire inventory as it becomes available for sale, real estate prices that have lately shown some stability will certainly weaken again. That will predictably swing the nascent housing turnaround in reverse. Also, selling in this soft real estate market will bring more losses that will ultimately turn into the taxpayer's responsibility. These choices are so unappealing. What other options are there? Renting them out until the housing market recovers and then later on sell them to at least break even, might be one answer. That is exactly what many investors are doing today, especially in worst-hit areas like Las Vegas and Phoenix. The operative word for them is hold. Be patient.
The government is not in the house leasing business but in this dire and unusual situation it might be wise to seek solutions outside the box.
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