Fannie Mae is selling more of its foreclosed properties to investors as prices rise, limiting homebuyers’ access to cheap housing.
When a Fannie Mae-owned loan defaults, the mortgage company acquires and sells the property. Fannie Mae, one of the largest sources of foreclosed homes on the market, sold 55 percent of its repossessed houses to individuals, non-profits and local governments last year, compared with 57 percent in 2012 and 59 percent two years earlier, according to a regulatory document.
Fannie Mae’s goal to increase homeownership through property sales is fading as prices soar in cities across the U.S. and mortgage rates climb. While homebuyers retreat from this market, investors are buying a greater share of the housing from the government-owned mortgage giant to rent or flip.
“I’ve told my clients they should not go that route at all,” said Teresa Huber, a Realtor outside of Atlanta. “It’s too hard to compete for homes” since some get as many as 20 offers, she said.
Fannie Mae and Freddie Mac, which has a smaller number of foreclosures, have taken steps to fill more of their properties with owner-occupants. In December, the companies extended their first-look programs, which place homeowners at the front of the line to buy the houses, by five days.
While offers from investors can be submitted to the programs, only bids from owner-occupants, some non-profits and public entities are considered during the first 20 days that a property is listed for sale.
Fannie Mae also is providing as much as 3.5 percent closing cost assistance in 27 states for buyers who submit offers by the end of April.
Since the companies try to get the highest possible price for their properties, they often are listed at or above the market value, according to Gail Buck, a real estate broker since 2007 in the Phoenix area. This makes it harder for owner-occupants to get a home during their exclusive buying window.
“The first-look program almost becomes moot because the homes are priced too high right out of the gate,” said Buck. “By the time the property gets reduced to what it’s worth, now you are past the first-look program and owner-occupants are competing with investors.”
From January 2007 to June 2012, sales to owner-occupants accounted for 63 percent at one of the government enterprises, and 68 percent at the other company, according to the U.S. Government Accountability Office.
Fannie Mae and Freddie Mac are not doing enough to help American families get these real estate owned, or REO homes, according to a group of 80 tenant and neighborhood advocacy organizations.
“While we applaud the newly introduced Fannie incentives program for REO purchase by potential owner occupants, we are concerned it will be no more effective than existing ’first look’ policies, which have failed to significantly expand homeownership opportunities for first-time homebuyers and others who wish to live in the homes they purchase,” the groups, including the California Reinvestment Coalition and the National Community Reinvestment Coalition, said in a March letter to federal regulators.
The organizations asked regulators “to address first-time homebuyers being outbid, tenants being displaced, and neighborhoods undergoing dramatic changes as private equity and investor cash continues flooding into local housing markets.”
Fannie Mae does “a few things to try to market properties to owner-occupants and the goal is to sell to them as often as we can,” said Andrew Wilson, a spokesman for the comapny.
Freddie Mac aims to sell two-thirds of its repossessed homes to owners who plan to live in them, Brad German, the spokesman, said in an email.
“A strong emphasis on selling to owner-occupants is consistent with Freddie Mac’s mission to foster homeownership opportunities and will help stabilize communities and local home prices,” German said.
In Atlanta, the prices of government-owned homes have outpaced the local market, which has climbed rapidly, according to Will Fassinger, an agent with brokerage Redfin. Three similar houses are currently for sale on Montview Drive in Marietta county. One of the properties, owned by Freddie Mac, is listed at $269,900, about $25,000 more than the others.
“It’s one of the most expensive houses in the neighborhood,” Fassinger said. “It does have a finished basement, but that doesn’t make up for the price difference.”
Mortgage rates are poised to continue rising as the Federal Reserve tapers its bond purchases that have kept borrowing costs low. The average interest rate for a 30-year fixed mortgage was 4.34 percent this week, up from 3.54 percent a year ago, according to a statement from McLean, Virginia-based Freddie Mac.
Home values increased more than 13 percent nationally in the year through January, according to the S&P/Case-Shiller index of 20 cities. Investor purchases have helped push prices higher in cities such as Phoenix, where values increased 44 percent since the 2011 low, S&P/Case-Shiller data show.
“Over the last year or so home values have gone up, which changes the affordability equation,” Wilson said.
Fannie Mae properties are also harder to sell in areas with fewer owner-occupants, according to Wilson. And some houses on the market could be in need of massive renovations that owners would be unable or unwilling to take on, he said.
Repairing properties makes them more marketable to potential homebuyers. Fannie Mae renovated about 66,000 properties at an average cost of $6,700 each last year, according to a regulatory filing.
Fannie Mae made $2.8 billion in income last year selling repossessed houses, compared with $254 million in 2012, when the company’s foreclosure unit started posting a profit. The goal is to obtain the “highest price possible” for the properties it sells, the mortgage financier said in a filing.
Home sales have helped Fannie Mae and Freddie Mac pay the U.S. Treasury. Taxpayers provided a $187.5 billion bailout after they were seized and taken into U.S. conservatorship in 2008. The companies will have sent $202.9 billion back to the Treasury by the end of this month.
Last month, Senate Banking Committee leaders Tim Johnson and Mike Crapo drafted a bipartisan bill to overhaul Fannie Mae and Freddie Mac. It calls for the sale of their assets and would fill the firms’ role in financing the majority of loans in the housing market with government bond insurance. That would kick in only after private capital suffered losses on the first 10 percent of capital.
The restructuring also relies on incentives to motivate lenders to give higher-risk borrowers mortgages. Consumer and civil-rights organizations are pushing instead for a mandate that those citizens must be served to ensure that young, low-income and minority homebuyers can get loans.
“The purpose of the system needs to be to serve the housing needs of the country,” said Julia Gordon, director for housing finance and policy at the Center for American Progress, a Washington advocacy group with ties to the Democratic Party. “You want it to serve urban and rural areas, communities of color, smaller and larger loans, you want to make sure all borrowers have a shot.”
Senator Sherrod Brown, Democrat from Ohio, said this week that a comprehensive revamp of the U.S. housing finance system won’t become law this year. Brown, a member of the Senate Banking Committee, said the bill is too complicated and doesn’t do enough to address too-big-to-fail concerns or provide assistance for affordable housing. The panel will consider the measure on April 29.
Investors have had an edge over homeowners seeking property owned by the mortgage finance companies because banks restricted credit after the housing collapse, according to Robert Grossinger, vice president for the national foreclosure response initiative at non-profit Enterprise Community Partners.
The Federal Housing Administration, the biggest source of financing for first-time and low-income buyers, raised the cost of borrowing to cope with losses on mortgages it insured as the real-estate bubble burst. The FHA has started to relax underwriting standards, with homebuyers’ average FICO scores at 686 in February, down from 699 a year earlier, according to data compiled by Pleasanton, California-based Ellie Mae.
For all loans given in February, 33 percent had an average FICO score of less than 700, compared with 24 percent a year ago, the data show.
“If lenders loosen credit, making more people eligible for mortgages, than first look programs will benefit,” Grossinger said.
Fannie Mae has a broad array of foreclosed homes listed for sale on its website. There were 11,656 available in Florida this week. First look options included homes ranging from a one-bedroom condominium in Tampa for $24,500 to a six-bedroom house for $599,900 in Hialeah, outside of Miami.
Freddie Mac is offering a one-bedroom condo in Fort Lauderdale for $27,900 exclusive to owner-occupants and a three-bedroom townhome in Delray Beach for $446,900.
Last year, Fannie Mae sold almost 147,000 repossessed properties and Freddie Mac dealt about 72,400, Securities and Exchange Commission filings show. Those sales made up half of all REO trades, according to data from regulatory filings and RealtyTrac.
Increasing these sales to non-investors could be a challenge with prices at levels too high for American homebuyers, especially first timers, who have been shrinking from the market, said Thomas Lawler, a former Fannie Mae economist.
“There aren’t many listings at the prices they can afford anymore,” Lawyer said. “It’s striking that even with the first-look program, there’s not enough demand from homebuyers.”