Tuesday, November 09, 2010

Private Label Security REO

by Bill McBride on 11/09/2010 04:56:00 PM

Last Friday I noted that the combined REO (Real Estate Owned) inventory for Fannie, Freddie and the FHA increased by 24% at the end of Q3 2010 compared to Q2 2010. However this is just a portion of the overall REO inventory.

Fannie Freddie FHA REO Inventory Click on graph for larger image in new window.

Here is the graph I posted last Friday showing the REO inventory for Fannie, Freddie and the FHA through Q3 2010.

The REO inventory for the "Fs" increased sharply over the last year, from 153,007 at the end of Q3 2009 to a record 293,171 at the end of Q3 2010.

As I noted, this is just a portion of the total REO inventory. Private label securities and banks and thrifts also hold a substantial number of REOs.

The following is from housing economist Tom Lawler:

While the SF REO inventory of “the F’s” – Fannie, Freddie, and FHA – surged last quarter, the SF REO inventory for private-label RMBS continued to decline (and the overall size of the RMBS market continued to shrink. Here is an updated chart showing the SF REO inventory (EOQ) for Fannie, Freddie, FHA, and private-label RMBS combined. I got the RMBS REO data from Moody’s economy.com. I don’t yet have enough data to estimate bank and thrift REO holdings, though the limited amount of “Q’s” I’ve read suggest that bank and thrift SF REO holdings probably increased last quarter, but by a smaller % than the “F’s.”

Fannie Freddie FHA REO Inventory
Recall that back in 2007 and 2008 delinquencies on loans backing PL RMBS exploded upward, and the “timelines” from serious delinquency to in-foreclosure to completed foreclosure sale were much shorter. In addition, servicers of PL RMBS were initially a “little slow” in disposing of SF REO (sticker shock on prices?), and REO exploded upward in the first ten months of 2008. In order to get inventories under “better control,” servicers of private-label RMBS accelerated their REO sales dramatically in the fall of 2008 through the spring of 2009, even as the financial markets in general and the mortgage markets in particular were in a state of “disarray,” and “traditional” home sales demand plunged. Servicers found they had to slash prices to move homes, and they did in a fashion never before seen in US history. That action put enormous downward pressure on home prices in general and especially repeat-transactions home price indexes that include foreclosure sales, and resulted in an unprecedented “de-stickification” of home prices.

To give one of bit of perspective: according to Moody’s economy.com data, the SF REO of private-label RMBS hit a peak of over 409,000 properties in October 2008, and the number of loans backing PL RMBS was around 9.039 million (and about 10.9 million at its peak in May 2007). This September, the combined SF REO inventory of Fannie, Freddie, and FHA, who combined own or guarantee around 37 million SF mortgages, totaled 293,171. Don’t get me wrong – the runup in overall REO over the last few quarters is very disturbing and a clear negative for near-term home prices. But ... it’s occasionally important to take things into perspective!

The above was from housing economist Tom Lawler.

We still need to add in the bank and thrift REO - and those holdings probably increased significantly in Q3.

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