The US government is already up to its neck in housing. Fannie Mae, Freddie Mac and the Federal Housing Administration, all wards of Uncle Sam, now have a combined 290,000 foreclosed homes they need to unload. That doesn’t even count the million-plus that could end up on their books.
The government effectively owns more foreclosed homes than private-sector banks, thrifts and credit unions combined. That’s even after spending trillions of dollars trying to shore up the housing market since the dawn of the financial crisis.
Data released earlier this week showed home prices plumbing new post-crunch lows, suggesting the housing hole could still get deeper.
The government’s role as a distressed seller raises more problems than it does, say, for private banks. Policymakers have broad social responsibilities and face political pressures to avoid making things worse for homeowners. Yet sales out of foreclosure tend to weigh on the residential market since they’re priced to sell quickly.
If the market can absorb 125,000 distressed sales a month, as Barclays Capital estimates, the government’s troubled property portfolio doesn’t look like a terrible overhang even after adding another 250,000 homes on the private sector’s books.
But the so-called shadow inventory — foreclosed homes available for sale plus those in the foreclosure process and those where the owner is seriously behind on mortgage payments — stands at 4.3 million, equivalent to some 8.5 percent of all single-family homes with mortgages. Federal agencies could end up owning about half that.
Other things being equal, it would take nearly three years to burn off the entire inventory.
A lot can happen in that time. But even optimists only expect home prices to hold steady for the next year. That’s hardly anything to cheer about, and any worse result could put more properties in danger of ending up owned by Uncle Sam. According to Freddie Mac, the time from a borrower’s last timely payment to foreclosure has increased to 456 days.
For stressed borrowers worried their homes might fall further in value, it could be tempting to stop paying and see what happens.
The government’s expensive efforts so far seem to have prolonged the suffering rather than bringing release. With a double-dipping housing market, the growing overhang of properties it needs to sell can only make the clearout process longer and more painful.