by Calculated Risk on 2/29/2012 12:20:00 PM

This morning Fannie Mae reported results for Q4 and all of 2011. Fannie reported that they acquired 47,256 REO in Q4 (Real Estate Owned via foreclosure or deed-in-lieu) and disposed of 51,344 REO. This has been the pattern all year; Fannie has sold more REO than they acquired (acquisitions slowed because of the process issues, but dispositions picked up sharply in 2011). Here is a table for the last two years:

Fannie Mae REO Acquisitions and Dispositions
	2011	2010
Acquisitions	199,696	262,078
Dispositions	243,657	185,744
Net	-43,961	76,334

This has been true for most lenders - they sold more REO than they acquired in 2011 - not just Fannie and Freddie. A common misperception is that when the lenders start foreclosing again at a higher level, that there will be a surge in REO sales. Fannie could increase acquisitions by 20%, and keep the sales pace the same, and their REO inventory wouldn't increase.

The following graph shows Fannie REO inventory, acquisition and dispositions over the last several years.

Click on graph for larger image.

When the blue line is above the red line, acquisitions are higher than dispositions, and REO inventory increases. In 2011 the opposite was true, and REO inventory declined by 27% from Q4 2010.

A few comments from Fannie:

Foreclosures generally take longer to complete in states where judicial foreclosures are required than in states where non-judicial foreclosures are permitted. For foreclosures completed in 2011, measuring from the last monthly period for which the borrowers fully paid their mortgages to when we added the related properties to our REO inventory, the average number of days it took to ultimately foreclose ranged from a low of 391 days in Missouri, a non-judicial foreclosure state, to a high of 890 days in Florida, a judicial foreclosure state. As of December 31, 2011, Florida accounted for 30% of our loans that were in the foreclosure process.

The non-judicial states will recover first.

The FHFA announced a pilot program to sell REO, and many analysts were surprised that most of the REO in the pilot were already leased. That will not continue since Fannie only has 9,000 leased properties:

We currently lease properties to tenants who occupied the properties before we acquired them into our REO inventory, which can minimize disruption by providing additional time to find alternate housing, help stabilize local communities, provide us with rental income, and support our compliance with federal and state laws protecting tenants in foreclosed properties. As of December 31, 2011, over 9,000 tenants leased our REO properties.

In February 2012, FHFA announced that it was beginning the pilot phase of an REO initiative that will allow qualified investors to purchase pools of foreclosed properties from us with the requirement to rent the purchased properties for a specified number of years. During the pilot phase, we will offer for sale pools of various types of assets including rental properties, vacant properties and nonperforming loans with a focus on the hardest-hit areas. The pilot transactions are expected to provide insight into how the participation of private investors can maximize the value of foreclosed properties and stabilize communities. We do not yet know whether this initiative will have a material impact on our future REO sales and REO inventory levels.

Freddie is expected to report results tomorrow.