(BAC) Fannie Mae Spurs Foreclosure Sales

Observing a downswing in foreclosed property sales, Fannie Mae (FNMA) is trying to lure buyers with attractive incentives. Fannie Mae started providing incentives to foreclosed home buyers in 2010, but it will now enhance its offers to increase sales of foreclosed homes it owns.

Though the incentives are expected to bring some relief for Fannie Mae by reducing its burden related to foreclosed homes to some extent, its success is still in doubt as the regulators have still not been able to settle critical deficiencies related to the foreclosure process.

T&C of Incentives

If buyers purchase a foreclosed home held by Fannie Mae on or before October 31, the company will give up to 3.5% of the property’s sale price as incentive, which would help buyers pay off closing costs.

Also, the real estate agents will get bonuses of up to $1,200 for bringing a prospective buyer to the company.

Additionally, Fannie Mae might provide mortgage and renovation financing to buyers of its foreclosed properties. Buyers will get the opportunity to avail of this financing with down payment as low as 3%.

However, those seeking to buy these properties for investments purposes and not to live in will not be eligible for these offers.

Trend of Foreclosed Home Sales

Last month, data released by RealtyTrac, the leading online marketplace of foreclosure properties, showed that the total number of foreclosed properties sold in the first quarter of 2011 was 158,434, down 16% from the prior quarter and 36% from the prior-year quarter. Also, the number is significantly lower that 350,000 foreclosed properties sold in the first quarter of 2009.

RealtyTrac’s report stated that if sale of foreclosed homes continues at the current rate, it would take nearly three years to clear about 2 million properties that are currently at some stage of foreclosure. The pace of the foreclosures has slowed down considerably in the recent months as the banks are to iron our issues related to their faulty paperwork that resulted in the foreclosure mess.

In May, repossessing of foreclosed homes declined further. This represented the second monthly decline in a row. According to RealtyTrac, 214,927 properties received a notice of default, scheduled home auction or home repossession last month. This implied a decrease of 2% from April and 33% from May 2010.

Foreclosure Mess: At What Stage?

Bank regulators are about to allow the nation’s major banks 30 more days to submit their foreclosure plans to address mortgage servicing malpractices. In April, the Office of the Comptroller of the Currency (OCC) entered into an agreement with 14 major lenders to ensure reimbursement to victims of incorrectly foreclosed homes.

Initially, OCC had given these banks 60 days time to figure out a rectification plan for their mortgage-servicing flaws. The banks were allowed to hire auditors and detect how many foreclosures could have been avoided in the last two years, had these banks not messed up the documents.

Following the detection of critical deficiencies related to the foreclosure process, U.S. bank regulators were gearing up to punish mortgage servicers. But the disciplinary initiatives were dramatically held back by inter-group bickering over the strictures of a defrayal.

Though the regulators failed to reach an agreement, a monetary settlement amounting more than $20 billion was suggested by some.

However, the state Attorneys General (AGs) and the Justice Department are in discussion with mega banks including Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Wells Fargo & Co. (WFC) and Ally Financial for a separate imbursement.

On the other hand, last month, U.S. mega banks decided to pay as much as $5 billion to settle critical deficiencies related to the foreclosure process.

Is Fannie on the Right Track?

As the government is in the process of privatizing Fannie Mae, it should free itself of burdens in order to operate profitably. Quite obviously, it’s a prerequisite for the company now to lessen the number of foreclosed homes it owns in order to thrive.

Fannie Mae and Freddie Mac (FMCC) were established by Congress in 1970 as a government sponsored enterprise (GSE). Amid increasing concerns that the GSEs did not have enough capital to withstand losses on their portfolio, the government ultimately seized and placed these institutions under conservatorship of the Director of the Federal Housing Finance Agency (FHFA) in 2008. Now the government holds about 80% stake in these companies.

Fannie Mae may not be very successful in reducing its inventory of foreclosed properties with its new incentive schemes as the overall backlog of selling foreclosed properties in the country has already pulled down values of those homes.

On average, foreclosed homes sell at a 20% discount, but still the demand is weak. So we aren’t sure how many buyers Fannie Mae’s incentive would be able to attract.

While regulators battle out how to put the housing sector back in order, we can only remain hopeful that a concrete settlement will be reached one day, making it easier for the lenders to drain out their foreclosed properties.

BANK OF AMER CP (BAC): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

FREDDIE MAC (FMCC): Free Stock Analysis Report

FANNIE MAE (FNMA): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

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