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Fannie Mae Foreclosure Perks Go To Residents, Not Investors

Fannie Mae's (FNMA) $84 billion profit last year, coupled with an announcement that it would make taxpayers whole for the $116 billion bailout in 2008, may have created the impression that the company has finally shut the door on the housing crisis.

But Fannie Mae still retains a large inventory of foreclosed properties, a stark reminder of loose underwriting excesses that fueled a financial crisis and pushed the government-sponsored enterprise to the edge of insolvency. Now, even as federal lawmakers draft a plan that could shutter Fannie Mae, the company is undertaking an effort to get those houses off its books by subsidizing some home purchases.

At the end of 2013, Fannie Mae possessed a pool of 103,229 foreclosed properties, or real estate owned (REO), with a book value of $10.3 billion, according to its latest financial reports. Fannie Mae acquired nearly 144,400 REO properties in 2013 and sold almost 147,000. At the end of 2012, Fannie Mae's REO inventory stood at 105,666 with a book value of $9.5 billion. For a historical comparison, Fannie Mae's REO portfolio at the end of 2007 had fewer than 35,000 homes.

Book value — the foreclosure's original cost minus impairments, depreciation and amortization — is usually higher than the price it can fetch: The average net sales price Fannie Mae got for its REO inventory in 2013 was 67% of the mortgage's unpaid principal balance at the time of foreclosure, for example, up from 59% in 2012.

Owner Occupants Get Perks

In an effort to dispose of more foreclosed homes and entice owner occupants into the market — particularly first-time homebuyers — Fannie Mae last month said buyers who intended to live in an REO property could receive up to 3.5% in closing cost assistance if they made their initial offer by the end of March and closed the deal by May 31.

"It has woken up the markets, so to speak" for sales of foreclosed homes, said Michael Diljohn, an agent with Century 21 Rose Realty West in South Florida.

Properties advertised on Fannie Mae's HomePath (homepath.com) listing platform are eligible for the incentive, and bidders must make an offer during the "FirstLook" period, a program that provides potential owner occupants with exclusive bidding privileges for 20 days after a property is listed on HomePath. (In Nevada, the FirstLook period lasts 30 days.) Public entities such as nonprofit organizations or state and local housing finance agencies may also bid on the homes during the FirstLook period and are eligible for the closing cost incentive.

Investors can bid only after the FirstLook period ends.

The FirstLook period generally denies investors a shot at the nicer properties, said Kevin Janowski, an agent with OneSource Realtors in suburban St. Louis.

"Investors are frustrated at having to wait," he said.

Fannie Mae's FirstLook strategy and other incentives for owner occupants parallel the U.S. Department of Housing and Urban Development's Neighborhood Stabilization Program, which gives grants to aid hard-hit neighborhoods.

"(FirstLook) is designed to promote owner occupancy by providing buyers with an advantage in submitting offers on Fannie Mae properties without competition from investors," said a Fannie Mae spokeswoman in a written statement. "While investors play an important role in the REO market, homebuyers who intend to occupy a home make an immediate and lasting commitment to the community and therefore merit priority consideration in the REO sales process.

The closing-cost incentive is available in 27 states, many of which still harbor a glut of foreclosures, including California, Florida, Nevada, Arizona and New Jersey. HomePath currently lists more than 460 homes in Las Vegas, for example, and 575 in Arizona's Maricopa County, which includes Phoenix, Gilbert and Scottsdale. Some listings are under contract, however.

To get the 3.5% closing cost assistance, bidders must request the incentive at the time of the offer and sign an owner occupant certification, among other requirements. Owner occupants are required to live in the home for at least a year.

Incentives Multiply

Some REO properties on HomePath also qualify for special financing incentives, including a down payment of 5% as well as appraisal and mortgage insurance waivers. In some cases, borrowers can roll renovation costs of up to 35% — capped at $35,000 — of the completed value into the mortgage.

Fannie Mae's spokeswoman stated that the company uses HomePath to dispose of 99% of its REO inventory. So far the offer to defray closing costs has sparked additional activity, observers say.

"It's a great incentive to help first-time homebuyers. They're the ones that are really taking advantage of this opportunity," Diljohn said.

He works out of Cooper City, Fla., north of Miami. The area has nearly 2,000 foreclosures on HomePath. Diljohn says the Fannie Mae REOs he represents run about two to five a month, though he thinks Fannie Mae has released more into the market this year. The homes have typically been fetching a handful of bids — some up to a dozen — depending on their condition, asking price and available incentives, he adds.

"We're seeing a lot of competition," he said.

Liz Schneider, a mortgage loan officer in suburban Cleveland with Talmer Bank and Trust, also sees first-time homebuyers predominantly taking advantage of the closing cost and other HomePath incentives. The Cleveland metro area has 350 homes listed on HomePath, and competition for more desirable properties has been brisk, she adds.

Housing Reform Ahead?

As Fannie Mae pushes ahead on ways to get rid of REOs, federal lawmakers this week are working on a bill that seeks to close down Fannie Mae and Freddie Mac (FMCC), replacing them with a new regulator.

Word of a housing finance overhaul in Congress spurred a 39% drop in Fannie Mae's (over-the-counter) stock Tuesday-Wednesday, erasing two weeks of gains tied to Fannie Mae's financial reports. The stock rose 7% Thursday.

The Senate Banking Committee's chairman, Tim Johnson, a Democrat, and its top Republican, Mike Crapo, set out a legislative framework on Tuesday, with a bipartisan bill expected soon. Among many other goals, the draft measure aims for strong mortgage underwriting standards and a down payment requirement of 5% for home purchases, except for first-time buyers, who would have to ante up at least 3.5%.