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Fannie Mae clearing books of non-performing loans. Is this the beginning of a new foreclosure cycle?

According to Bloomberg News: Fannie Mae will begin bulk auctions of mortgages, including some sales targeted for non-profit groups and small investors, as Fannie Mae moves to reduce the number of non-performing loans “sour mortgages” on its books.

“These transactions are intended to reduce the number of seriously delinquent loans that Fannie Mae owns, to help stabilize neighborhoods and to offer borrowers access to additional foreclosure prevention options,” Fannie Mae Senior Vice President Joy Cianci said in a statement Thursday. “Our goal is to market these loans to a diverse range of buyers.”

Demand for soured mortgages has been increasing as Wall Street firms compete to buy loans at a discount after a real-estate market rebound.

Investment firms including Lone Star Funds, Bayview Asset Management LLC and Selene Finance LP have been some of the biggest buyers of delinquent home loans.”

What does that mean for Fannie Mae – it helps put their books into better balance.  What Fannie Mae’s notice does not discuss is what this means for the homeowner.  Fannie Mae has certain regulations dictating how to deal with default loans.  The new owner of these default loans will not have that same oversight and/or regulation.   What does that mean for the neighborhood?  Without doubt it means foreclosures.  How does that “stabilize the neighborhood”?   Over a long period of time it might recycle the property into the hands of new owners.  I said MIGHT.  Most likely what will happen is that the foreclosures will lead to the gradual decline of the neighborhood.  But, Fannie Mae’s books will look good!

The Federal Housing Finance Agency “FHFA” will require prospective investors to prove they’ve retained a loan servicer with a track record of handling delinquent debt, the agency said in a March 2 statement.  Servicers also will have to offer aid to avoid foreclosures as a condition of sale.

Call me doubtful.  There is a long history of investors/servicers not following guidelines when dealing with loans in default.  These failures include poor accounting, fee loading, misleading “workout” programs, the list goes on and on.  So why should we believe that the buyer of these loans will act any differently than they have in the past?  Between you and me, I hold out little hope that they will change their ways.

Why are Wall Street firms investing in real estate?

I agree that the real estate market is rebounding. So, why would these Wall Street firms, who previously invested in discounted loans, buy new portfolios of delinquent loans? Call it common sense. With a better real estate market there is a greater return on the firm’s investment by way of foreclosure of these new loans. It is simple math. The loser is the homeowner who was led to believe that their home would be saved by a federal workout program. Some say the homeowner cannot afford the home, therefore it should be returned to the market place. I agree with that concept, but what makes me angry is misleading the homeowner into believing there is a solution to help them save their home, only to sell their loan to an investor who will foreclose. I call that deceitful, perhaps bordering on criminal behavior.

Just my two cents.