Fitch: Timing and Method of REO Disposition Matters

Citing data from Lender Processing Services estimating more than 2 million properties in some state of foreclosure, Fitch Ratings stated in a press release Tuesday that REOsales – both single-property and bulk sales – will be an integral component of the housing market over the next two years. However, "[t]he timing and method of their disposition has significant implications for home prices," according to Fitch, because distressed properties generally sell at a substantial discount, further exacerbated by the presence of excess inventory.

While the government has been considering a range of disposition strategies to diminish some of the inventory on Fannie Mae, Freddie Mac, and the Federal Housing Authority’s books, Fitch offered its take in Tuesday’s press release.

According to Fitch, allowing foreclosed homeowners to stay in their homes as rental tenants "would help reduce the inventory of distressed properties for sale and also allow the borrowers to avoid the disruption of moving."

This method would be most beneficial in areas with high concentrations of distressed properties, such as Florida, Michigan, and Ohio. Fitch estimates 10 percent of homes in these three states are in foreclosure or REO.