Banks Starting to Jettison Foreclosed Homes

The WSJ reported today that banks are becoming more and more willing to take a steep loss on foreclosed homes instead of hanging on to them. The increase of foreclosed homes they now own, the ongoing costs of maintaining them, and the continued drop in the real estate market are convinving banks to unload at lower prices.

"One example of the deep price cuts on foreclosures: A 1,230-square-foot home in Corona, Calif., was sold by a unit of investment bank Credit Suisse in June for $198,000, down from $450,000 when the property sold in a regular transaction in December 2006.

"I do not think this is the time to be holding onto [foreclosed homes] and hoping for a better day," Daniel Mudd, chief executive of Fannie Mae, said during a conference call Friday."

Another interesting quote:

"The pain may get worse before it starts to ease. A recent report from Barclays Capital estimates that there are 721,000 bank-owned homes nationwide, up from 112,000 two years ago. Barclays expects the total to rise 60% more before peaking in late 2009.

Financial institutions are acquiring homes through foreclosure much faster than they can sell them. Fannie Mae, a government-sponsored mortgage investor, disclosed last week that it acquired 44,071 homes through foreclosure during this year's first half but sold only 23,627, leaving a balance of 54,173 as of June 30."

As the credit crisis moves into the Alt A and Prime mortgage market, look for the number of foreclosed homes to spike. This will only put more pressure on the banks.

For investors this means two things:

1. Home prices will continue to decline, especially in areas with a growing number of foreclosed homes.

2. The banks that own these mortgages and homes will face continued financial pressure. Some of them may fold.