Shadow Inventory held by the GSEs and HUD vastly outnumbers REO properties the groups maintain, according to a joint report from the Office of Inspector General for the Federal Housing Finance Agency and HUD. The report further warned HUD and the GSEs must pay close attention to shadow inventory, which threatens to increase their supply of REOs.
For the report, shadow inventory was defined as properties 90-days or more past due but not yet in foreclosure
According to the report, as of September 2012, HUD held about 37,445 REOs in its inventory, while Fannie Mae and Freddie Mac had about 158,138 REOs, leading to a combined total of 195,583.
Meanwhile, the GSEs held 966,649 properties in their shadow inventory, while HUD was found to have 741,384 homes still in the shadows, for a total of 1.7 million properties.
For the GSEs, the ratio of shadow inventory to REO inventory was about 6-to-1, while shadow inventory for HUD was 19.9 times greater than REO inventory.
Given the massive number of homes still hiding in the shadows, the OIG says the number of REO inventories held by the GSEs could increase significantly as the seriously delinquent properties become foreclosed on.
"Even a fraction of the shadow inventory falling into foreclosure could considerably swell HUD and GSE inventories of REO properties," the report stated.
The OIG also found the number of mortgages past due by a year or more actually increased, rising from 558,761 at the end of 2011 to 655,782 by the end of September 2012.
According to the report, the inspector general for HUD named several areas where HUD did not have "adequate procedures," such as list prices that were not reduced according to marketing plans, accepted bids that did meet HUD's flexible threshold, and properties assigned to field service managers even though performance issues were identified, among other issues.
The issues resulted in REO properties that were not competitively valued, longer holding times, sales that did not achieve the highest net return, and properties being assigned to contractors that did not perform at a satisfactory level, according to the report.
To improve FHFA's oversight and conservatorship efforts, the report says the inspector general for the agency is implementing an audit and evaluation strategy to monitor performance.
For example, FHFA-OIG plans to assess FHFA's REO-to-rental pilot program and the agency's oversight of single-family property inspections from the GSEs.
Through the evaluations, FHFA-OIG will determine if the agency is ensuring the GSEs are effectively managing REOs to maximize financial recoveries and to minimize the negative impact of foreclosures.