NEW YORK--(BUSINESS WIRE)-- Fitch expects single-property REO and bulk REO sales to be key parts of the housing market over the next two years. However, uncertainties around FHFA's next steps make the disposition of those assets and their impact on the housing market hard to predict and variable by location.

The supply of REO is staggering. Lenders Processing Service, Inc. estimates that, nationally, over two million properties are currently in foreclosure. Corelogic, Inc. estimates the percentage of total sales that are distressed loan properties has averaged 25%-35% in recent months. More are undoubtedly coming. The investigation by several state governments into the processes that banks used to foreclose caused the market to freeze and build up a glut.

We expect REO to be important in the disposition of these assets over the next two years, with the majority occurring during the next 12-24 months. The lag is caused first by the foreclosure process, which takes, on average, approximately 12 months to complete. Subsequently, properties spend, on average, nearly eight months in REO before being sold.

The impact of these sales on the broader market is unclear. FHFA, which owns approximately half of all residential distressed assets, requested suggestions in the fall on how to dispose of them. No decision has been made, but the director has publicly said that FHFA is considering solutions that are local, not national, in scope. It is possible, but unlikely, that a rapid disposition of FHFA homes at discounted prices could have a significant impact on the national market. We believe it more likely that FHFA will choose a program that leads to measured sales or sales to investors that hold and rent out the properties for some term. This impact would be more modest in most regions. However, in some overbuilt areas, any disposition will likely be more notable. Fitch's special report "U.S. RMBS 2Q 2011 Sustainable Home Price Projection," published on Nov. 15, 2011, estimated that close to 10% of all loans in Florida, Michigan, and Ohio are in foreclosure or REO.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research:
U.S. RMBS 2Q 2011 Sustainable Home Price Projection
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656030

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