Fitch Ratings analysts think that single-property REO and bulk REO sales will be key components of the housing market in the next two years.

However,the uncertainties around the Federal Housing Finance Agency's (FHFA) next move make the disposition of those assets and their effect on the housing market difficult to predict. The impact will also vary according to location.

The REO supply is "staggering," the rating agency said in today's release. Fitch cited Lenders Processing Service data that estimated that, nationally, over two million properties are nowin foreclosure. Meanwhile, Fitch also noted that Corelogic  projected that the percentage of total sales that are distressed loan properties has averaged 25%-35% in recent months.

Fitch said that more REOs are undoubtedly in the pike. The investigation by several state governments into banks' foreclosure practices caused the market to freeze and build up the supply.

Analysts think that REOs will be important in the disposition of these distresssed assets in the next two years, with the majority happening in the next 12-24 months. 

The lag can be attributed to the length of the foreclosure  process, which takes, on average,  roughly 12  months to complete. Subsequently, properties spend, on average, close to eight months in REO before being sold.

The effect of these sales on the broader market is not clear, analysts stated in the releaase. FHFA, which owns roughly half of all residential distressed assets, requested suggestions in the fall on how to dispose of them, although no decision has been made thus far.

However, Fitch mentioned that the director has publicly said that FHFA is considering solutions that are local, and not national, in scope. It is possible, but unlikely, that a quick disposition of FHFA  homes at discounted prices can have a considerable effect on the national market.

Fitch analysts think said that it is more probable 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, Fitch said that in some overbuilt areas, any disposition will likely be more notable. The rating agency previously estimated that roughly 10% of all loans in Florida, Michigan, and Ohio are in foreclosure or REO.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.