Let's Do the Math

Bloomber reports that Fannie and Freddie have $5 billion in REO's.

Together, Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, owned a record $6.9 billion of foreclosed homes on March 31, compared with $8.56 billion held by all 8,500 U.S. commercial banks and savings and loans. Foreclosed houses sell at an average discount of about 20 percent, according to economists Ethan Harris and Michelle Meyer at New York-based Lehman Brothers Holdings Inc. At that rate, the two mortgage companies stand to lose $1.39 billion on the foreclosed houses they currently own.

The authors of this drivel are in the stone age. Instead of assuming that foreclosure sales recoup 80%, they could have used their own article for research. Then again, maybe the $1.39 billion number came from Lehman Brothers.

Let's look at some numbers from Fannie and Freddie further in the article:

The typical price Fannie Mae received for foreclosed homes sold in the first
quarter fell to 74 percent of the unpaid mortgage principal from 93 percent in 2005

100% minus 74% = 26%. That's a bigger than 20% loss right there. (Running total = 26% losses.)

But wait, there are more gems:

It costs creditors such as Fannie Mae 2 percent of the value of the property every month in taxes, insurance, utilities, lost revenue, maintenance, management and cleanup after vandalism

And how long does it take Fannie to sell a house?

Freddie Mac-owned properties spend an average of 152 days on the
market and typically sell for 92 percent of the listed price, usually about 30
percent less than the peak prices of 2006

It appears that Freddie loses even more money than Fannie, but let's be charitable and not quibble over the difference between 26% and "about 30 percent". 152 days is five months. Take another 10% off that recovery. (Running total = 36% losses.)

Let's plug in the REO total for Fannie and Freddie: $6.9 billion.

36% losses = $2.48 billion.