Millions of U.S. home owners are months behind on payments on government-backed mortgages, raising the risk federal housing agencies will end up facing the cost of managing a fresh flood of foreclosed homes, two government watchdogs said on Thursday.
Some 2.7 million borrowers have missed several payments on mortgages backed by the U.S. government, the inspectors general of the Federal Housing Finance Agency and Department of Housing and Urban Development said in a joint report.
These loan delinquencies represent a "shadow inventory" of homes that could hit the market if foreclosed on, which would need be managed by government-run Fannie Mae (FNMA.OB) or Freddie Mac (FMCC.OB), or some other federal housing agency.
Once seized, these so-called real estate owned properties, or REOs, present significant financial challenges to these government agencies, the report said.
"Not only are current REO inventory levels elevated ... they may rise over the next several years depending on the number of shadow inventory properties that are ultimately foreclosed on," the report stated.
Since the housing market boom and bust, the government has employed billions of dollars to help borrowers manage high-cost loans and stabilize neighborhoods hit by foreclosures. Fannie Mae, Freddie Mac and HUD, which oversees the nation's mortgage insurer, the Federal Housing Administration, have been burdened with a glut of repossessed properties as a result of the housing market collapse.
Not only does the government need to cover maintenance costs, it also needs to hire real estate agents and contractors to rehabilitate and sell the homes. Finding cost-effective ways to deal with the supply poses a challenge, the report said.
"These networks require significant oversight to ensure that they perform effectively and that they mitigate both REO-related expenses and foreclosure's negative effects," the report stated.
The report said the shadow inventory, which is made up of loans that have been delinquent for at least 90 days, is more than seven times the inventory of REOs that Fannie Mae, Freddie Mac and HUD currently own.
"Even a fraction of the shadow inventory falling into foreclosure could considerably swell ... inventories of REO properties," the report warned.
Fannie Mae, Freddie Mac and the Federal Housing Administration are backing about nine out of every ten new home loans. Fannie Mae and Freddie Mac owned about 158,000 REO properties at the end of September 2012, while HUD had about 37,000.