"Foreclosures have come down but these are still extraordinarily high levels," said CoreLogic Chief Economist Frank Nothaft.
"Foreclosures have come down but these are still extraordinarily high levels," said CoreLogic Chief Economist Frank Nothaft. Bloomberg News

Fannie Mae and Freddie Mac have put billions of dollars' worth of distressed mortgage assets up for sale this year, but small buyers acquiring carve-outs of these offerings are driving activity in this niche market.

Since the government-sponsored enterprises stepped up sales of nonperforming loans, Fannie and Freddie's share of distressed market trading has grown to nearly 50%, from less than 10%, said Peter Andrews, CEO of Dreambuilder Investments, which invests in and manages distressed mortgages.

"Smaller trade size and more active trades have been the big shift in the market," Andrews said in an interview during the recent Distressed Residential Mortgage Summit, presented by National Mortgage News.

While home prices and loan quality are strong, there is still more distressed product in the market than there was between 1980 and the early 2000s, thanks in part to particularly long foreclosure timelines in some states, said CoreLogic Chief Economist Frank Nothaft.

"We still have way too many foreclosures," said Nothaft, who spoke at the conference. "Short sales are shrinking and have come down. Foreclosures have come down, but these are still extraordinarily high levels."

While the housing market in a lot of ways still hasn't returned to historically normal levels, "we'll be making progress on that," he said.

The increased influence of Fannie Mae and Freddie Mac sales amplifies a trend in the last three-to-five years toward a more regulated market that's required investors to work more closely with distressed borrowers, said Andrews, who chaired the conference that was held in New York City.

Fannie Mae, for example, requires post-sale quarterly reporting on loans for a few years after purchase, "so we can show a lot of positive outcomes and show what has happened to pools that have sold," Jay Ryan, Fannie's vice president for REO and NPL sales, said during a panel discussion.

Most mom-and-pop investors aren't equipped to handle these requirements on the scale of the pools valued at $10 million to $100 million in unpaid principal balance that are currently on the market, Andrews said. That makes midtier investors, who have more ways to raise capital and can handle the compliance requirements, the typical buyers for these deals, he added.

GSE sales can be as large as $1 billion in size. But those large offerings often get broken down into much smaller, specialized packages, either by acquiring buyers or the GSEs themselves. Fannie Mae, for example, sold one loan group this year that was just over $10 million and consisted of more than 70 loans, said Ryan.

The auction was conducted as part of Fannie's Community Impact Pool program, which was designed to target nonprofit businesses, as well as minority- and women-owned businesses and small investors. Fannie also said it sold the portfolio with the intent to give homeowners additional options to avoid foreclosure.

The possibility of modification is something buyers as well as sellers want today, Bob Ives, a Fannie Mae vice president in the unit responsible for retained portfolio asset management, said during the GSE's presentation.

"We do find that there is an investor preference for pools with more modification potential," Ives said, noting that buyers view modification not only to help borrowers but as a way to potentially add value.

Buyers also prefer negative equity pools and occupied properties.

"With positive equity fewer modification strategies can be employed," Ives said. "If a property is vacant, modification is less likely."

Continued increases in home prices across the country continue to bolster the value of assets, even if the increases are decelerating.

"In virtually every market, prices are up from the trough and we're anticipating further gains in the national home price index in 2016," said Nothaft. "Prices will continue to rise but more slowly than last year."

CoreLogic forecasts a 4.7% increase in prices nationally next year, though the increase is less than the 6.9% increase during the 12 months from July 2014 to July 2015.

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