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Extra7/14/2009 3:33 PM ET

Subprime debt's new threat to housing

Home prices are being beaten down as bondholders unload foreclosed houses at discounts to what banks are asking for comparable properties.

By The Wall Street Journal

The housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell.

While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.

Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy.

"While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further," said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va.

In the Atlanta area, hit hard by foreclosures and declining home values in the past two years, mortgage-backed securitization entities completed 6,260 foreclosures in last year's fourth quarter and the first quarter of 2009, according to data compiled by Data Intelligence., a Marietta, Ga., real-estate analytics firm, which reviewed the records for The Wall Street Journal. That was more than double the 2,737 foreclosures by banks in the same period.

Of those foreclosures, securitization entities sold 2,963 homes during the same period for an average of 62% of the original loan amount. Banks unloaded just 442 of the homes they foreclosed upon, with an average selling price of 69% of the original loan amount.

There still is much more inventory that mortgage-servicing firms are racing to sell for securitization trusts. Such entities tend to sell in bulk so that they can cut losses, finding it more cost-efficient to move homes through foreclosure and subsequent sale than to try to restructure the mortgages with the borrowers.

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Subprime woes © Ingram Publishing/Jupiterimages
A lifeline for struggling homeowners?
Rep. Barney Frank has introduced a controversial bill called the 'TARP for Main Street Act of 2009' that allocates $2 billion to prevent foreclosures.
Securitization trusts also realize that potential buyers won't step in unless the price is attractive.

"You have to haircut that in a big way," said Christopher Marinac, managing principal at FIG Partners, a bank-research firm in Atlanta.

According to Karen Weaver, global head of securitization research at Deutsche Bank AG, the steepest losses are on subprime loans, where lenders generally are recovering just 26% of the original loan amount.

Continued: Helped feed the subprime boom

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