Is Fannie Mae Overpricing Properties in California?

6 months ago

A growing number of real estate deals have been falling apart across California – agents and sellers put the blame solely at the feet of government backed mortgage giant Fannie Mae. The tax payer supported company has been accused of over-pricing homes across the state, killing many short-sale deals and forcing the sellers to enter foreclosure.

Why would the biggest mortgage lender in the nation be purposely scuppering deals in a time when it should be encouraging market recovery? The answer is complicated.

While Fannie Mae has a vested interest in helping homeowners avoid foreclosure through short-sales and other means, it also has the competing goal of making sure that the American taxpayer who is funding Freddie Mac and Fannie Mae (whether they like it or not) is getting a good deal out of every real estate deal brokered by the mortgage giant.

As a result Fannie Mae regularly overprices short sale properties 20 to 40 percent higher than what they would normally go. Officials at Fannie Mae say they are justified in overpricing short sale properties to such an extent while the California Association of Realtors strongly disagrees. Representatives from the CAR argue setting the price so high drives away buyers, kills chances of a successful short sale and forces the homeowners into foreclosure.

Fannie Mae’s spokesperson, on the other hand, says that their valuations are justified and are based on several factors that include past sales of similar properties, appraisals and the opinions of their in-house real estate brokers.

California realtors, unfortunately, can do little except complain. Amid all the accusations of rampant value inflation by the mortgage giant, a delegation from the California Association of Realtors recently flew to Washington D.C. to try and straighten things out with the top Fannie Mae officials. What this will actually accomplish in California’s real estate market remains to be seen, however.

Besides killing potential short-sales, the overpricing of properties by Fannie Mae has another more insidious effect on California’s housing market. Many agents argue that Fannie Mae’s rampant overpricing has the additional consequence of artificially inflating home prices across the board. This in turn drives traditional buyers away since they have to seek additional financing to meet Fannie’s higher prices. Cash buyers, on the other hand, are often backed by companies with ready capital, so don’t face this problem. This goes a long way in explaining why cash is king in

Southern California’s real estate market, accounting for 34.9 percent of all homes sold in January.

Certain areas such as the San Diego real estate market are particularly hot right now. A combination of a lack of inventory of entry-level homes and declining San Diego foreclosure numbers means that more buyers are forced enter the regular property market, foregoing the distressed housing market. As more buyers compete for regular properties the offers start to increase in value, raising prices. Mortgage giants like Fannie Mae are fully aware of this trend and are only too happy to take advantage of it.


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