The government-sponsored enterprises (GSEs) Fannie Mae (FNM) and Freddie Mac (FRE), like the banking industry, are preparing for a surge in foreclosures to hit already overloaded REO portfolios in 2010. Freddie holds 45,000 real estate owned (REO) properties in its portfolio as of the end of 2009, according to a filing with a quarterly filing with the Securities and Exchange Commission (SEC). REO levels increased in every quarter last year from 29,145 at the end of Q109. A property is classified as REO after a bank forecloses and repossesses it. According to First American CoreLogic, the sale of these homes and short sales, which takes place after default but before foreclosure, make up 29% of the US market. And while Freddie expects the number of REO to continue to grow in 2010, exactly how much will depend on the pace of the economic recovery, according a spokesperson at Freddie. Fannie currently holds 86,000 REO properties in its inventory as of the end of 2009, according to its report to the SEC. That number has more than doubled the 33,729 at the end of 2007 and grown another 35% from 63,538 in 2008. “Although we have expanded our loan workout initiatives to keep borrowers in their homes, we expect our foreclosures to increase in 2010 as a result of the adverse impact that the weak economy and high unemployment have had and are expected to have on the financial condition of borrowers,” according to the SEC filing by Fannie. By comparison, JPMorgan Chase expects REO levels in its portfolio to reach between 33,000 and 45,000 at the end of 2010. Some blogs have Bank of America (BAC) foreclosing on 45,000 homes per month by the end of 2010, although a spokesman for BofA could not confirm that number. Wells Fargo (WFC) and Citigroup (C) did not provide REO or foreclosure numbers. Write to Jon Prior. The author holds no relevant investments.

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