The amount of repossessed homes held by Fannie Mae and Freddie Mac rose considerably in the fourth quarter from a year earlier, according to financial supplements. Fannie reports its real estate owned inventory by volume of properties. In the fourth quarter, it reported 162,489 in REO that needed to be resold, up 88% from the year before. Freddie reports its inventory in the unpaid principal balance on the underlying mortgages that the borrower defaulted on. As of the fourth quarter, Freddie held $12.9 billion in REO, up 55% from one year ago. The government holds more REO exposure than what is on the books of the government-sponsored enterprises. Fourth quarter REO levels at the Federal Housing Administration increased 47% from the year before, as well, climbing to 60,739 properties. For Fannie and Freddie, much of the REO is located out West. In California, Arizona and Nevada, Fannie holds more than 33,000 properties in REO, nearly as much as the 35,000 in the entire Midwest combined. More than $3.4 billion of the unpaid principal balance in REO for Freddie resides out West. The next highest is the $1.9 billion located in the north central area of the country. Prices for REO are also dropping along with the rest of the housing market, at least at Fannie. The GSE reported that REO net sales compared with the unpaid principal balance was 55% in the fourth quarter, down from 57% the quarter before. In 2005, REOs sold at 87% of the unpaid principal balance. As Congress considers options for winding down Fannie and Freddie, the idea of forming a bad bank to handle the legacy loans and REO homes awaiting resale has come up from several analysts and commentators. Bob Hagmann, an REO agent with West Islands Realty in Cape Coral, Fla., said whatever the plan is, agents like him will have plenty of work to do. "I don’t think any plan including a merge will hurt REO brokers because sooner or later the properties will have to be sold and the units that are 90-plus days in default have less than a 1% chance of coming current on their loan even if the loan was modified," Hagmann said. "So they will sooner or later make it to our desk." Write to Jon Prior. Follow him on Twitter: @JonAPrior