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As big banks and Fannie Mae and Freddie Mac

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[FMCC  Loading...      ()   ] push foreclosures through the pipeline, the inventory of REO (bank-owned) properties is rising.

That pushes distressed and overall home prices down.

Note in California, median home prices took their steepest dive in May, down 8.2 percent year over year to $280,000, as distressed sales made up more than half the market.

Nobody knows all this better than mortgage giant, government-owned Fannie Mae

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[FNMA  Loading...      ()   ], which at the end of March had more than 153,000 single family foreclosed properties on its books, worth $14.1 billion.

Fannie acquired 53,549 foreclosed properties in the first quarter, up from just under 46,000 in the previous quarter.

No surprise they are now adding incentives to unload these properties: The expanded incentives offer qualified homebuyers up to 3.5 percent of the final sales price to put towards closing costs.

In addition, selling agents representing the owner-occupant buyer can now receive a $1,200 bonus. The incentive must be requested in the initial offer.

Eligible initial offers must be submitted on or after June 14 and must close by Oct. 31, 2011. Investor sales are not eligible for the incentive.

Note, however, that these incentives are only for owner-occupants, not investors.

Fannie also has a rule that owner-occupants get a "first look" at REOs before investors can bid.

I understand the reasoning: "By encouraging homebuyers who will make these properties their long-term home, these expanded incentives will help to stabilize communities,” said Ed Neill, senior vice president for Credit Loss Management at Fannie Mae.

I'm just not sure I agree with it entirely.

Investors are critical to clearing these properties off the banks'/government's balance sheets.

The faster this gets done, the faster home prices recover, and we all start to move out of the worst housing crash since the Great Depression (I had to throw that in because Paul Dales at Capital Economics declared it worse than the Great Depression today).

Investors may help home prices more than you think.

Why? Properties bought at auction by investors (i.e. that don't go back to banks as REO) are re-selling at a faster clip in some of the hardest-hit states, according to a new report today from ForeclosureRadar.

"While we believe this is partially due to finally seeing some spring selling activity, we think it has more to do with an overall lack of quality, affordable, homes for sale," said ForeclosureRadar CEO Sean O'Toole.

"Investors far better fill this need then banks, who put little into cleaning up their properties before sale, or non-distressed homeowners, who are often not motivated to sell at prices homebuyers can now realistically afford," he added.

This week, attendees of the REO Expo default services conference in Texas are talking all about how best to sell distressed and often dilapidated properties.

The big talk, according to Jon Prior at Housing Wire, is a philosophical shift toward rehabbing more REOs.

He quotes Wells Fargo

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[WFC  Loading...      ()   ] vendor network manager Kevin Schriver: "As other servicers begin to change their philosophy on this, it will be more important for our agents to understand. I think this is the biggest shift for us in some time, as far as getting everyone on board."

While the philosophy shift is all well and good, I doubt Fannie Mae has the time or the resources to get in and rehab hundreds of thousands of foreclosed properties.

That's why I think there should be more investor incentives, because investors take the time to rehab, which in turn allows them to sell these homes at a higher price, which consequently improves overall home prices.

Look, the banks, the government, they need help, and investors are not the enemy here.

They could be part of the solution.