There happens to be a very real threat lurking out there. One that hangs over us like the sword of Damocles. Indeed, I will most certainly elaborate.
"Officially, there are 3.5 million homes for sale nationwide. But there are millions more lurking in the shadows", writes Toluse Olorunnipa for The Miami Herald, in her article, "'Shadow inventory' of homes could topple real-estate recovery" (Sacramento Bee reporter Rick Daysog contributed to this story). Additionally, Olorunnipa says that this ballooning shadow inventory stands as the most "menacing problem" for the Housing Market, and it is "threatening to stifle recovery for several years".
"The question that you might be asking is; "Well, what is Shadow Inventory?".
Basically, Shadow Inventory falls into 3 categories, as broken down by Olorunnipa; Real-Estate Owned (REOs), which are repossessed properties which are not for sale, properties in the midst of the foreclosure process, and "severely delinquent" properties that are headed for, but not yet in foreclosure.
The national supply of homes is officially listed at about 3.5 million, or nine months' worth of homes (home sales are on track to reach about five million this year), writes Olorunnipa, but adding shadow inventory more than doubles that to "at least 7.5 million", but a "healthy housing market", writes Olorunnipa, has about six months' supply of properties, which would be about 2.4 million.
South Florida has one of the nation's largest collections of unseen inventory. "A lot of people don't understand how much inventory is set to come online in the next 18 to 24 months," said Jack McCabe, CEO of McCabe Research & Consulting in Deerfield Beach. "When you compare what the Realtors show is inventory to what's out there, you realize we have a long way to go."
Economists say that the housing industry "will not normalize and recover" until most of the foreclosures work their way through the system (several years, writes Olorunnipa).
However, if mortgage lenders were to list and sell these homes and flood the market, it could be a disaster (due to the deep discounts and also the potentially poor condition of these homes). Selling off these REOs would basically crush their bottom line due to write-offs, and thus, Olorunnipa writes that "a growing number of vacant homes have idled on banks' balance sheets for several years."
Going forward, things are looking to remain bleak due to the "robo-signing" chaos (false or incomplete foreclosure documents were signed), leaving banks "struggling to prove that they have legal standing to foreclose", writes Olorunnipa, who cites info from the data firm Lender Processing Services, which found that it now takes an average of nearly two years to repossess a property.
Nearly two million homeowners who haven't paid their mortgage in three months or more have not received a foreclosure filing, writes Olorunnipa, with 800,000 of those that haven't made a payment in more than a year, (according to LPS). As Olorunnipa writes, there is a "lesser-of-two-evils" option at work here, where Lenders are basically letting delinquent homeowners stay in their homes (quick foreclosure would mean empty homes, additional maintenance costs, and more documentation woes).
With the slow pace that banks are selling off homes, they would not be able to keep pace if they start aggressively foreclosing on homes, and Olorunnipa writes that even at the currently slowed pace, "national foreclosure starts are three times higher than foreclosure sales". Some struggling homeowners are doing "strategic defaults" to take advantage of this precarious situation for the banks.
The alternatives to foreclosures? Short sales have been on the rise, and additionally, some banks are "cutting deals with homeowners who agree to hand over the keys to a house, rather than go through a legal battle.", writes Olorunnipa (basically, "lenders are forking over wads of cash to convince troubled borrowers to leave their homes amicably.").
With some ugly options on the table, it looks like Lenders will need to be creative to ride out the storm, and to walk the balance sheet tightrope. What would you suggest to the banks?
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TAGS: #shadowinventory #foreclosure #reo #housingrecovery #mortgagelenders #robosigning