Debunking the Shadow Inventory Myth in the Los Angeles Foreclosure Market
by Ben Nicolas
on Saturday, November 28th, 2009 at 6:45pm.
“Shadow inventory” is the term many Real Estate prognosticators have been using to describe homes that were foreclosed on which the bank held on to and did not try to resell right away, in hopes of selling them later on when the market is more favorable to the bank, at a higher price. By taking the number of foreclosures that banks have taken back and subtracting the number of foreclosures they have since resold, one can find the number of foreclosures the banks still have possession of, their “shadow inventory”. The numbers of such properties were on the rise until September of 2008, when banks began reselling foreclosure properties at a rate higher than the number of foreclosures they were receiving from trustee sales. Sales transactions have been increasing slightly lately but not by much. Since unemployment is still high and the number of homeowners defaulting is rising why isn't the shadow inventory growing?
Los Angeles properties are no stranger to the plague of foreclosures sweeping across the country. The home loan delinquency rate, the number of mortgage holders late on their payment 30 days or more, in Los Angeles County in July hovered around 10%. Seventy-three percent of all the homes for sale in the Los Angeles area the first week of September were foreclosure properties. Of the more than 17,000 pieces of Los Angeles real estate, 12,500 were foreclosed homes; the remainder of the homes for sale were resale homes, not new construction or vacant land; these figures were strictly from residential units listed for sale on the MLS. With statistics such as these, it doesn't seem like banks are keeping secret inventories away from the los angeles real estate market.
But what about the Making Home Affordable program? The market saw the number of mortgage delinquencies continue to rise, but saw the number of foreclosure sales sink; why? Because of government programs such as the Making Home Affordable program; this federal program caused banks to delay the initiation of foreclosure proceedings and sales of foreclosed properties so that eligible customers could have a chance to modify their current situation to try and stay in their homes. So basically government intervention is delaying foreclosures. While some are qualifying for long term modifications the majority are not. Many homeowners who haven't been paying their mortgage for months sometimes well over 6 months of non-payment are stuck waiting for an answer for months by their lender or loan servicer. The loan servicers are starting homeowners in the HAMP program but many that I have spoken to have finished their trial period and still haven't gotten a permanent loan mod. The HAMP program is still way to vague, the banks aren't forced to commit to terms of a modification, they start the trial periods, get a check from the government and then do nothing but leave the homeowner in limbo in many cases. Servicers and lenders aren't halting foreclosures because they feel a duty to listen to the government who wants to slow foreclosures down for political reasons, they aren't foreclosing because they don't want to have to write down the value of their assets to true current market value. These financial institutions probably don't care if the final investors are losing billions if not trillions in lost monthly income, they'd rather play financial accounting games as long as possible to prevent disclosing to their shareholders and the public the true extent of their losses. The accumulation of these circumstances have caused the number of houses taken back by banks and servicers to drop. The government loan mod programs are delaying the inevitable. While other governmental programs such as MHA may come about in the future, the likelihood is not enough to make banks accountable for strictly adhering to the guidelines of the "suggested" loan modification programs.
Another factor that led to unreliable foreclosure data are state laws. CA Senate Bill 1137 required lenders to contact borrowers before filing a Notice of Default. With the borrowing public more and better informed, there are fewer chances of the banking industry taking their houses out from under them without them understanding what was happening. While the numbers of Los Angeles homes in jeopardy is rising, the number of resold foreclosed homes is relatively stable. The problem here is that the government isn't really doing anything but making it more difficult for the market to naturally work things out, they are throwing up more redtape that make it challenging for lenders to foreclose, meanwhile the unethical mortgage applicants that took advantage of the mortgage system most aggregiously have figured this out and realize that they can sit in their homes for very long periods without even receving a notice of default from their lender!!!. They've learned that by saying "I didn't understand my loan" they are perceived as helpless victims that were taken advantage of by "greedy brokers and bankers" and as such are entitled to retribution.
In other areas, the number of properties on the edge of foreclosure continues to rise; as much as one in seven mortgages is either foreclosing or are delinquent in payments across the nation. The Mortgage Bankers Association, MBA, said that “the percentage of loans in foreclosure rose to 1.42 percent, from 1.36 percent in the second quarter and 1.07 percent in the third quarter of 2008.” Fewer and fewer of these foreclosures are truly selling off because of various delays at trustee sales while simultaneously banks are doing very well on sales of their bank owned properties. The banks have been able to lower their inventory from last year due to the lack of incoming new inventory. The average time of resale for Los Angeles properties from time of eviction, going through the process of repairs and relisting, and then the reselling and financing process, is down to seven months. With the inventory being limited because of the lack of ability to foreclose and sales being brisk due to enticingly low prices, low interest rates and the federal homebuyer tax credit, there is no reason for banks to hold shadow inventory.