Shadow Inventory Gets More Shadowy

If you've been trying to keep track of the "shadow inventory" of homes that are destined to be foreclosed and come onto the market within the next few years, you'll be glad to know that the hard-to-determine statistic has been narrowed down: It's either 1.7 million houses or 12 million houses.

That's the skinny from a site called CapitalGainsAndGames.com, which cites some comments made last week by Amherst Securities analyst Laurie Goodman:

Laurie Goodman told the National Economists Club today in D.C. 7.2 million are already in the delinquency pipeline, and 250,000 are going delinquent each month bringing the total to 12 million. "Once you're 60 days delinquent, a foreclosure is highly probable," she said. Goodman is a Senior Managing Director of Amherst Securities and is widely recognized as the best housing finance economist on Wall Street.

She emphasized that negative equity is the main problem, and that any program which doesn't significantly reduce principal won't work. She estimated that under the most optimistic assumptions, President Obama's HAMP program would avert 1.1 million foreclosures. Goodman added that banks aren't renegotiating underwater mortgages in which they hold a second lien, "a huge conflict of interest problem."

She noted that FHA loans are still the whole market and suggested that the homebuyer tax credit, due to expire at the end of this month, and other housing incentives have borrowed so much demand forward that the only way left to stimulate the market would be for FHA to ease its requirements and allow investors to participate.

I hate Goodman's infinite-intervention plan to employ "one modification plan after another until a plan is successful." But I love her dire view of the foreclosure landscape, and her useful debunking of the common belief that unemployment is the main cause of mortgage defaults.

In congressional testimony in December, Goodman had the shadow inventory at 7.2 million properties. I'm not sure how she's getting to 12 million houses, especially when DataQuick says first-quarter notices of default declined more than 4 percent in California, the most populous and one of the most troubled of the delinquency states.

The shadow inventory will be an important drag on house prices for years, which will in turn prompt more efforts to use your money to prop up the sagging market (or as we say in the second quarter of 2010, "spur the recovery"). So it's important to get a handle on how large this inventory is. Best estimate as of this time: One crapload.

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  • ||

    There is a byword in lending which runs "Your first loss is your best lost." What that means is: Recognize your losses and get out. Dragging the situation out increases your losses and keeps a dubious "asset" on your books, decreasing your ability to go back into profitable loans.

    Let the damn foreclosures happen quickly. Get the pain over and move on.

  • ||

    I think all the government intervention has resulted in many banks avoiding foreclosure altogether. Like the problem will just go away by not dealing with it. They couldn't have done that without hundreds of billions in bailouts.

  • Brian Defferding||

    I'm wondering what that shadow inventory is going to be a couple years after those tax credits expire and the era of the Federal Reserve's low interest rate is over. If Obama is lucky, the next bubble won't burst under his watch so they can blame it all on someone else.

  • x,y||

    You're kidding right? We could be 7.5 years into Obamaland, and if a bubble pops then you can guarantee the mainstream media and other usual suspects will be beating the "it all began with Bush" drums.

  • Brian Defferding||

    Aye, true - or, they'll blame it all on a few regulations lifted in the 90's, thus successfully saying the free market is to blame, and more regulation and central planning is needed.

  • Rich||

    "shadow inventory" -- the number of houses that are highly likely to come onto the market soon

    A measure that precise is just *screaming* for derivatives.

  • Ty Kuhn||

    At least negative equity can turn around. What is renting going to get you? Which is what you will be doing for a long time if you let yourself get foreclosed on.

  • robc||

    Renting often saves you money, but that varies with situation. However, you are right on negative equity. No matter how far the house falls in value, once you pay off the mortgage, you will have positive equity. People dont freak out about their car being underwater.

  • ||

    Yes negative equity can turn around, it's possible that the value of a house will increase to the point that it would have been worth paying off the mortgage to get it. Trouble is nobody else thinks that's true. If they did they'd willingly take the mortgage off the banks hands or buy the house. Negative equity means you made a big mistake with the down payment cheque, don't compound it with regular installments.

  • ||

    the only way left to stimulate the market would be for FHA to ease its requirements and allow investors to participate.

    Isn't this is pretty much what caused the bubble?

    Its a shame that the goal appears to be "do anything to keep the bubble from deflating entirely", rather than "allow the market to clear itself."

  • Paul||

    Markets don't clear themselves. Only government can clear a market. Well, wipe it out, really.

  • cynical||

    Nature does pretty well for herself in that regard.

  • ||

    She noted that FHA loans are still the whole market and suggested that the homebuyer tax credit, due to expire at the end of this month, and other housing incentives have borrowed so much demand forward that the only way left to stimulate the market would be for FHA to ease its requirements and allow investors to participate.

    What could possibly go wrong?

  • ||

    I think all the government intervention has resulted in many banks avoiding foreclosure altogether.

    I suspect they think Timmay will buy those loans from them at face value, if they wait long enough. And then, the Resolution Authority, which does not have to worry about a bunch of pesky bank examiners poring over their balance sheets, will just sort of lose interest in the whole thing.

    "Pay, don't pay; whatever."

  • ¢||

    We could be 7.5 years into Obamaland, and if a bubble pops then you can guarantee the mainstream media and other usual suspects will be beating the "it all began with Bush" drums.

    There'll be a Republican House (and maybe Senate) then. Whichever one of those guys is on TV most will get blamed. Brady, maybe? He's uppity.

  • Anonymous Backstabber||

    You know when those Southern California Santa Ana desert winds really start blowing, those wildfires can get out of control real quick.

    It would be a real shame if a whole lot of real pretty homes burned down real fast, especially empty ones with no one to look after them.

    Just sayin.

  • Jersey Patriot||

    You know when those Southern California Santa Ana desert winds really start blowing, those wildfires can get out of control real quick.

    Also, Babylon sisters may shake it.

  • ||

    MILKQUAKE! RUN FOR YOU LIVES!

  • ||

    Of course, it starts with a crapload, inevitably escalates to a shitload, and eventually reaches fuckload proportions. That's the usual progression in DC, don't let anyone fool you.

    I heard that a WashingTon was a crapload of fucktonnes, but am not that familiar with the metric political system that they use over in Europe. Does anyone know for sure?

  • ||

    Sorry, that should have been "fuquetonnes." My bad. What can I say? I'm a gringo.

  • Max D.||

    So houses in Orange County, CA, won't be affordable for the foreseeable future? Texas, here we come.

  • Ken||

    Why Texas?

  • ||

    Another reason foreclosures have slowed even after mortgage borrowers are long in default, see WSJ article "Congress Helped Banks Defang Key Rule" by Susan Pulliam & Thomas McGinty pub. 6/3/2009. Then do a key word search: on 'squatters in default' and 'shadow inventory'.

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