Shadow Inventory Opens: Almost A Million Houses Headed to Market

Foreclosure activity in the U.S. real estate market increased by 7 percent in the first quarter of 2010, according to RealtyTrac's U.S. Foreclosure Market Report. Default notices, scheduled auctions and bank repossessions were reported on 932,234 properties in the first quarter. The pace of foreclosure activity seems to have increased through the three-month period ending March 31. The breakdown:

304,799 default notices

369,491 foreclosure auctions scheduled

257,944 bank repossessions (REOs)

"[B]anks are starting to wade through the backlog of troubled home loans at a faster pace," says AP's Alex Veiga.

Is this the kind of wading you can do with just hip boots?  The "shadow inventory" -- the number of houses that are highly likely to come onto the market soon -- is as hard to pin down as its name implies. First American CoreLogic [pdf] puts the figure at 1.7 million units. Amherst Securities senior analyst Laurie Goodman estimated in congressional testimony [pdf] that there are closer to 7 million mortgages so dire that they will inevitably fail -- though Goodman made the case in December that "there will be one modification plan after another until a plan is successful." The latest HAMP report [pdf] offers more evidence that the number of unsalvageable mortgages is growing. (The shadow inventory estimates do not include good borrowers who will be selling in the near future.) Here's an estimate of 7.2 million delinquent mortgages as of January.

Goodman has been an advocate for much more radical public spending to rescue bad mortgages. Fortunately the political winds have blown even more strongly against this position since December, and the Obama Administration is now experimenting with a potentially less destructive strategy of simply giving bad borrowers relocation assistance. This is still a misuse of the public's money, but at least it's pointing in the right direction. However many hopeless mortgages there are out there, they need to be processed as quickly as possible.

Comments

[Xeones]

Short sales are "tailor-made for fraud," said Mr. Lawler, a former executive at the mortgage finance company Fannie Mae.

And he would know from fraud!

[J sub D]

Goodman has been an advocate for much more radical public spending to rescue bad mortgages.

Goodman is an ass. Let them fail. Let housing prices find their correct level. Let the mortgage lenders and borroweres deadbeats bite the bullet for their foolishness.

From 2 1/2 years ago.

[robc]

Also from that thread

[J sub D]

If our prescription (do nothing and let the fools pay) would have been followed, the "housing crisis" would be over by now.

[robc]

Yep. The economy might be in a depression too, but the bad stuff would be over and it could only go up from here. Instead, we are going to get a decade of bouncing in and out of recessions.

[robc]

Of course, if our prescription had been followed from the beginning (say, before either of us was born), we wouldnt have had the crisis to begin with.

[x,y]

My condo is probably worth $20-30k less than what I bought it for. Because I'm not in a nonrecourse state, I can't just send the bank my keys. Lower housing prices and more houses/condos on the market is going to kill what little value is left in my place. And yet I can't stand these snivelling idiots. I made a decision, and now I have to live with it. So should everyone else.

[Invisible Finger]

You could sell it and be done with it. Except for the lack of moral hazard, throwing good money after bad is the same mistake the government makes.

[ChicagoTom]

In a non-recourse state wouldn't he still be liable for the balance of the principle after he sells it? So he'd sell the house at a loss and still owe money to the bank. Might as well just stay where you are.

And it isn't necessarily throwing good money after bad, unless he bought strictly for investment purposes and planned on selling it in a couple of years.

He still gets to live in a condo that he likes (which I assume is why he bought it in the first place). Unless the goal was to buy now and sell in a relatively short period of time, why pay attention to its valuation at this point? If he is in it for the long haul he can probably ride it out and break even or even sell it for more in the long term future.

[robc]

If the bank agreed to a short sale without recourse (which can be hard to do), then he wouldnt owe them anything, otherwise yes.

But, you are right, being underwater only matters if you are forced to sell. Otherwise, paying down the mortgage will eventually get you back to positive equity. If someone is happy with what they are paying and plans on staying for a while, it doesnt hurt anything.

[joshua corning]

Unless the goal was to buy now and sell in a relatively short period of time, why pay attention to its valuation at this point?

Cuz he can buy a better one for less money. The intensives of Investment and home enjoyment both point the same direction; get the fuck out of the loan ASAP even if it means foreclosure.

[R C Dean]

The intensives of Investment and home enjoyment both point the same direction; get the fuck out of the loan ASAP even if it means foreclosure.

Of course, if he gets foreclosed out of his current condo, he'll never get a loan for a new one, so unless he can buy the new one for cash, I'm not sure this is an option.

[joshua corning]

he'll never get a loan for a new one, so unless he can buy the new one for cash, I'm not sure this is an option.

Real estate contracts usually do not require a credit score. Plus he will be getting a smaller loan for the new place....and can have a lower credit score in order to get the corresponding smaller loan.

Plus you are forgetting the competing market of rentals. The choice between being underwater with a large loan payment and renting with a smaller rent for a better place is not much of a choice. Again the incentive is to get out of an underwater loan ASAP.

[robc]

Again the incentive is to get out of an underwater loan ASAP.

Once again, the car analogy comes into play. While there are (minor) differences between a foreclosure and a repossession, the incentive difference on an underwater loan is the same.

If you are underwater on your car, it makes sense to sell it, buy a cheap beater, take out a note for the difference and/or pay it off.

But, if you can afford the payments, it also makes sense to just pay it each month and eventually you will above water and then later get the car paid off.

The same applies to houses with just a 6x time scale.

[joshua corning]

Once again, the car analogy comes into play. While there are (minor) differences between a foreclosure and a repossession, the incentive difference on an underwater loan is the same.

If you are underwater on your car, it makes sense to sell it, buy a cheap beater, take out a note for the difference and/or pay it off.

But, if you can afford the payments, it also makes sense to just pay it each month and eventually you will above water and then later get the car paid off.

Good work ROBC you got me thinking. My guess is that the car market is priced with the assumption of future utility vs loss value built into it. Everyone knows that a car once it leave the lot will lose value instantly. Everyone also "knows" that homes regardless of the utility you take from it will retain its value. The market has already priced these commodities accordingly. So unlike cars which have always lost value instantly and been priced with this assumption homes which have not been priced on this assumption cause a shit storm when they lose value.

[robc]

Of course, if he gets foreclosed out of his current condo, he'll never get a loan for a new one, so unless he can buy the new one for cash, I'm not sure this is an option.

Yep. You are renting for at least a few years at least after a foreclosure. It isnt as bad as a bankruptcy, but its close. A short sale, even if the bank accepts it, damages your credit due to defaulting on the loan balance, so that is like a mini-foreclosure.

[joshua corning]

Actually i was just studying this.

Foreclosures and short sales both take a hit at your credit score both about 200-300 points. Short sales though only hurt your credit score for about 2 years while a foreclosure hurts your credit for up to 7 years.

But taking a hit and being unable to get a loan period are two different things. You can still get a loan with a low credit score.

There are also more way to buying a home then getting a loan from a bank. Stop treating the market like some ridged robot monster.
Do you guys even know what a real estate contract is?

[joshua corning]

Yep. You are renting for at least a few years at least after a foreclosure.

No. You buy the new home on a real estate contract. After so many years you get a loan and close the contract with a deed and trust bank loan. The cool thing about this is that you will be building up your credit by paying off your contract.

You guys need to stop worshiping the god of credit scores. If you can make your payment you can buy a house regardless of your credit score.

A credit score hit is a small consideration vs being underwater.

[robc]

You guys need to stop worshiping the god of credit scores.

You are saying this to me? Im the one usually quoting Dave Ramsey around here.

If you can make your payment you can buy a house regardless of your credit score.

If you can make your payment being underwater doesnt matter. You were happy with that payment when you bought the place, if you are still happy, why care that you happen to be underwater for a few years?

A credit score hit is a small consideration vs being underwater.

Neither matter at all if you arent making another transaction.

I assume by "real estate contract" you mean a contract for deed. One, finding a seller who wants to finance the loan themselves is hard. Especially to a deadbeat who was just foreclosed upon. Two, there are risks to a contract for deed as the buyer has limited legal protection. Amongst other problems, since the seller continues to own the property, the property can become encumbered with liens due to judgments against the seller. To quote one source: "Depending on state law and whether the contract is recorded in a timely manner, the buyer's interest may be junior in priority to these pre- and post-contract encumbrances placed on the property by the seller."

[Joshua Corning]

"Depending on state law and whether the contract is recorded in a timely manner, the buyer's interest may be junior in priority to these pre- and post-contract encumbrances placed on the property by the seller."

yes get a title report and title insurance and be sure to read and understand everything on that report. Also yes i would rather have deed in trust then a real estate contract. But you are making it out like having a bad credit score is the end of the world which it is not. you can still buy a house. Also we have not touched on this but of course it depends on how underwater you are. Some people bought at the top of the market and have seen 40% loss in their equity some lost 2% and bought the house 15 years ago and have a substantial amount payed off. Now you are smart which one do you think I am talking about?

[robc]

Im not saying a bad credit score is the end of the world, Im saying there is no reason to get a bad credit score just because you are underwater IF you can still afford the payments and want to continue to live there.

Like with a car, again, being underwater matters not a bit. It isnt worse than a bad credit score. It matters NONE at all. Its a temporary state. No matter how much the value of the property drops, you will be above water at the end of the mortgage. Guaranteed. You were fine with paying XXX per month for 30 years ago, what has changed? The value to you as a home hasnt changed. It still provides the same amount of shelter, so what do you care what the underlying value is? A drop in value has lowered your property tax, if nothing else. 🙂

[robc]

The cool thing about this is that you will be building up your credit by paying off your contract.

Actually, this rarely happens as most sellers in contract for deed situtation dont report the payments to the credit agencies.

[R C Dean]

The bank won't give lift their lien and allow the buyer to get clean title unless they are paid off in full (or otherwise agree to a short sale).

So you really can't just sell it and short the bank.

Even a non-recourse state doesn't let you sell the property out from under the lien. What non-recourse means is that if the bank can't sell it for enough after they foreclose, they can't go after you for the shortfall.

[Tman]

We would probably not have had as bad a recession as we did if more people were like x,y and didn't decide to just bail when things went south. If you can't afford it you can't afford it, but ultimately you did sign a contract stating exactly the amount of money you would pay to the bank. Kudos to you sir.

[PabloKoh]

Default is not immoral. It is a rational action after considering the pros and cons of a specific contracted deal. Not feeding your family to continue to pay an unaffordable mortgage is immoral.

[joshua corning]

We would probably not have had as bad a recession as we did if more people were like x,y and didn't decide to just bail when things went south.

One could make the argument that if banks had been more thoughtful about who they give loans to and under what conditions we would be in a better position.

But this is all academic. We are beyond the point of the natural problems of the market and are now in "Holy shit the government is crazy has pulled crazy shit and plans on pulling even more crazy shit i am not taking any risks" mode.

The fault of our lingering recession is now clearly in the government's lap.

[The Boss]

I agree we need to let the market normalize naturally but not all borrowers in default are deadbeats. The unemployment rate is very high and few people (deadbeats or otherwise) have six months of reserves.

[Jersey Patriot]

Jobless claims are up, delinquent mortgages are up, foreclosure activity is up.

Ladies and gentlemen, your 2010 Economic Recovery!

[Colin]

But Obamy was gonna stop this.

And give us free health insurance.

And gas.

[J sub D]

Well I've at least got gas. Damned burrito.

[joshua corning]

If foreclosures are caused by loans being underwater and with this number of foreclosures depressing home values I wonder if this will trigger a second wave.

[robc]

Foreclosures arent caused by loans being underwater. Otherwise, most people would have their cars repoed the moment they drove off the lot.

[joshua corning]

Tim thinks otherwise and has studies to back it up. On this I tentatively agree with him.

Cars are not homes...The relative cost and the competing rental market for cars and homes i think make them different.

[robc]

The cause is ALWAYS failing to pay the mortgage.

Now, many people when they cant meet the mortgage, sell the house. If they are underwater, they cant sell it, so they get foreclosed upon. But it isnt being underwater that is causing the foreclosure, it is failing to make payments.

[joshua corning]

Go back and read Tim's article on the subject. Being underwater has the highest correlation with foreclosures then other factors.

Yes I get not paying a mortgage is the cause of foreclosure. My intent was to look at what causes poeple not to pay that mortgage.

I do not know why people treat their Cars and Homes loans differently in the market. Th point is that they do.

[robc]

Being underwater has the highest correlation with foreclosures then other factors.

No, it doesnt. Being delinquent on payments has a perfect correlation. 100% of foreclosures occur on people who are behind on their payments (I guess an exception could be made for voluntary foreclosures, but when you mail the keys in, you dont make the next payment and are behind -- buy a true deed in lieu of foreclosure agreement isnt a foreclosure).

[robc]

but a true, not buy a true.

[Joshua Corning]

please don't be obtuse just to be obtuse.

I am talking about people being broke or lost their job or had a heart failure as other reasons people don't make their payments and go into foreclosures.

[PabloKoh]

If the banks don't sell the homes they can still say they are worth 100% of the mortgage. When they sell they accept the homes are only worth 50%. Then the banks need to raise cash to meet minimum reserve requirement from the FDIC. There is no excess cash to be raised. This is why the shadow inventory has built up and why it will not hit the market anytime soon. Except homes with insured mortgages.

[Bill]

Exactly this is why people are are still in homes that are in foreclosure years later.

[robc]

joshua corning,

Time for a gadanken experiment, I dont know where this is going to lead, but lets see.

3 hypothetical situations, all 3 start the same. Someone buys a house with a 200k mortgage, 30 years, 5% interest, 2 years ago. For the sake of the argument, they have enough income to continue to make the mortgage payments - otherwise, no point in discussing this, their path would be clear if they cant make payments.

Situation A: House value has fallen to 190k (slightly underwater)
Situation B: 160k (significantly underwater)
Situation C: 100k (WTF! panic mode!)

At 2 years, the owner still owes 194k and change.

Okay, two other situations, (1)owner has 2k in cash/liquid assets, (2)owner has 50k in cash/liquid assets.

So we have 6 cases, A1, A2, B1, B1, C1, C2.

What should the underwater owners do in each case?

A1: the owner is 4.2k underwater. Whoopty freaking doo. He doesnt have the cash to get it even, but no biggie, in 16 months he will have positive equity if housing prices stagnate. No reason to panic and sell.

A2: same as A1 only he has the cash to do something about it. Heck, he could put 15k in the bank as an emergency fund and knock 35k off that mortgage, taking it from 28 years remaining to 19.

B1: owner is 34.2k underwater. Ouch. He doesnt have the cash to do anything about it, and as I mentioned above, it will take nearly 9 years to get his head above water. But, if he sells/foreclosed, he is still going to owe the bank 34k. He can then declare bankruptcy or hope the bank doesnt decide to chase him for the money, but why bother if he can make the payments?
He cant turn around and get a 160k loan for the same size home. If he wants to rent or downgrade in house he call pull it off, but why not stay. Heck, in 9 years the housing prices might bounce at least part way back meaning it takes less time. If you know you are going to be moving in a few years, it probably makes sense to give it up and rent for a while. But otherwise, I dont see it.

B2: Might as well stay. You have the cash to make it whole, if you short sell or get foreclosed the bank is going to get your cash anyway.

C1 (and C2): Same situation, dont have enough cash anyway. About 18.5 years to get above water, if prices stagnate. 9.5 if you throw 35k at the principle (situation C2). If this is your dream house you want to retire in, no reason not to stay and pay. If, on the other hand, you plan on moving anyway in that time frame, this is the situation where getting out makes sense, especially in C1. Rent for a few years, you dont have any money to pay the bank off anyway, at worst they force you into bankruptcy. No biggie, in 7 years that rolls off and you can go buy the dream house with the nice down payment you saved up over 7 years and still have the house 11.5 years earlier than you would have had it if you had paid down the debt.

Many people are in the C situation. But B is much more common. And A is very common. In a non-recourse state, the 2s can walk away and protect their cash, but I dont see it for A2, just not worth it for a piddling few thousand.

[robc]

Oops, I ended up using 5.25% not 5%.

[Joshua Corning]

I am not going to argue with you. Of course it depends on how underwater you are and what kind of deal you can get with a new home. If it is not worth it it is not worth it. My point was simply that being severely underwater is worse then a bad credit score.

And i really do not want to get into dream homes. People buy what they want and want what they buy. If they love it i am not going to try to talk them into selling. It is only money. If you are happy then enjoy your blessings and don't fuck with it.

[robc]

My point was simply that being severely underwater is worse then a bad credit score.

1. You didnt say severly.

2. No it isnt, if you are happy and can make your payments. Underwater is a temporary state, even if severely underwater. No matter what, when you pay off the mortgage, you will be above water. It wont have a negative value.