Shadow Inventory: Conspiracy Theory or Real?

It is becoming groupthink that the housing market is bottoming based on a bunch of indicators that point to a somewhat less terrible market. I have offered that until I know how banks are handling all the foreclosures they have, I cannot make a call. Two opposing views are on display Monday to further confuse the issue.

Calculated Risk covers a Diana Olick CNBC piece on how Bank of America (BAC) states they are handling their foreclosure process:

Bank of America:
Foreclosure sales have been abnormally low since we learned of the pending implementation of the administration’s Making Home Affordable program. From that point, we delayed the initiation of foreclosure proceedings and sales for customers that may eligible for a loan modification under MHA. As a result of this policy, our foreclosure sales in recent months have been as little as half the normal pace we experienced before. ...
Now that Making Home Affordable programs are operational, we do project an increase in foreclosures as we exhaust every available option to qualify customers for modifications and other solutions.
...
We do not hold foreclosed properties off the market.

So Bank of America does not hold foreclosure properties off the market, unless they are holding them off the market based on yet another mortgage modification plan to be enacted. Is that even an answer?

Dr. Housing Bubble offers another take on "Shadow Inventory" and the post Monday is a must read if you want to understand the games being played. Some excerpts:

Apparently acknowledging shadow inventory is like holding onto childhood superstitions like believing in Santa Clause or the financial Easter Bunny. Over the last week, many of you have sent me articles where many authors both amateur and professional have started attacking shadow inventory and started proclaiming that it was a myth. Shadow inventory does not exist according to these new articles. Some of these authors went ahead and made up their own definitions of shadow inventory which in itself is curious since this inventory supposedly does not exist. The problem of course is that there are many definitions of what shadow inventory is so I will try to reiterate what I have been talking about for months...

What is shadow inventory? First, shadow inventory is housing units that are not making it onto the public market for one reason or another. There is speculation surrounding why this is happening. Lenders are overwhelmed and simply do not have the human capital to handle the glut so goes one theory. Others speculate that lenders are simply too incompetent to have a system in place to handle the mess they created.”...

(See article for graphic) The public can see 465 homes with 114 short sales and 48 foreclosures. But the reality is, there are some 1,639 properties either in pre-foreclosure, default, or bank owned. Now, if we remove the public listings that would leave us with 1,477 homes not showing up. Given the entire MLS inventory is 465 I would say that is a rather significant number. Most of these homes will default. This is something we already know. This is in fact shadow inventory. Banks are simply self-serving and are holding off on foreclosing on homes because to do so, would implode their business. That is, they would need to take an immediate and gigantic write-down.

The article has plenty of graphs and real time housing data points to back up his opinion. Bank of America only has their reputation behind their claims. I leave it to you to decide who is more believable.

Comments

[http://www....:]

I own a condo and have an outstanding balance of $140k, consisting of $104k primary and $36k secondary. I took the home equity to consolidate debts. At the time the property was valued at $163k but now it is valued at $134k. I'm looking to sell because i am engaged and will be moving into my fiancee's home. Check www.obamamortgagerelie.../. If I have a buyer who offers me within say $5-7k of the outstanding, can i agree to assume a loan on the residual and pay the bank the difference over time with interest? The same bank holds both mortgages.

Sep 01 05:00 AM

[dragonpaw:]

Are you nuts? You take on the liability of 134K with no assurance of payment, the bank doubles its chances of loss with another layer of uncertainty, and you think the bank will bite for this? Ahhh, but maybe.
Fannie May and Freddie Mac lookout! Everybody wants to play bankster, even the downtrodden. No wonder we're in the fix we are!

Sep 01 11:28 AM

[cadoggy:]

If you live in a non-recourse state like California and the same bank holds both notes then you can walk away and not have to pay the bank a dime (or the IRS).

Your only other option is to come up with cash at the closing table and basically pay someone to buy your house. And by the way, when you add in all the closing costs you're not looking at $7k but probably more like $22k.

Sep 01 12:39 PM

[PainfullyAware:]

Shadow Inventory Of Foreclosures Is A Reality That Is Not Published.

There Have been Many "Owners" that we have come across that were in a distressed situation and had been receiving "threatening Letters" from their lenders, but no action, for almost a year now..

There are many reasons that the banks have "Stayed Foreclosure" and most have to do with "The Magnitude" of the current "Economic Event"..

Reserve Issues, Losses Threatening Solvency, and Exceeding Bank Charter "Real Estate Holdings Allowed" are the main factors.

This issue has a Very Long Way To Go.

Sep 02 02:38 AM

[Sterling Ha...:]

Since 90 day mortgage delinquencies have continued to increase every month this year, but foreclosures have not kept pace, it's clear that sooner or later most of these bad mortgages will find their way into the supply of housing. One reason banks have delayed foreclosing on bad mortgages is that they can continue to mark a mortgage at cost until they foreclose, when they realize the loss.

Sep 02 10:48 AM

[PainfullyAware:]

On Sep 02 10:48 AM User 463618 wrote:

> Since 90 day mortgage delinquencies have continued to increase every
> month this year, but foreclosures have not kept pace, it's clear
> that sooner or later most of these bad mortgages will find their
> way into the supply of housing. One reason banks have delayed foreclosing
> on bad mortgages is that they can continue to mark a mortgage at
> cost until they foreclose, when they realize the loss.


Very True.

... and not only do the banks have to "Recognize A Loss"; If they are not able to liquidate, they may surpass the "Regulated Limit" of "Real-estate Holdings" to remain qualified to be a Bank. Another Detriment ,that is kind of a double whammy, is that "Reserves Must Be Replenished" when accounting for the loss.

The Worst Is Yet To Come.

Sep 06 03:26 AM

[Seth Chalnick:]

I'm really surprised that this article didn't get more kudos from SA readers, and also that the first comment was actually taken seriously, which unfortunately diluted focus from the main point highlighted by the author.

This is a terrific piece... one of only ones I have seen that puts substance behind the excellent point that user 463618 makes, and which astute observers have been talking about for some time now.

Overlooking this “shadow inventory" or whatever the heck you want to call “that which should be on the MLS but is not”… and taking the banks and the government at face value about how they've been dealing with the situation, or even acknowledging it in the first place, is a mistake that I believe will catch both Main and Wall Streets by surprise... the consequences of which will be devastating.

How on Earth most people are willing to rationalize that the fundamental problems don't exist when technical data temporarily suggests otherwise is simply beyond me. Add to this that the prime re-sets have not even started yet, that interest rates are artificially being kept at bay, that there is no market for jumbo paper, and that unemployment is still a huge factor... and wtf are people thinking??

Sep 10 02:17 AM

[Economic Di...:]

Seth,
Thanks for the kind words. I noticed at the OC Register MAtt Padilla has written a few articles on shadow inventory that paint a muddled picture as well. What is clear is that there is some level of shadow inventory and thus all data on housing has an disclaimer.

Sep 10 07:24 AM

[BioGuy:]

Ha! I am always impressed when someone actually references real data. Figures you're a biologist.

I thought I was crazy when I was able to make sense of things when no one in the media or wall street could. But, then I realized they wouldn't know hard, peer reviewed data from a crossword puzzle. The financial industry needs a heavy dose of scientific method, critical thinking, logic, game theory, statistics, and a culture of quality peer reviewed research and accountability.

It's all BS right now, all BS. That's no way to run an economy, and it's disappointing because people should be smarter and more suspicious.

Nov 13 12:06 PM

[Economic Di...:]

BioGuy,
Thanks for checking out some of my articles. Yes, if you are the scientific type then economics will seem pretty annoying to you!

Nov 14 11:25 AM

[manya05:]

Well, when the government actually has a plan for Fannie and Freddie to lease back repossessed houses to the people that cannot pay the mortgage so that they do not go through traditional foreclosure and eviction, you know, there is an official policy to create "shadow inventory"

Nov 15 08:55 AM