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Beware The Hidden "Backlog" of Foreclosures

Banks aren't foreclosing houses as fast as they "should," given the number of delinquencies. These numbers, in turn, have basically "swamped" the banks' capacity to foreclose. Meaning that the "official" foreclosure numbers aren't anything like the true ones.

Given the wave of defaults, the official "foreclosure" rate is a function of two things; the banks' ability to write off loans as non-performing, and the banks' ability to handle the related paperwork. Right now both systems are under strain. Which means that the banks will foreclose at a rate that they can handle, which is a lesser rate than the one reflected by true economic reality.

So how do you spread out the foreclosure process? For starters, you lengthen the lead time of delinquencies from 90 days to 180 days. That means that loans will be delinquent for twice as long before the banks start foreclosing. And let's not kid ourselves; with the odd exception, very few of those loans that are "non-performing" on the ninetieth day will be restored to "performing" on the one hundred eightieth. Meaning that the number of delinquent loans will essentially double under the new policy.

So beware if you are using the foreclosure rates to judge the supply. Only part of them are being reported. Underneath the tip of the iceberg is a hidden inventory of oversupply that will last a long, long time.